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<TITLE>FORM S-1</TITLE>
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">As filed with the Securities and Exchange
Commission on August&nbsp;25, 2004</FONT></B>
</DIV>

<P align="right">
<B><FONT size="2">Registration
No.&nbsp;333-&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></B>

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<B><FONT size="4">UNITED STATES</FONT></B>

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<B><FONT size="4">SECURITIES AND EXCHANGE COMMISSION</FONT></B>
</DIV>

<DIV align="center">
<B>Washington,&nbsp;D.C. 20549</B>
</DIV>

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<B><FONT size="5">FORM S-1</FONT></B>

<DIV align="center">
<B>REGISTRATION STATEMENT</B>
</DIV>

<DIV align="center">
<B>UNDER</B>
</DIV>

<DIV align="center">
<B>THE SECURITIES ACT OF 1933</B>
</DIV>

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<B><FONT size="6">Warren Resources, Inc.</FONT></B>

<DIV align="center">
<I><FONT size="2">(Exact name of Registrant as specified in its
charter)</FONT></I>
</DIV>

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<TR>
    <TD width="34%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="32%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="28%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <B><FONT size="2">Maryland</FONT></B></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <B><FONT size="2">1311</FONT></B></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <B><FONT size="2">11-3024080</FONT></B></TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <I><FONT size="2">(State or jurisdiction of<BR>
    incorporation or organization)</FONT></I></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <I><FONT size="2">(Primary Standard Industrial<BR>
    Classification Code Number)</FONT></I></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <I><FONT size="2">(I.R.S. Employer<BR>
    Identification Number)</FONT></I></TD>
</TR>

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<TR>
    <TD width="51%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="46%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <B><FONT size="2">489 Fifth Avenue, 32nd&nbsp;Floor<BR>
    New York, NY 10017<BR>
    (212)&nbsp;697-9660<BR>
     </FONT></B><I><FONT size="2">(Address, including zip code,
    and<BR>
    telephone number, including area code, of<BR>
    Registrant&#146;s principal executive offices)</FONT></I></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <B><FONT size="2">Norman F. Swanton<BR>
    Chief Executive Officer<BR>
    489 Fifth Avenue, 32nd&nbsp;Floor<BR>
    New York, NY 10017<BR>
    (212) 697-9660<BR>
     </FONT></B><I><FONT size="2">(Name, address, including zip
    code, and<BR>
    telephone number, including area code, of<BR>
    agent for service)</FONT></I></TD>
</TR>

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<B><I><FONT size="2">Copies to:</FONT></I></B>

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<TR>
    <TD width="56%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="41%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <B><FONT size="2">Alan L. Talesnick<BR>
    JoEllen L. Legg<BR>
    Patton Boggs LLP<BR>
    1660 Lincoln Street, Suite&nbsp;1900<BR>
    Denver, CO 80264-1901<BR>
    (303)&nbsp;830-1776</FONT></B></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <B><FONT size="2">Christopher M. Kelly<BR>
    Timothy J. Melton<BR>
    Jones Day<BR>
    North Point<BR>
    901 Lakeside Avenue<BR>
    Cleveland, OH 44114-1190<BR>
    (216) 586-3939</FONT></B></TD>
</TR>

</TABLE>
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<P align="left">
<FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;<B>Approximate date of
commencement of proposed sale to public:</B> As soon as
practicable after this Registration Statement becomes effective.
</FONT>

<P align="left">
<FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;If any of the securities
being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule&nbsp;415 under the Securities
Act of 1933, check the following
box.&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">&#111;</FONT>
</FONT>

<P align="left">
<FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;If this Form is filed to
register additional securities for an offering pursuant to
Rule&nbsp;462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same
offering.&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">&#111;</FONT>
</FONT>

<P align="left">
<FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;If this Form is a
post-effective amendment filed pursuant to Rule&nbsp;462(c)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same
offering.&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">&#111;</FONT>
</FONT>

<P align="left">
<FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;If this Form is a
post-effective amendment filed pursuant to Rule&nbsp;462(d)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same
offering.&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">&#111;</FONT>
</FONT>

<P align="left">
<FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;If delivery of the
prospectus is expected to be made pursuant to Rule&nbsp;434,
please check the following
box.&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">&#111;</FONT>
</FONT>

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<B><FONT size="2">CALCULATION OF REGISTRATION FEE</FONT></B>

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    <TD width="57%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="17%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="20%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="5"></TD>
</TR>

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    <TD colspan="5" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="5"></TD>
</TR>

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    <TD colspan="5" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Proposed Maximum</FONT></B></TD>
    <TD></TD>
    <TD></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Title of Each Class of Securities</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Aggregate Offering</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Amount of</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">to be Registered</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Amount</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Registration Fee(2)</FONT></B></TD>
</TR>

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    <TD colspan="5"></TD>
</TR>

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    <TD colspan="5" align="center" nowrap><HR size="1" noshade></TD>
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<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Common Stock, par value $.0001&nbsp;per share(1)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="bottom">
    <FONT size="2">$70,000,000
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="bottom">
    <FONT size="2">$8,869.00
    </FONT></TD>
</TR>

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    <TD colspan="5" align="left"><HR size="1" noshade></TD>

</TR>

<TR>
    <TD colspan="5" align="left"><HR size="1" noshade></TD>

</TR>

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<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes shares of common stock that may be
    purchased by the underwriters solely to cover over-allotments,
    if any.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(2)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Estimated solely for the purpose of calculating
    the registration fee pursuant to Rule&nbsp;457(o) of the
    Securities Act of 1933.
    </FONT></TD>
</TR>

</TABLE>

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<P align="left">
<B><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;The Registrant hereby
amends this Registration Statement on such date or dates as may
be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that
this Registration Statement shall thereafter become effective in
accordance with Section&nbsp;8(a) of the Securities Act of 1933
or until this Registration Statement shall become effective on
such date as the Securities and Exchange Commission, acting
pursuant to said Section&nbsp;8(a), may determine.</FONT></B>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<TABLE width="100%" border="1" cellpadding="5"><TR><TD>
<B><FONT size="2" color="#E8112D">The information contained in
this preliminary prospectus is not complete and may be changed.
These securities may not be sold until the registration
statement filed with the Securities and Exchange Commission is
effective. This preliminary prospectus is not an offer to sell
these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.</FONT></B><FONT size="2"> <BR>
</FONT>
</TD></TR></TABLE>

<P align="center">
<B><FONT size="2" color="#E8112D">SUBJECT TO COMPLETION,
DATED &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2004</FONT></B>

<P align="center">
<B><FONT size="5">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Shares</FONT></B>

<P align="center">
<IMG src="y99523y9952301.gif" alt="(WARREN RESOURCES INC. LOGO)">

<P align="center">
<B><FONT size="5">Common Stock</FONT></B>

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<HR size="1" width="22%" align="center" noshade>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">This is an initial public offering of shares of
common stock of Warren Resources, Inc. All of the shares in this
offering are being sold by us.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Prior to this offering, there has been no public
market for our common stock. It is currently estimated that the
initial public offering price per share will be between
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;and
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;.
We intend that our common stock will be quoted on the Nasdaq
National Market under the symbol &#147;WRES&#148;.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B>Investing in our common stock involves risks. See &#147;Risk
Factors&#148; beginning on page&nbsp;10 to read about factors
you should consider before buying shares of our common stock.</B>

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<TR>
    <TD width="60%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="20%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Per Share</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Total</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Price to the public
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="bottom">
    <FONT size="2">$
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Underwriting discount
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="bottom">
    <FONT size="2">$
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Proceeds, before expenses, to Warren Resources,
    Inc.&nbsp;</FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="bottom">
    <FONT size="2">$
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have granted an over-allotment option to the
underwriters. Under this option, the underwriters may elect to
purchase a maximum
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;additional
shares from us within 30&nbsp;days following the date of this
prospectus to cover over-allotments.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Neither the Securities and Exchange Commission
nor any state securities commission has approved or disapproved
of these securities or determined if this prospectus is truthful
or complete. Any representation to the contrary is a criminal
offense.</FONT></B>

<P align="left">
<FONT size="2">
</FONT><B><FONT size="6">K</FONT><FONT size="5">EY</FONT><FONT size="6">B</FONT><FONT size="5">ANC</FONT><FONT size="6">
C</FONT><FONT size="5">APITAL</FONT><FONT size="6">
M</FONT><FONT size="5">ARKETS</FONT></B>

<DIV align="center">

</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="20%"></TD>
    <TD width="80%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <FONT size="2">
    </FONT><B><FONT size="6">J</FONT><FONT size="5">EFFERIES</FONT><FONT size="6">
    &#38; C</FONT><FONT size="5">OMPANY,</FONT><FONT size="6">
    I</FONT><FONT size="5">NC.</FONT></B></TD>
</TR>

</TABLE>

<DIV align="center">

</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="40%"></TD>
    <TD width="60%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <FONT size="2">
    </FONT><B><FONT size="6">S</FONT><FONT size="5">ANDERS</FONT><FONT size="6">
    M</FONT><FONT size="5">ORRIS</FONT><FONT size="6">
    H</FONT><FONT size="5">ARRIS</FONT></B></TD>
</TR>

</TABLE>

<DIV align="center">

</DIV>

<P align="center">
<FONT size="2">The date of this prospectus
is &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2004
</FONT>

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<DIV align="left">
<A name="tocpage"></A>
</DIV>

<P align="center">
<B><FONT size="2">TABLE OF CONTENTS</FONT></B>

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<TR>
    <TD width="75%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="10%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="9%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Page</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#101'>Prospectus Summary</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#102'>Risk Factors</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#103'>Cautionary Note Regarding
    Forward-Looking Statements</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">24</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#104'>Use Of Proceeds</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#105'>Dividend Policy</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">26</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#106'>Capitalization</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">27</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#107'>Dilution</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">28</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#108'>Selected Consolidated
    Financial Data</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">29</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#109'>Management&#146;s Discussion
    And Analysis Of Financial Condition And Results Of Operations</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">31</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#110'>Business</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">46</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#111'>Management</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">65</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#113'>Certain Relationships And
    Related Transactions</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">78</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#114'>Principal Stockholders</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">79</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#115'>Description Of Capital
    Stock</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">81</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#116'>Shares Eligible For Future
    Sale</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">87</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#117'>Underwriting</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">89</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#118'>Legal Matters</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">91</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#119'>Experts</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">91</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#120'>Where You Can Find More
    Information</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">91</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#121'>Index To Consolidated
    Financial Statements</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">F-1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#122'>Appendix&nbsp;A To
    Prospectus&nbsp;&#151; Glossary Of Certain Oil And Natural Gas
    Terms</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">A-1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#123'>Appendix&nbsp;B To
    Prospectus&nbsp;&#151; Summary Reserve Report Of Williamson
    Petroleum Consultants, Inc. As Of December&nbsp;31, 2003</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">B-1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y99523exv21.htm">SUBSIDIARIES OF WARREN RESOURCES, INC.</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y99523exv23w1.htm">CONSENT OF GRANT THORTON LLP</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y99523exv23w2.htm">CONSENT OF WILLIAMSON PETROLEUM CONSULTANTS, INC.</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y99523exv23w3.htm">CONSENT OF CBIZ VALUATION GROUP, INC.</A></FONT></TD></TR>
</TABLE>
</CENTER>

<DIV align="left">
<!-- /TOC -->
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">You should rely only on the information
contained in this prospectus. We have not, and the underwriters
have not, authorized any other person to provide you with
different information from that contained in this prospectus. If
anyone provides you with different or inconsistent information,
you should not rely on it. We are not, and the underwriters are
not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our logo is a trademark or service mark of Warren
Resources, Inc. Other trademarks or service marks appearing in
this prospectus are the property of their respective holders.
</FONT>

<P align="center"><FONT size="2">i
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="width: 100%; border: 1px solid black; padding: 12px;">

<DIV align="left">
<A name='101'></A>
</DIV>

<!-- link1 "PROSPECTUS SUMMARY" -->

<P align="center">
<B><FONT size="2">PROSPECTUS SUMMARY</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">This summary highlights information contained
elsewhere in this prospectus. You should carefully read the
entire prospectus before investing in our common stock. Unless
the context otherwise requires, all references to
&#147;Warren&#148;, &#147;we&#148;, &#147;us&#148; and
&#147;our&#148; refer to Warren Resources, Inc. and its
subsidiaries. The term &#147;you&#148; refers to a prospective
investor. References to our oil and gas interests include our
allocable share of oil and gas leasehold interests held by
drilling programs that we sponsor together with minority
interests allocable to other interest holders in 13 limited
liability companies that we control. We have included
definitions of technical terms and abbreviations important to an
understanding of our business under &#147;Glossary of Certain
Oil and Natural Gas Terms&#148; beginning on
page&nbsp;A-1.</FONT></I>

<P align="center">
<B>Overview</B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are a growing independent energy company
engaged in the exploration and development of domestic onshore
natural gas and oil reserves. We focus our efforts primarily on
the exploration and development of coalbed methane, or CBM,
properties located in the Rocky Mountain region and on our
waterflood oil recovery program in the Wilmington Townlot Unit,
or Wilmington unit, in the Wilmington field within the Los
Angeles Basin of California. Our CBM operations are located in
two core areas: the Washakie Basin, which comprises
approximately the southeast one-third of the Greater Green River
Basin in southwestern Wyoming, and the Powder River Basin in
northeastern Wyoming. As of June&nbsp;30, 2004, we owned natural
gas and oil leasehold interests in approximately
261,880&nbsp;gross (146,550&nbsp;net) acres, 95% of which are
undeveloped. Substantially all our undeveloped acreage is
located in the Rocky Mountains. We have identified approximately
1,162 drilling locations on our acreage, primarily on 80-acre
and 160-acre well spacing.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In the Washakie Basin, we have assembled a large,
predominantly undeveloped CBM leasehold, which we believe
positions us for significant long-term growth. Our operations in
the Washakie Basin consist of the Atlantic Rim project located
along the Basin&#146;s eastern rim and the Pacific Rim project
located along its western rim. As of June&nbsp;30, 2004, we had
247,450&nbsp;gross (140,782&nbsp;net) acres prospective for CBM
development in this area, of which 136,157 are net undeveloped
acres. This acreage contains approximately 1,049 identified
drilling locations. We own a 57% average working interest in
this acreage.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our Atlantic Rim project consists of
approximately 212,258&nbsp;gross (113,248&nbsp;net) acres. As of
June&nbsp;30, 2004, we participated in the drilling of 46 CBM
wells in this project. These wells included 22 producing wells
and 24&nbsp;wells that are awaiting completion of production
facilities, all of which we believe are capable of commercial
production. Based on geological and seismic data, we previously
drilled 26 geological test wells, 11 of which we believe are
capable of commercial production. As of December&nbsp;31, 2003,
the proved reserves for the 22 producing wells and for their 23
proved undeveloped offset locations average&nbsp;1.01&nbsp;Bcfe
per gross well on 80-acre and 160-acre spacing, based upon a
reserve report prepared by Williamson Petroleum Consultants,
Inc., an independent petroleum engineering firm. In 2004, we
entered into an agreement to jointly construct, own and operate
gathering systems, compression facilities and a pipeline in the
Atlantic Rim with Anadarko Petroleum Corporation. During 2005,
we plan to increase our drilling activity in the Atlantic Rim by
participating in the drilling of 52 gross (20.0 net) additional
wells in this area.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During the last half of 2003, we established our
Pacific Rim project which consists of approximately
35,192&nbsp;gross (27,534&nbsp;net) acres prospective for CBM
development. As of June&nbsp;30, 2004, we had drilled nine CBM
wells and acquired four previously drilled wells in this
project, all on 160-acre spacing. In our first pilot program, we
expect to complete construction of a gathering system and
commence production from nine of these wells by the end of 2004.
During 2005, we also plan to increase our drilling activity in
the Pacific Rim by participating in the drilling of 38 gross
(24.4 net) additional wells in this area.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of December&nbsp;31, 2003, we had estimated
net proved reserves of 106.2&nbsp;Bcfe, with a PV-10 value of
$183.0&nbsp;million, based on the reserve report prepared by
Williamson Petroleum Consultants. These estimated net proved
reserves are located on less than 4% of our net acreage. We
currently have interests in 205&nbsp;gross (79.0&nbsp;net)
producing wells and are the operator of record for 55% 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. On June&nbsp;30, 2004,
total production from these wells was 18.6&nbsp;MMcfe/d gross
(5.5&nbsp;MMcfe/d net).
</FONT>
</DIV>

<P align="center"><FONT size="2">1
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="width: 100%; border: 1px solid black; padding: 12px;">

<DIV align="left">
<FONT size="2">For 2005, we have a total capital expenditure
budget of approximately $40.8&nbsp;million to participate in the
drilling of 142&nbsp;gross (88.4&nbsp;net) wells.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table provides information
regarding our operations by area:
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="24%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">As of December&nbsp;31, 2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">As of June&nbsp;30, 2004</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Estimated Net</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Identified</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Net</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Net</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Proved Reserves</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">PV-10</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Drilling</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Producing</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Undeveloped</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2" align="center" nowrap><B><FONT size="1">Area</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Bcfe)(1)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(in millions)(1)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Locations(2)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Wells</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Acreage</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Washakie
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10.6</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">18.6</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,049</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">136,157</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Powder River
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1.8</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.6</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">57.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">453</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Wilmington
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">85.8</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">143.5</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">100</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14.6</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">908</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other(3)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">17.3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,291</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">106.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">183.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,162</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">79.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">138,809</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Our reserves and the present value of future net
    revenues were determined using $4.50 per Mcf of natural gas and
    $28.45 per barrel of oil. These are the prices used in our
    reserve report as of December&nbsp;31, 2003, which was prepared
    by Williamson Petroleum Consultants. See
    &#147;Business&nbsp;&#151; Natural Gas and Oil Reserves&#148;.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(2)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Identified drilling locations consist of total
    gross locations that we have identified and currently are
    estimating for our future drilling activities on existing
    acreage. The total locations shown in the table include 126
    proved undeveloped locations. Actual drilling activities may
    differ from this estimate. See &#147;Risk Factors&nbsp;&#151;
    Risks Relating to Our Business&#148; and &#147;&#151;&nbsp;Risks
    Relating to the Oil and Gas Industry&#148;.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(3)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes conventional oil and gas operations
    primarily in New Mexico, Texas and North Dakota.
    </FONT></TD>
</TR>

</TABLE>

<P align="center">
<B>Our History</B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">From our inception in 1990 through 2003, we
functioned principally as the sponsor of privately placed
drilling programs and joint ventures. During that period, we
sponsored 31 drilling programs that raised an aggregate of
approximately $228&nbsp;million. Under these programs, we
contribute drilling locations, pay tangible drilling costs and
provide turnkey drilling services to the drilling programs and
retain an interest in the wells drilled. On behalf of the
drilling programs, we have participated in the drilling of
approximately 470 conventional, horizontal and CBM wells, of
which approximately 90% were completed as commercial producing
wells. At June&nbsp;30, 2004, we had deferred income from
turnkey drilling contracts of approximately $19&nbsp;million
related to the drilling programs. The drilling programs will
participate with us on a pro rata basis in all our drilling
activities until the turnkey contracts have been completed,
which we expect to occur in the first half of 2005.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Since 1999, we have been assembling larger
acreage positions primarily in the Rocky Mountains. After we
have completed all our turnkey drilling contracts, we intend to
invest more of our own capital in future wells to accelerate our
growth in production and reserves. We anticipate that future
drilling activities with third parties will consist of joint
ventures and similar arrangements.
</FONT>

<P align="center">
<B>Anadarko Joint Venture</B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In December 2002, we entered into a joint venture
with Anadarko Petroleum Corporation, one of the largest
independent oil and gas exploration and production companies in
the world. This joint venture provides for exploration and
development within the Atlantic Rim project on a 50/50 basis
covering over 141,000 net acres within a 211,000 acre area of
mutual interest, or AMI. Under the joint venture, we contributed
88,993 net acres, and Anadarko contributed 52,444 net acres and
paid us $20.2&nbsp;million, which included reimbursement for
$2.2&nbsp;million of our prior drilling expenses. In 2004, we
expanded our relationship with Anadarko to jointly construct,
own and operate gathering systems, compression facilities and a
pipeline in the Atlantic Rim project of the Washakie Basin on a
50/50 basis.
</FONT>
</DIV>

<P align="center"><FONT size="2">2
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="width: 100%; border: 1px solid black; padding: 12px;">

<P align="center">
<B>Recent Institutional Equity Investment</B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In 2004, we have raised a total of
$20&nbsp;million through the private placement of
2,850,000&nbsp;shares of our common stock and 1,425,000 common
stock warrants to institutional investors managed by a large
Boston-based investment advisor.
</FONT>

<P align="center">
<B>Business Strategy</B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The principal elements of our business strategy
are designed to generate growth in oil and gas reserves,
production volumes and cash flows at a positive return on
invested capital. We plan to focus on the following:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <B><I><FONT size="2">Exploit Existing Properties Through the
    Drillbit.</FONT></I></B><FONT size="2"> We intend to increase
    our proved reserves by drilling numerous locations identified on
    our Rocky Mountain CBM properties and on our Wilmington unit. As
    of June&nbsp;30, 2004, we have identified a total of 1,162
    drilling locations, of which we plan to participate in the
    drilling of 142&nbsp;gross wells during 2005.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <B><I><FONT size="2">Increase Our Working Interest in Future
    Wells.</FONT></I></B><FONT size="2"> We plan to increase our
    level of participation in future wells by investing more of our
    own capital in drilling operations in our high growth areas. We
    believe this will enable us to accelerate our growth in
    production, reserves and cash flows.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <B><I><FONT size="2">Pursue Selective Acquisitions and Joint
    Ventures.</FONT></I></B><FONT size="2"> We believe we are well
    positioned, given our asset base and technical expertise, to
    pursue selected acquisitions and attract industry joint venture
    partners. We expect to pursue further acquisitions of natural
    gas and oil properties in areas where we have specific technical
    knowledge and experience. We also plan to enter into additional
    joint ventures to increase our CBM acreage and develop our
    reserves.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <B><I><FONT size="2">Reduce Costs Through Economies of Scale and
    Efficient Operations.</FONT></I></B><FONT size="2"> As we
    continue to increase our production and develop our existing
    properties, we expect that our unit cost structure will benefit
    from economies of scale. With respect to our CBM operations, we
    anticipate reducing unit costs by greater utilization of our
    existing infrastructure over a larger number of wells. We seek
    to exert more control over costs and timing in our exploration,
    development and production activities through our operating
    activities and relationships with our joint venture partners.
    </FONT></TD>
</TR>

</TABLE>

<P align="center">
<B>Competitive Strengths</B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As a result of the following strengths, we
believe we are well positioned to execute our business strategy:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <B><I><FONT size="2">Substantial Rocky Mountain Undeveloped CBM
    Acreage Position.</FONT></I></B><FONT size="2"> We believe that
    the Rocky Mountain region is one of the few remaining high
    potential CBM natural gas provinces in North America. We have
    assembled a substantial undeveloped acreage position in the
    Rocky Mountains of 240,170&nbsp;gross (136,610&nbsp;net) acres
    containing 1,059 identified drilling locations. In the Rocky
    Mountains, our estimated total net proved reserves of 12.4 Bcf
    are located on approximately 2% of our net acreage.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <B><I><FONT size="2">Technical
    Expertise.</FONT></I></B><FONT size="2"> Since the beginning of
    our CBM operations in 1996, we have gained considerable
    expertise in advanced CBM drilling, completion and re-entry
    techniques. We also have expertise in directional and horizontal
    drilling relating to our waterflood recovery program in the
    Wilmington unit.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <B><I><FONT size="2">Experienced Management
    Team.</FONT></I></B><FONT size="2"> Our management team has
    25&nbsp;years of experience on average in the oil and gas
    industry, and our technical professionals have 17&nbsp;years of
    experience on average in oil and gas operations. Our personnel
    have extensive experience in managing large-scale operations in
    each of our areas of concentration. Most members of our senior
    management have been with us since the mid-1990&#146;s.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <B><I><FONT size="2">Incentivized Management
    Ownership.</FONT></I></B><FONT size="2"> The equity ownership of
    our management team is strongly aligned with that of our
    stockholders. As of August&nbsp;18, 2004, our 14&nbsp;directors
    and executive officers beneficially owned 5,610,544&nbsp;shares
    of common stock, which includes exercisable options to purchase
    1,278,252&nbsp;shares of our common stock.
    </FONT></TD>
</TR>

</TABLE>
</DIV>

<P align="center"><FONT size="2">3
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="width: 100%; border: 1px solid black; padding: 12px;">

<P align="center">
<B>Our Properties</B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Information concerning our properties is set
forth in the table and narrative below:
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="47%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Planned</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2005</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Gross</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Net</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Gross Wells</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Capital</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Area</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Acres</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Acres</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">in 2005</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Expenditures</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(in millions)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Washakie:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Atlantic Rim
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">212,258</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">113,248</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">52</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11.4</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(1)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Pacific Rim
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">35,192</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">27,534</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">38</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12.7</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Powder River
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,190</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,536</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1.3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Wilmington
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,440</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,243</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">40</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15.4</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other(2)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,800</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,989</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">261,880</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">146,550</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">142</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">40.8</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes $950,000 for the construction of
    gathering systems, compression facilities and a pipeline
    pursuant to our agreement with Anadarko.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(2)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes conventional oil and gas properties
    located primarily in New Mexico, Texas and North Dakota.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<B><I><FONT size="2">Washakie Basin</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Washakie Basin is located in southeastern
Wyoming and represents our largest acreage position. Our
activities in this basin are focused on CBM development and are
conducted through our Atlantic Rim and Pacific Rim projects.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Atlantic Rim.
</FONT></I></B><FONT size="2">Our Atlantic Rim project comprises
approximately 212,258&nbsp;gross (113,248&nbsp;net) acres on the
eastern rim of the Washakie Basin. In April 2002, we established
commercial production through the 10&nbsp;wells in our first
pilot program. The 12&nbsp;wells in our second pilot program are
currently dewatering. We expect commercial production for this
program to commence by the end of the first quarter of 2005. Key
statistics for this project include:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">3,510&nbsp;Mcf/d gross (856&nbsp;Mcf/d net)
    production as of June&nbsp;30, 2004 from the 10&nbsp;wells in
    our first pilot program, compared with 2,559 Mcf/d gross (529
    Mcf/d net) production as of June&nbsp;30, 2003;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">45.5&nbsp;Bcf gross (10.6&nbsp;Bcf net) estimated
    proved reserves as of December&nbsp;31, 2003, based on an
    evaluation of 22 producing wells and their 23 proved undeveloped
    offsets;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">22&nbsp;gross (4.1&nbsp;net) producing wells as
    of June&nbsp;30, 2004; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">$10.5&nbsp;million capital expenditure budget for
    2005 to participate in the drilling of 52 gross wells and
    $950,000 to construct a pipeline and related facilities with
    Anadarko.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Pacific Rim.
</FONT></I></B><FONT size="2">We established our Pacific Rim
project in the last half of 2003. This project comprises
approximately 35,192&nbsp;gross (27,534&nbsp;net) acres on the
western rim of the Washakie Basin, approximately 60&nbsp;miles
west of our Atlantic Rim project. Key developments for this
project include:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Drilled nine CBM wells and acquired four
    previously drilled wells on 160-acre spacing;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Constructed a gathering system connecting the
    wells to establish our first CBM nine-well pilot program, which
    we anticipate will commence production by the end of 2004;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Acquired a 6&nbsp;1/2-mile gas pipeline that
    connects to the Kern River pipeline system; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">$12.7&nbsp;million capital expenditure budget for
    2005 to participate in the drilling of 38 gross wells.
    </FONT></TD>
</TR>

</TABLE>
</DIV>

<P align="center"><FONT size="2">4
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="width: 100%; border: 1px solid black; padding: 12px;">

<P align="left">
<B><I><FONT size="2">Powder River Basin</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Powder River Basin is located in northeastern
Wyoming. This project comprises approximately 5,190 gross (2,536
net) acres. Our operations consist primarily of developed CBM
projects. Key statistics for this project include:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">6,068&nbsp;Mcf/d gross (2,788&nbsp;Mcf/d net)
    production as of June&nbsp;30, 2004, compared to
    5,063&nbsp;Mcf/d gross (1,200&nbsp;Mcf/d net) production as of
    June&nbsp;30, 2003;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">6.8&nbsp;Bcf gross (1.8&nbsp;Bcf net) estimated
    proved reserves as of December&nbsp;31, 2003;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">119&nbsp;gross (57.0&nbsp;net) producing wells as
    of June&nbsp;30, 2004; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">$1.3&nbsp;million capital expenditure budget for
    2005 to participate in the drilling of 12&nbsp;gross wells.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<B><I><FONT size="2">Wilmington Unit</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our Wilmington unit is located in the Wilmington
field in the Los Angeles Basin of California, which has produced
over 2.5&nbsp;billion barrels of oil since its discovery in the
1920&#146;s. Our Wilmington unit oil reserves are primarily
proved undeveloped, or PUD. We seek to develop these reserves
using directional and horizontal drilling and secondary recovery
techniques, such as a waterflood recovery program. Key
statistics for our position in this unit include:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">522&nbsp;Bbls/d gross (254&nbsp;Bbls/d net)
    production as of June&nbsp;30, 2004, compared to 538&nbsp;Bbls/d
    gross (200&nbsp;Bbls/d net) production as of June&nbsp;30, 2003;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">23.3&nbsp;MMbbls gross (14.3&nbsp;MMbbls net)
    estimated proved reserves as of December&nbsp;31, 2003, 97% of
    which are PUDs;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">31&nbsp;gross (14.6&nbsp;net) producing wells as
    of June&nbsp;30, 2004; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">$15.4&nbsp;million capital expenditure budget for
    2005 to participate in the drilling of 40&nbsp;gross wells.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We currently are involved in an arbitration with
Magness Petroleum Company, our joint venture partner, concerning
our interests in the Wilmington unit. In the arbitration
proceeding, Magness Petroleum is asserting that the joint
venture be dissolved. Although we do not believe that this is
the most likely outcome, if it were to occur, we would retain
our existing interests in the 31&nbsp;producing wells and a 47%
working interest in the undeveloped properties. Additionally, if
the joint venture were dissolved, our estimated net proved
reserves and our estimated discounted net future cash flows from
the Wilmington unit would be reduced significantly.
</FONT>

<P align="center">
<B>Risk Factors</B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The competitive strengths that we maintain, the
implementation of our business strategy and our future operating
results and financial condition are subject to a number of risks
and uncertainties, including the accuracy of reserve estimates,
volatility of natural gas and oil prices, the possibility of
environmental delays and restrictions impeding our activities,
the effect of the arbitration concerning our Wilmington unit,
our obligations to repurchase drilling program interests and
other factors. The factors that could adversely affect our
actual results and performance, as well as the successful
implementation of our business strategy, are discussed under
&#147;Risk Factors&#148; beginning on page&nbsp;10.
</FONT>

<P align="center">
<B>Our Executive Offices</B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our executive offices are located at 489 Fifth
Avenue, 32nd&nbsp;Floor, New York, NY 10017, and our telephone
number is (212)&nbsp;697-9660. Warren E&#38;P, Inc. is
headquartered at 123 West 1st&nbsp;Street, Suite&nbsp;505,
Casper, WY 82601. Information contained on our website,
www.warrenresources.com, is not intended to be part of this
prospectus.
</FONT>
</DIV>

<P align="center"><FONT size="2">5
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="width: 100%; border: 1px solid black; padding: 12px;">

<P align="center">
<B>The Offering</B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="28%"></TD>
    <TD width="1%"></TD>
    <TD width="71%"></TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">Common stock offered by us
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">Common stock to be outstanding after this offering
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">Use of proceeds
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">We intend to use the proceeds from this offering
    primarily to accelerate our exploration and development
    activities in the Atlantic Rim and Pacific Rim projects of the
    Washakie Basin, as well as in the Wilmington unit, and for
    general corporate purposes.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">Over-allotment option
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">We have granted to the underwriters an option to
    purchase up to an
    additional &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;common
    shares solely to cover over-allotments.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">Nasdaq National Market Symbol
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">WRES
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The number of common shares to be outstanding
after the offering is based on shares outstanding as of
June&nbsp;30, 2004. The number of shares of our common stock to
be outstanding after this offering does not include
15,814,172&nbsp;shares issuable upon the exercise and conversion
of the following:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">2,751,262&nbsp;shares are issuable upon exercise
    of stock options with a weighted average exercise price of
    $5.45&nbsp;per share;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">686,875&nbsp;shares are issuable upon exercise of
    class&nbsp;A warrants at an exercise price of $10.00&nbsp;per
    share;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">506,250&nbsp;shares are issuable upon exercise of
    class&nbsp;B warrants at an exercise price of $12.50&nbsp;per
    share;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">5,317,111&nbsp;shares are issuable upon
    conversion of outstanding bonds with a weighted average exercise
    price of $7.11&nbsp;per share;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">6,552,674&nbsp;shares are issuable upon
    conversion of preferred stock with a conversion price of
    $12.00&nbsp;per share.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Unless otherwise stated, all information
contained in this prospectus assumes no exercise of the
over-allotment option granted to the underwriters.
</FONT>
</DIV>

<P align="center"><FONT size="2">6
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="width: 100%; border: 1px solid black; padding: 12px;">

<P align="center">
<B>Summary Consolidated Historical Financial Data</B>

<DIV align="center">
<FONT size="2">(Dollars in thousands, except share and per share
data)
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">This section presents our summary consolidated
historical financial data. You should read carefully the
consolidated financial statements included in this prospectus,
including the accompanying notes. The summary consolidated
historical financial data is not intended to replace the
consolidated financial statements.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We derived the statement of operations data and
statement of cash flows data for the years ended
December&nbsp;31, 2003, 2002 and 2001, and the balance sheet
data as of December&nbsp;31, 2003 and 2002 from our audited
consolidated financial statements included in this prospectus.
We derived the statement of operations data and statement of
cash flows data for the six months ended June&nbsp;30, 2004 and
2003, and the balance sheet data as of June&nbsp;30, 2004, from
the unaudited consolidated financial statements included in this
prospectus. The interim unaudited consolidated financial
statements have been prepared on the same basis as the annual
audited financial statements and include, in the opinion of
management, all adjustments consisting of normal and recurring
adjustments necessary to present fairly the data for such
periods and may not necessarily be indicative of full year
results.
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="39%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Six Months Ended</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Year Ended December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">June&nbsp;30,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">(unaudited)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Statement of Operations Data:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Revenues:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Turnkey contracts with affiliated partnerships
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$11,301</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;5,841</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;30,103</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;3,250</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;1,877</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and gas sales from marketing activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,621</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,272</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,867</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,795</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,790</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Well services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,168</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,895</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,574</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">512</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">501</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and gas sales
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,717</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">593</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">948</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,681</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,832</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total revenues
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">23,807</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">19,601</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">51,492</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,238</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Costs and operating expenses:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Turnkey contracts
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,285</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,965</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25,953</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,344</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,235</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cost of marketed oil and gas purchased from
    affiliated partnerships
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,121</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15,299</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,725</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,731</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Well services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">662</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">839</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,519</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">261</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">330</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Production and exploration
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,812</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,326</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">568</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,046</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,952</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Depreciation, depletion, amortization and
    impairment
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,249</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,930</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,462</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,534</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">519</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">General and administrative
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,496</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,278</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,485</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,337</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,165</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Contingent repurchase obligation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,065</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,319</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total costs and operating expenses
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25,004</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">31,394</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">68,605</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,247</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,932</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Income (loss) from operations
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,197</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(11,793</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(17,113</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,009</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(932</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other income (expense):
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Interest and other income
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,340</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,258</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,977</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,092</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">752</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Interest expense
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,528</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6,313</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,776</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(256</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,238</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Gain on sale of oil and gas properties
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">494</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,287</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">120</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net gain (loss) on investment
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">21</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">464</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(10</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(88</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">126</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total other income (expense)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">327</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,696</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,809</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">868</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(360</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Loss before income taxes, extraordinary item and
    cumulative effect of change in accounting principle
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(870</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(8,097</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(20,922</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,141</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,292</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Income tax expense (benefit)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">129</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(471</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">152</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">146</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(194</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Loss before minority interest and cumulative
    effect of change in accounting principle
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(999</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,626</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(21,074</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,287</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,098</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Minority interest
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(112</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(32</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(62</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss before change in accounting principle
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,111</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,626</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(21,074</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,319</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,160</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cumulative effect of change in accounting
    principle
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(88</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(88</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,199</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,626</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(21,074</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,319</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,248</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Preferred dividends and accretion
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,562</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,290</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,736</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss applicable to common stockholders
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$(5,761</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;(7,642</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$(21,074</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;(5,609</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$(2,984</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Basic and diluted loss per common share
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;(0.34</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;&nbsp;(0.44</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;&nbsp;(1.20</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;&nbsp;(0.31</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;(0.17</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Weighted average shares outstanding basic and
    diluted
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16,827,857</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">17,339,869</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">17,532,882</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">18,357,891</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16,871,121</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>
</DIV>

<P align="center"><FONT size="2">7
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="width: 100%; border: 1px solid black; padding: 12px;">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="41%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Six Months Ended</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Year Ended December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">June&nbsp;30,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">(unaudited)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Statement of Cash Flows Data:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net cash provided by (used in):
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Operating activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,278</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6,101</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(15,712</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,491</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">668</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Investing activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(13,524</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,317</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(17,635</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(10,032</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,723</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Financing activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,591</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,045</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,700</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,027</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(102</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

</TABLE>
</CENTER>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="45%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">At December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">At June&nbsp;30,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(unaudited)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Balance Sheet Data:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash and cash equivalents
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;24,529</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;23,185</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;20,033</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and gas properties, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">94,950</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">48,684</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">102,423</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">151,054</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">108,262</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">153,295</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Long-term debt (including current maturities)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">49,916</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">56,202</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">48,667</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Convertible preferred stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">76,334</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">20,956</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">77,021</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total stockholders&#146; equity
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">56,394</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,002</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">65,429</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>
</DIV>

<P align="center"><FONT size="2">8
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="width: 100%; border: 1px solid black; padding: 12px;">

<P align="center">
<B>Summary Reserve And Production Data</B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table sets forth summary
information concerning our estimated proved oil and gas reserves
at December&nbsp;31, 2003, 2002 and 2001 based on reports
prepared by Williamson Petroleum Consultants, Inc., our
independent petroleum consultants. A copy of a summary reserve
report as of December&nbsp;31, 2003 is attached to this
prospectus as Appendix&nbsp;B. All calculations of estimated net
proved reserves have been made in accordance with the rules and
regulations of the Securities and Exchange Commission, or the
SEC, and, except as otherwise indicated, give no effect to
federal or state income taxes. You should refer to &#147;Risk
Factors&#148;, &#147;Management&#146;s Discussion and Analysis
of Financial Condition and Results of Operations&#148;,
&#147;Business&nbsp;&#151; Natural Gas and Oil Reserves&#148;
and the reserve report included in this prospectus in evaluating
the material presented below.
</FONT>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="66%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">At December&nbsp;31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Estimated Net Proved Reserves:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Natural gas (MMcf)(1)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15,448</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,503</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,495</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil (MBbls)(2)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15,124</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,324</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,478</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Natural gas equivalent (MMcfe)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">106,190</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">82,447</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">53,365</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">PV-10 value (in thousands)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">182,985</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">113,954</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">20,482</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Standardized measure of discounted future net
    cash flows<BR>
    (in thousands)(3)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">146,126</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">71,418</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">19,512</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Prices Used in Calculating Estimated Value of
    Proved Reserves:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Natural gas (per Mcf)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.50</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.36</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1.76</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil (per Bbl)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">28.45</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">27.15</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">13.87</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Other Reserve Data:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Proved developed reserves (MMcfe)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,862</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,967</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,697</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table sets forth summary
information concerning our production results and average sales
prices for the years ended December&nbsp;31, 2003, 2002 and 2001
and the six months ended June&nbsp;30, 2004.
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="48%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">For the</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Year Ended December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Six&nbsp;Months</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Ended</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">June&nbsp;30, 2004</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Net Production Volume:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Natural gas (MMcf)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">785.8</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">54.8</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">32.6</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">359.3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil (MBbls)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">87.4</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2.3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">33.4</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total equivalents (MMcfe)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,310.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">80.3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">46.7</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">559.7</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Average Sales Prices:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Natural gas (per Mcf)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.70</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1.90</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2.83</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(4)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.58</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil (per Bbl)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25.42</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">20.84</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16.74</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">30.97</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Weighted average (per Mcfe)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.92</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2.40</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2.82</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.79</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Included in 2003 and 2002 reserves,
    1,028&nbsp;MMcf and 577&nbsp;MMcf is attributable to
    consolidated subsidiaries in which there is an average minority
    interest of 25% and 34%, respectively.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(2)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Included in 2003 and 2002 reserves,
    2,469&nbsp;MBbls and 1,195&nbsp;MBbls is attributable to
    consolidated subsidiaries in which there is an average minority
    interest of 25% and 34%, respectively.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(3)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Standardized measure of discounted future net
    cash flows differs from PV-10 value because it includes the
    effect of future income taxes. Included in 2003 and 2002
    standardized measure of discounted future net cash flows,
    $23,017 and $10,462 is attributable to consolidated subsidiaries
    in which there is an average minority interest of 25% and 34%,
    respectively.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(4)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Average sales price for natural gas in 2001
    includes $0.24 per Mcf hedging loss.
    </FONT></TD>
</TR>

</TABLE>
</DIV>

<P align="center"><FONT size="2">9
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left">
<A name='102'></A>
</DIV>

<!-- link1 "RISK FACTORS" -->

<P align="center">
<B><FONT size="2">RISK FACTORS</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">An investment in our common stock involves a
high degree of risk. You should carefully consider the following
risk factors, together with the other information contained in
this prospectus, before deciding to invest in our common stock.
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.</FONT></I>

<P align="left">
<B><I><FONT size="2">Risks Relating to Our
Business</FONT></I></B>

<P align="left">
<B><FONT size="2">Our reserve estimates depend on many
assumptions that may turn out to be inconclusive, subject to
varying interpretations or inaccurate.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">This prospectus contains estimates of our proved
natural gas and oil reserves and the estimated future net
revenues from these reserves. 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. It requires interpretations of available geological,
geophysical, engineering and economic data for each reservoir.
Therefore, these estimates are inherently imprecise. Further,
the potential for future reserve revisions, either upward or
downward, is significantly greater than normal because most of
our reserves are undeveloped.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Actual natural gas and oil prices, future
production, revenues, operating expenses, taxes, development
expenditures and quantities of recoverable natural gas 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
prospectus. 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 prices and other factors, many of which are beyond
our control.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of December&nbsp;31, 2003, approximately 91%
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 be able to raise the capital we need to develop these
proved reserves. Most of these proved reserves are located in
the Wilmington unit where drilling activities have been
suspended since late 1999. Further delays or an unfavorable
resolution of our dispute with Magness Petroleum Company, our
joint venture partner, in the Wilmington unit would result in a
downward revision of our proved reserves. See
&#147;Business&nbsp;&#151; Legal Proceedings&#148;.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">You should not assume that the present value of
future net revenues referred to in this prospectus 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 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 from 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
</FONT>

<P align="center"><FONT size="2">10
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left">
<FONT size="2">gas industry and oil and gas prices will affect
whether the 10% discount factor accurately reflects the market
value of our estimated reserves.
</FONT>
</DIV>

<P align="left">
<B><FONT size="2">If we are unable to settle our disagreements
with Magness Petroleum Company, our joint venture partner in the
Wilmington unit, the value of our interest there or realization
of that value could be significantly diminished or
delayed.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Approximately 81% of the estimated net present
value of our proved reserves as of December&nbsp;31, 2003 is
attributable to our interests in the Wilmington unit. Our
operations in this unit to date have been governed by the joint
venture agreement and the purchase and sale agreement with
Magness Petroleum Company, our joint venture partner in the
Wilmington unit. These agreements require a substantial degree
of coordination and cooperation between us and Magness
Petroleum. Our business relationship with Magness Petroleum has
been characterized by significant discord, litigation and
arbitration and, as a result of litigation and arbitration
initiated against us by Magness Petroleum, no new drilling or
development operations have taken place in this unit since
November 1999. Magness Petroleum continues to operate 31
producing wells in the Wilmington unit, including three wells
drilled pursuant to the joint venture. Additional information
concerning these litigation and arbitration proceedings between
us and Magness Petroleum is set forth under
&#147;Business&nbsp;&#151; Legal Proceedings&#148;.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The ultimate outcome of this litigation, which is
currently in arbitration, could affect our percentage ownership
interest in the Wilmington unit or its value. Specifically, if
Magness Petroleum were to prevail in its attempt to cause a
termination of the joint venture, we would retain our existing
interests in the 31 producing wells and a 47% working interest
in the undeveloped properties. Additionally, if the joint
venture were dissolved, our estimated total proved natural gas
and oil reserves, as
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2004, would decrease from 106.2&nbsp;Bcfe to
approximately &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Bcfe and the
estimated discounted future net cash flows from our estimated
proved reserves would decrease from $183.0&nbsp;million to
approximately
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;million.
Continued delays in conducting drilling operations in the
Wilmington unit due to litigation with Magness Petroleum is
likely to affect the realization of the value of our interests
in that unit because most of our proved reserves in that unit
are undeveloped and require further drilling to become producing
reserves.
</FONT>

<P align="left">
<B><FONT size="2">Failure to obtain financing and environmental
approvals for the development of our Washakie Basin properties
in which we own interests could have a material adverse effect
on our business, financial condition or results of
operations.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our future growth plans rely heavily on
establishing significant production and reserves in the Washakie
Basin. However, an inability to obtain financing at acceptable
rates could prevent us from developing the Washakie Basin.
Furthermore, environmental restrictions in this area could
prevent us from developing this acreage as planned. The
U.S.&nbsp;Bureau of Land Management, or the BLM, has begun
preparation of an environmental impact statement, or EIS, which
involves a series of scientific studies, surveys and public
hearings and formulation of a plan for drilling and production
in the Washakie Basin. The EIS is currently expected to be
completed by the end of 2005, although this projected completion
date may be extended. Our prior drilling in this basin, along
with our projected drilling through 2005, is being conducted
under an interim drilling policy of the BLM, under which up to a
total of 200&nbsp;wells can be drilled in this basin, 165 of
which have been allocated to us and our drilling partners. If
public opposition to continued drilling in this basin or other
regulatory complications occur, the EIS may not be completed
during 2005, or could cause the BLM to condition, severely
restrict or prohibit drilling on a more permanent basis. Legal
challenges to the EIS could also materially affect the timing
and ultimate environmental restrictions that are imposed on our
drilling and production operations. 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 in
the Washakie Basin as planned. We cannot predict the timing or
outcome of the EIS. 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.
</FONT>

<P align="center"><FONT size="2">11
</FONT>

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<P align="left">
<B><FONT size="2">Our substantial contingent obligations to
repurchase&nbsp;10% of our outstanding bonds and debentures
annually and to repurchase drilling program interests could
strain our financial resources.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of June&nbsp;30, 2004, we had
$46.9&nbsp;million of outstanding bonds and debentures. Holders
of these securities are entitled each year to tender up to 10%
of the original aggregate face amount of each series of
debentures for repurchase by us at their face amount, or
$4.7&nbsp;million in 2004 and $4.2&nbsp;million in 2005.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In addition, under the terms of 13 of our
drilling programs formed before 1998, to the extent that the
drilling programs and other program investors elect not to
purchase a withdrawing partner&#146;s interest, the minority
interest investors have the right to require us to repurchase
their interests in each program for a formula price. This right
is effective either seven years from the date of a
partnership&#146;s formation, or between the 15th and 25th
anniversary of their formation. As of June&nbsp;30, 2004, we
have potential repurchase obligations for programs which mature
on January&nbsp;1, 2005 of approximately $4.5&nbsp;million and
for programs which mature on and after December 2009 of
approximately $1.4&nbsp;million. At June&nbsp;30, 2004, a
portion of our repurchase obligation was secured by
$1.1&nbsp;million market value of U.S.&nbsp;treasury bonds held
by an independent trustee.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Depending upon the amount of cash distributions
to investors in our programs prior to the repurchase obligation
dates and the number of investors who tender their interests for
repurchase as their tender rights become available, a
significant amount of funds may be required for these
repurchases. These repurchase obligations could put a strain
upon our financial resources and otherwise adversely affect our
ability to execute our business plan. Any payment made under
this obligation would be recorded as a reduction to minority
interest as shown on our balance sheet.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Under the terms of our seven drilling programs
formed between 1998 and 2001 investors have the right to require
us to repurchase their interests in each program seven to
25&nbsp;years from the date of a partnership&#146;s formation,
to the extent that the drilling programs and other program
investors elect not to purchase the investor&#146;s interest.
The price of our repurchase is fixed by the drilling program
agreement to be the lower of the PV-10 value of the assets of
the program and a formula based on the amount of the
investor&#146;s cash investment reduced by the amount of any
cash distributions received. As of June&nbsp;30, 2004, based on
the December&nbsp;31, 2003 reserve reports of the respective
drilling programs, the aggregate PV-10 value of the assets in
these programs was $15.8&nbsp;million. Because this amount is
less than the formula price of $96.5&nbsp;million as of
June&nbsp;30, 2004, the PV-10 of $15.8&nbsp;million is our
maximum repurchase obligation as of June&nbsp;30, 2004. This
PV-10 amount may increase when we drill the remaining 22 net
wells on behalf of these seven drilling programs. As a result of
oil and gas price increases since December&nbsp;31, 2003, we
anticipate that the PV-10 value has increased since that time.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Based on the formula price as of June&nbsp;30,
2004, if in the future the drilling program PV-10 value were to
exceed $96.5&nbsp;million, then our maximum obligation would be
the formula price of $96.5&nbsp;million, consisting of
obligations of $43.3&nbsp;million between July&nbsp;1, 2005 and
June&nbsp;30, 2007, $51.7&nbsp;million between July&nbsp;1, 2007
and June&nbsp;30, 2009 and $1.5&nbsp;million thereafter.
</FONT>

<P align="left">
<B><FONT size="2">We face significantly increasing water
disposal costs in our CBM drilling operations.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Wyoming Department of Environmental Quality,
or Wyoming DEQ, has restrictive regulations applying 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 re-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&nbsp;&#38; 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
</FONT>

<P align="center"><FONT size="2">12
</FONT>

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<DIV align="left">
<FONT size="2">the Washakie Basin, will become more difficult to
obtain. In Wyoming, our produced water is currently injected at
six wells, and we have obtained permits to drill six more of
these underground injection 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.
</FONT>
</DIV>

<P align="left">
<B><FONT size="2">Operational impediments may hinder our access
to natural gas and oil markets or delay our
production.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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 no existing pipeline in
the southern portion of the Washakie Basin. Therefore, if
drilling results are positive in the entire length of the
Washakie Basin, an entirely new gathering system would need to
be built at a cost of approximately $20&nbsp;million.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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 also may be harmed by:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the lack of pipeline transmission facilities or
    carrying capacity;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">federal and state regulation of natural gas and
    oil production; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">federal and state transportation, tax and energy
    policies.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We recently entered into an agreement with
Anadarko to jointly construct gathering systems, 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 its price. 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
were made to deliver our production to market.
</FONT>

<P align="left">
<B><FONT size="2">Our level of indebtedness reduces our
financial flexibility and could impede our ability to
operate.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of June&nbsp;30, 2004, our long-term debt was
$48.7&nbsp;million, substantially all of which consists of
debentures we have issued from time to time with due dates
ranging from December&nbsp;31, 2007 through December&nbsp;31,
2022. At June&nbsp;30, 2004, the ratio of our debt to equity was
0.7 to 1.0, and the ratio of our debt to total assets was 0.3 to
1.0. We are required to make sinking fund payments on
$46.9&nbsp;million principal amount of our outstanding
debentures, with respect to which we have deposited
$20.5&nbsp;million of principal amount of U.S.&nbsp;treasury
bonds as of June&nbsp;30, 2004, with estimated sinking fund
payments required of $2.8&nbsp;million by the end of 2004 and
$3.0&nbsp;million by the end of 2005. We are also contingently
obligated to repurchase&nbsp;10% of our outstanding bonds
annually. We may not have sufficient funds to make repayments or
sinking fund payments throughout all future maturities.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our level of debt affects our operations in
several important ways, including the following:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">a large portion of our net cash flow from
    operations has and will continue to be used to pay interest on
    borrowings;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">a high level of debt may impair our ability to
    obtain additional financing in the future for working capital,
    capital expenditures, acquisitions, general corporate or other
    purposes;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">our leveraged financial position may make us more
    vulnerable to economic downturns and may limit our ability to
    withstand competitive pressures.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">13
</FONT>
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<P align="left">
<B><FONT size="2">We may incur additional debt in order to fund
our exploration and development activities, which would continue
to reduce our financial flexibility and could have a material
adverse effect on our business, financial condition or results
of operations.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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 out of cash on
hand, we could attempt to refinance the debt or repay the debt
with the proceeds of an 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.
</FONT>

<P align="left">
<B><FONT size="2">We have substantial capital requirements that,
if not met, may hinder our growth and operations.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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 projected these capital expenditures to be
approximately $40.8&nbsp;million in 2005. Historically, we have
financed our capital expenditures primarily through drilling
programs that participated in the exploration, drilling and
development of the projects, and to a lesser extent through debt
and equity financing. In the future, we intend to finance these
capital expenditures through the proceeds of this equity
offering 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:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the success of our CBM projects in the Washakie
    Basin;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">our success in locating and producing new
    reserves;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the level of production from existing
    wells;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">prices of natural gas and oil.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">a substantial portion of our operating cash flow
    being dedicated to the payment of principal and interest;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">our being more vulnerable to competitive
    pressures and economic downturns;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">restrictions on our operations.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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.
</FONT>

<P align="left">
<B><FONT size="2">We have incurred losses from operations in the
past and cannot guarantee profitability in the future.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">At June&nbsp;30, 2004, we had an accumulated
deficit of $70.0&nbsp;million and total stockholders&#146;
equity of $65.4&nbsp;million. We have recognized annual net
losses in each year since 1999. See &#147;Selected Consolidated
</FONT>

<P align="center"><FONT size="2">14
</FONT>

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<DIV align="left">
<FONT size="2">Financial Data&#148;. We may not achieve or
sustain profitability or positive cash flows from operating
activities in the future.
</FONT>
</DIV>

<P align="left">
<B><FONT size="2">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.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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 assess fully 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.
</FONT>

<P align="left">
<B><FONT size="2">Our operations in Wyoming could be adversely
affected by abnormally poor weather conditions.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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.
Unusually severe weather could further curtail these operations,
including drilling of new wells or production from existing
wells, and depending on the severity of the weather, could have
a material adverse effect on our business, financial condition
and results of operations.
</FONT>

<P align="left">
<B><FONT size="2">As general partner of limited partnerships and
co-venturer in joint ventures, we are liable for various
obligations of those partnerships and joint ventures.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We currently serve as the managing general
partner of nine limited partnerships and participate in four
joint ventures as a result of our sponsorship of drilling
programs. As general partner or co-venturer, we are contingently
liable for the obligations of the partnerships or joint
ventures, as applicable, including responsibility for their
day-to-day operations and liabilities which cannot be repaid
from partnership or venture assets, insurance proceeds or
indemnification by others. In the future, we might be exposed to
litigation in connection with partnership or joint venture
activities or find it necessary to advance funds on behalf of
certain partnerships or 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. See &#147;Business&nbsp;&#151; Drilling
Programs&#148;.
</FONT>

<P align="left">
<B><FONT size="2">Our role as general partner of limited
partnerships and co-venturer in joint ventures may result in
conflicts of interest, which may not be resolved in our best
interests or the best interests of our stockholders.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our role as general partner of limited
partnerships and co-venturer in joint ventures may result in
conflicts of interest between the interests of those entities
and our stockholders. For example, we plan to continue drilling
natural gas and oil wells for the various drilling programs we
have sponsored. The allocation of those wells to the drilling
programs may give rise to a conflict of interest between our
interests and the interests of the partners or co-venturers in
our drilling programs. Any resolution of these conflicts may not
always be in our best interests.
</FONT>

<P align="left">
<B><FONT size="2">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.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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, and Kenneth A. Gobble,
our senior vice president of exploration and production, and
other key management
</FONT>

<P align="center"><FONT size="2">15
</FONT>

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<DIV align="left">
<FONT size="2">and technical personnel. The loss of the services
of Messrs.&nbsp;Swanton, Larkin, Gobble or other key management
and technical personnel could adversely affect our business
operations. We maintain key person life insurance on
Messrs.&nbsp;Swanton, Larkin and Gobble but not on other key
management and technical personnel.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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.
</FONT>

<P align="left">
<B><FONT size="2">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.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">environmental hazards, such as uncontrollable
    flows of natural gas, oil, brine, well fluids, toxic gas or
    other pollution into the environment, including groundwater and
    shoreline contamination;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">abnormally pressured formations;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">mechanical difficulties, such as stuck oil field
    drilling and service tools and casing collapse;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">fires and explosions;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">personal injuries and death;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">regulatory investigations and penalties;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">natural disasters.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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
&#147;Business&nbsp;&#151; Operating Hazards And Insurance&#148;.
</FONT>

<P align="left">
<B><FONT size="2">We have limited control over activities on
properties we do not operate, which could reduce our production
and revenues.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Substantially all 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&#146;s breach
of the applicable agreements, could reduce our revenues and
production. The success and timing of our drilling and
development activities on properties operated by others
therefore depends upon a number of factors outside of our and
the operator&#146;s control, including:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">timing and amount of capital expenditures;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">expertise and financial resources;
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">16
</FONT>

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<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">inclusion of other participants in drilling
    wells;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">use of technology.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<B><FONT size="2">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.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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 unit from Magness Petroleum in
1999, which had acquired the interest from a third party that in
turn had acquired its interest from Exxon Corporation with no
warranty of title. Exxon had owned the Wilmington unit for over
25&nbsp;years before its sale in 1997. We have acquired no title
opinion as to the interests we own in that field, which may
ultimately prove to be less than the interests we believe we
own. Losses in this field may result from title defects or from
ownership of a lesser interest than we assume we acquired or
from the assignment of leasehold rights by us to our drilling
programs. 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 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.
</FONT>

<P align="left">
<B><I><FONT size="2">Risks Relating to the Oil and Gas
Industry</FONT></I></B>

<P align="left">
<B><FONT size="2">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.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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
will 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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Among the factors that cause this fluctuation are:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">changes in domestic and global supply and demand
    for natural gas and oil;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">levels of production and other activities of the
    Organization of Petroleum Exporting Countries and other natural
    gas and oil producing nations;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">market expectations about future prices;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the level of global natural gas and oil
    exploration, production activity and inventories;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">political conditions, including embargoes, in or
    affecting other oil producing activity;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the price and availability of alternative fuels.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Lower natural gas and oil prices may not only
decrease our revenues on a per unit basis, 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.
</FONT>

<P align="center"><FONT size="2">17
</FONT>
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<P align="left">
<B><FONT size="2">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.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our future success depends largely on the success
of our exploitation, exploration, 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 &#147;&nbsp;&#151; Risks Related to Our Business&nbsp;&#151;
Our reserve estimates depend on many assumptions that may turn
out to be inconclusive, subject to varying interpretations or
inaccurate&#148; for a discussion of the uncertainty involved in
these processes. Our cost 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:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">unexpected drilling conditions;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">pressure or irregularities in geological
    formations;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">equipment failures or accidents;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">well blow-outs;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">fires and explosions;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">pipeline and processing interruptions or
    unavailability;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">title problems;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">adverse weather conditions;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">lack of market demand for natural gas and oil;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">delays imposed by or resulting from compliance
    with environmental and other regulatory requirements;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">shortages of or delays in the availability of
    drilling rigs and the delivery of equipment;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">reductions in natural gas and oil prices.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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
options or 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.
</FONT>

<P align="left">
<B><FONT size="2">If natural gas and oil prices decrease, we may
be required to record an impairment, which would reduce our
stockholders&#146; equity.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We use the successful efforts method of
accounting for costs related to our natural gas and oil
properties. Accordingly, we capitalize the cost to acquire,
explore for and develop gas and oil properties. Wells are
evaluated on a field-by-field basis for impairment. We review
our natural gas and oil properties on a field level when
circumstances indicate that the capitalized costs, less
accumulated depreciation, depletion and amortization or the
carrying value of the property, may not be recoverable. If the
carrying value of the property exceeds the expected future
undiscounted cash flows, an amount equal to the excess of the
carrying value over the fair value of the property, generally
based upon discounted cash flow, is charged to expense. An
impairment results in a non-cash charge to earnings which does
not impact cash flow from operating activities, but does reduce
our stockholders&#146; equity. The risk that we will be required
to write down the carrying value of our oil and gas properties
increases when oil and gas prices are low or volatile. In
addition, write-downs may occur if we experience substantial
downward adjustments to our estimated proved reserves.
</FONT>

<P align="center"><FONT size="2">18
</FONT>

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<DIV align="left">
<FONT size="2">Once incurred, a write-down of oil and gas
properties is not reversible at a later date. See
&#147;Management&#146;s Discussion and Analysis of Financial
Condition and Results of Operations&nbsp;&#151; Critical
Accounting Policies&#148; for additional information on these
matters.
</FONT>
</DIV>

<P align="left">
<B><FONT size="2">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.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">acquiring desirable producing properties or new
    leases for future exploration;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">marketing our natural gas and oil production;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">integrating new technologies;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">acquiring the equipment and expertise necessary
    to develop and operate our properties.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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.
</FONT>

<P align="left">
<B><FONT size="2">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.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Exploration for and exploitation, 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 laws and environmental laws and regulations, and requires
various permits and approvals from federal, state and local
agencies. If these permits are not issued or 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. Further, these laws and
regulations, particularly in the Rocky Mountain region, 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:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">water discharge and disposal permits for drilling
    operations;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">drilling permits;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">drilling bonds;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">reclamation;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">spacing of wells;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">occupational safety and health;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">unitization and pooling of properties;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">air quality, noise levels and related permits;
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">19
</FONT>

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<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">rights-of-way and easements;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">reports concerning operations to regulatory
    authorities;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">calculation and payment of royalties;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">gathering, transportation and marketing of gas
    and oil;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">taxation;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">waste disposal.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<FONT size="2">Under these laws and regulations, we could be
liable for:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">personal injuries;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">property damage;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">oil spills;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">discharge of hazardous materials;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">well reclamation costs;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">remediation and clean-up costs;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">fines and penalties;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">natural resource damages;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">other environmental protection and damages issues.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">See &#147;Business&nbsp;&#151; Regulations&#148;
for a more detailed discussion of laws affecting our operations.
</FONT>

<P align="left">
<B><FONT size="2">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.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If domestic drilling activity increases,
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,
these costs have sharply increased and could do so again. The
demand for and wage rates of qualified drilling rig crews
generally rise 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.
</FONT>

<P align="left">
<B><FONT size="2">Unless we replace, maintain or expand our
natural gas and oil reserves, our reserves and production will
decline, which could have a material adverse effect on our
business, financial condition and results of
operations.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In general, production from natural gas and oil
properties declines over time as reserves are depleted, with the
rate of decline depending on reservoir characteristics. If we
are not successful in our exploitation, exploration, development
and enhancement activities or in acquiring properties containing
proved reserves, our proved reserves will decline as reserves
are produced. Our future natural gas and oil production is
highly dependent upon our ability to economically find, develop
or acquire reserves in commercial quantities.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">To the extent cash flow from operations is
reduced, either by a decrease in prevailing prices for natural
gas and oil or an increase in finding and development costs, and
external sources of capital become limited or unavailable, our
ability to make the necessary capital investment to maintain or
expand our asset base of natural gas and oil reserves would be
impaired. Even with sufficient available capital, our future
exploration and development activities may not result in
additional proved reserves, and we may not be able to drill
productive wells at acceptable costs.
</FONT>

<P align="center"><FONT size="2">20
</FONT>

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<P align="left">
<B><I><FONT size="2">Risks Relating to Ownership of Our Common
Stock</FONT></I></B>

<P align="left">
<B><FONT size="2">Purchasers in this offering will experience
immediate dilution and will experience further dilution with the
future exercise of stock options.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If you purchase shares of our common stock in
this offering, you will pay more for your shares than the per
share book value as of June&nbsp;30, 2004. As a result, the
value of your investment based on the net tangible book value
per share of our common stock will be less than what it would
have been had you and all of the existing stockholders and
existing option holders paid the same amount per share of common
stock as you will pay in this offering. The net tangible book
value dilution to new investors in this offering will be
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share at an assumed initial public offering price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share. The exercise of outstanding options and notes or bonds
convertible into common stock may result in further dilution to
you. See &#147;Dilution&#148; for a more complete description of
how the value of your investment in our common stock will be
diluted upon completion of this offering.
</FONT>

<P align="left">
<B><FONT size="2">The number of shares eligible for future sale
or which have registration rights could adversely affect any
future market that develops for our common stock.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Sales of substantial amounts of our common stock
in a public market, or the perception that a large number of
shares are available for sale, could depress the market price of
our common stock. Upon completion of this
offering, &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock will be outstanding, 11,798,447&nbsp;shares of
common stock are issuable upon conversion of our convertible
debt and convertible preferred stock and 2,712,512&nbsp;shares
of common stock are issuable upon exercise of outstanding
options and warrants. In addition to the shares of common stock
sold in this offering, approximately 13,310,571&nbsp;shares of
our common stock will immediately be eligible for sale in the
public market. An additional 4,038,499&nbsp;shares held by our
affiliates will immediately be eligible for sale in the public
market subject to the volume and other limitations of
Rule&nbsp;144. Further, upon conversion by the holders of
existing convertible debt and preferred stock into common stock,
8,456,888 shares will immediately be eligible for sale in the
public market, and 3,341,559 shares held by our affiliates will
immediately be eligible for sale subject to the volume and other
limitations of Rule&nbsp;144. In addition, as soon as
practicable following the date of this prospectus, we intend to
file a registration statement on Form&nbsp;S-8 under the
Securities Act to register up to 6,876,250&nbsp;shares of our
common stock reserved for grant or previously granted under our
stock option plans. These shares generally will be available for
sale in the public market by holders who are not our affiliates
and, subject to the volume and other applicable limitations of
Rule&nbsp;144, by holders who are our affiliates, subject to
vesting restrictions. Further, upon conversion by holders of
outstanding warrants to purchase shares of our common stock, an
aggregate of 1,618,125&nbsp;shares will be eligible for sale in
the public market upon satisfying the one-year holding period of
Rule&nbsp;144.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">All of our directors, executive officers and
certain of our stockholders, holding approximately 8,322,009
shares of our common stock, will be subject to agreements with
the underwriters or us that restrict their ability to sell or
transfer their stock for 180&nbsp;days from the date of this
prospectus. After these agreements expire, such shares will be
eligible for sale in the public market. For a detailed
discussion of the shares eligible for future sale, see
&#147;Shares Eligible for Future Sale&#148;.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In accordance with the terms and conditions of
the registration rights agreement dated December&nbsp;12, 2002,
holders of 6,552,674&nbsp;shares of our convertible preferred
stock as of June&nbsp;30, 2004 have a one-time right to demand
that their shares of common stock issuable upon conversion of
the convertible preferred stock be registered under the
Securities Act commencing 180 days after the date of this
offering. Also, commencing 180&nbsp;days after completion of
this offering, these holders may have the right to include their
shares of common stock, subject to the consent of any
underwriter, in registration statements that we may file, if
any, to register shares of our common stock under the Securities
Act for ourselves or other stockholders. Additionally,
commencing February&nbsp;3, 2005, we are required to file a
registration statement for 2,875,000&nbsp;shares of outstanding
common stock and 1,437,500&nbsp;shares of common stock issuable
upon exercise of our class&nbsp;A and class&nbsp;B warrants
under the Securities Act. The holders of these securities have
agreed to certain restrictions on the transfer of their stock
for a period of 180&nbsp;days after this offering. If our
stockholders sell significant amounts of common stock on 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
</FONT>

<P align="center"><FONT size="2">21
</FONT>

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<DIV align="left">
<FONT size="2">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.
</FONT>
</DIV>

<P align="left">
<B><FONT size="2">Our management has broad discretion over the
use of the net proceeds from this offering, and you may not
agree with how they use them.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our management has significant flexibility in
applying the proceeds we receive in this offering. Because the
proceeds are not required to be allocated to any specific
purpose, investment or transaction, you cannot determine the
value or propriety of our management&#146;s application of the
proceeds on our behalf. See &#147;Use of Proceeds&#148; for a
more detailed description of how management intends to apply the
proceeds of this offering.
</FONT>

<P align="left">
<B><FONT size="2">There has been no public market for our common
stock, and you may be unable to resell your shares at or above
the offering price.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">There currently is no public market for our
common stock, and an active trading market may not develop or be
sustained after this offering. The initial public offering price
for the shares will be determined by negotiations between us and
the representatives of the underwriters and may not be
indicative of the market price for our common stock after this
offering. The market price of our common stock could fluctuate
significantly in response to many risk factors listed in this
section.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">domestic and worldwide supplies and prices of and
    demand for natural gas and oil;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">political conditions in natural gas and oil
    producing regions;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">war and acts of terrorism;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">demand for our common stock;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">revenue and operating results failing to meet the
    expectations of securities analysts or investors in any
    particular quarter;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">changes in expectations as to our future
    financial performance or changes in financial estimates, if any,
    of public market analysts;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">investor perception of our industry or our
    prospects;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">general economic trends;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">limited trading volume of our stock;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">changes in environmental and other governmental
    regulations;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">actual or anticipated quarterly variations in our
    operating results;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">our involvement in litigation;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">conditions generally affecting the oil and
    natural gas industry;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the prices of oil and natural gas;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">announcements relating to our business or the
    business of our competitors;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">our liquidity;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">our ability to raise additional funds.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<B><FONT size="2">Control by our executive officers and
directors will limit your ability to influence the outcome of
matters requiring stockholder approval and could discourage our
potential acquisition by third parties.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of August&nbsp;18, 2004, our executive
officers and directors beneficially owned approximately 25.7% of
our common stock. These stockholders, if acting together, would
be able to influence significantly all matters
</FONT>

<P align="center"><FONT size="2">22
</FONT>

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<DIV align="left">
<FONT size="2">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.
</FONT>
</DIV>

<P align="left">
<B><FONT size="2">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.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">giving the board the exclusive right to fill all
    board vacancies;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">providing that special meetings of stockholders
    may only be called by the board pursuant to a resolution adopted
    by
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="5%"></TD>
    <TD width="3%"></TD>
    <TD width="92%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#151;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">a majority of the board, either upon a motion or
    upon written request by holders of at least 66&nbsp;2/3% of the
    voting power of the shares entitled to vote,&nbsp;or
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#151;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">by our president;
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">a classified board of directors;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">permitting removal of directors only for cause
    and with a super-majority vote of the stockholders;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">prohibiting cumulative voting in the election of
    directors.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">These provisions also could discourage proxy
contests and make it more difficult for you and other
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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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&#146;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 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 acquiror 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
&#147;Description of Capital Stock&#148;.
</FONT>

<P align="left">
<B><FONT size="2">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.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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.
</FONT>

<P align="center"><FONT size="2">23
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left">
<A name='103'></A>
</DIV>

<!-- link1 "CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS" -->

<P align="center">
<B><FONT size="2">CAUTIONARY NOTE&nbsp;REGARDING FORWARD-LOOKING
STATEMENTS</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">This prospectus and the documents incorporated by
reference in this prospectus contain forward-looking statements
within the meaning of the federal securities laws.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">These forward-looking statements include, among
others, the following:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">our growth strategies;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">our reserve estimates;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">our ability to successfully and economically
    explore for and develop oil and gas resources;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">anticipated trends in our business;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">our future results of operations;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">our liquidity and ability to finance our
    exploration and development activities;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">market conditions in the oil and gas industry;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">our ability to make and integrate
    acquisitions;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the impact of environmental and other
    governmental regulation.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">These statements may be found under
&#147;Prospectus Summary&#148;, &#147;Risk Factors&#148;,
&#147;Management&#146;s Discussion and Analysis of Financial
Condition and Results of Operation&#148;, &#147;Business&#148;
and other sections of this prospectus. Forward-looking
statements are typically identified by use of terms such as
&#147;may&#148;, &#147;will&#148;, &#147;could&#148;,
&#147;should&#148;, &#147;expect&#148;, &#147;plan&#148;,
&#147;project&#148;, &#147;intend&#148;, &#147;anticipate&#148;,
&#147;believe&#148;, &#147;estimate&#148;, &#147;predict&#148;,
&#147;potential&#148;, &#147;pursue&#148;, &#147;target&#148; or
&#147;continue&#148;, the negative of such terms or other
comparable terminology, although some forward-looking statements
may be expressed differently.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The forward-looking statements contained in this
prospectus 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&#146;s assumptions about future events may prove to
be inaccurate. Management cautions all readers that the
forward-looking statements contained in this prospectus 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:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the failure to obtain sufficient capital
    resources to fund our operations;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">an inability to replace our reserves through
    exploration and development activities;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">unsuccessful drilling activities;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">a decline in oil or natural gas production or oil
    or natural gas prices;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">incorrect estimates of required capital
    expenditures;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">increases in the cost of drilling, completion and
    gas gathering or other costs of production and operations;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">impact of environmental and other governmental
    regulation;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">hazardous and risky drilling operations;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">an inability to meet growth projections.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">You should also consider carefully the statements
under &#147;Risk Factors&#148; and other sections of this
prospectus, which address additional factors that could cause
our actual results to differ from those set forth in the
forward-looking statements.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">All forward-looking statements speak only as of
the date of this prospectus. 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.
</FONT>

<P align="center"><FONT size="2">24
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left">
<A name='104'></A>
</DIV>

<!-- link1 "USE OF PROCEEDS" -->

<P align="center">
<B><FONT size="2">USE OF PROCEEDS</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We estimate that we will receive net proceeds of
approximately
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;million
based on an assumed offering price of $&nbsp;from the sale
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares of our common
stock in this offering. The total net proceeds would be
approximately
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;million
if the underwriters&#146; over-allotment option is exercised in
full. &#147;Net proceeds&#148; is what we expect to receive
after paying the underwriting discounts and commissions and
other expenses of the offering.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We intend to use the proceeds from this offering
primarily to accelerate our exploration and development
activities in the Atlantic Rim and Pacific Rim projects of the
Washakie Basin, as well as in the Wilmington unit, and for
general corporate purposes. See &#147;Management&#146;s
Discussion and Analysis of Financial Condition and Results of
Operations&nbsp;&#151; Liquidity and Capital Resources&#148;.
</FONT>

<P align="center"><FONT size="2">25
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left">
<A name='105'></A>
</DIV>

<!-- link1 "DIVIDEND POLICY" -->

<P align="center">
<B><FONT size="2">DIVIDEND POLICY</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have never paid or declared any cash dividends
on our common stock. We intend to retain all future earnings for
the development of our business. Our convertible preferred stock
restricts our ability to pay dividends on our common stock.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Since issuing our convertible preferred stock in
December 2002, we have paid six consecutive quarterly cash
dividends on this stock at the rate of 8%&nbsp;per annum. At our
option, these dividends may be paid in cash or paid in kind
through the issuance of additional shares of convertible
preferred stock at a rate of 8%&nbsp;per annum. See
&#147;Description of Capital Stock&nbsp;&#151; Preferred
Stock&#148;.
</FONT>

<P align="center"><FONT size="2">26
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left">
<A name='106'></A>
</DIV>

<!-- link1 "CAPITALIZATION" -->

<P align="center">
<B><FONT size="2">CAPITALIZATION</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table sets forth, as of
June&nbsp;30, 2004, a summary of our capitalization, both on an
actual basis and on an as adjusted basis, to give effect to this
offering at an assumed initial public offering price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share, after deducting underwriting discounts and commissions
and the estimated offering expenses payable by us and assuming
sales
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of our common stock in this offering and the application of the
estimated net proceeds of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;.
See &#147;Use of Proceeds&#148;.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">You should read the following table in
conjunction with &#147;Management&#146;s Discussion and Analysis
of Financial Condition and Results of Operations&#148; and our
consolidated financial statements and related notes that are
included elsewhere in this prospectus.
</FONT>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="62%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="4"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">As of June&nbsp;30, 2004</FONT></B></TD>
</TR>

<TR>
    <TD colspan="4"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="4"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Actual</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">As Adjusted</FONT></B></TD>
</TR>

<TR>
    <TD colspan="4"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="4"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="4"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">(in thousands)</FONT></B></TD>
</TR>

<TR>
    <TD colspan="4"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="4"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">(unaudited)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash and cash equivalents
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">20,003</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current portion of long-term debt
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,019</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Long-term debt:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Debentures and other long-term liabilities(1)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">43,648</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Stockholders&#146; equity:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Preferred stock, $0.0001&nbsp;par value,
    10,000,000&nbsp;shares authorized, of which
    6,552,674&nbsp;shares are issued and outstanding
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">77,021</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Common stock, $0.0001&nbsp;par value,
    100,000,000&nbsp;shares authorized
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Actual&nbsp;&#151; 19,374,070&nbsp;shares issued
    and outstanding
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">As
    adjusted&nbsp;&#151; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    issued and outstanding
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Additional paid in capital
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">58,623</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Treasury stock, at cost, 632,250&nbsp;shares
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(728</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accumulated other comprehensive income
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">558</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accumulated deficit
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(70,047</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total stockholders&#146; equity
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">65,429</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total capitalization
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">134,099</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Our net debt is approximately $29.7&nbsp;million
    after offsetting zero coupon U.S.&nbsp;treasury bonds having a
    market value of $13.9&nbsp;million held in bank escrow as
    collateral for repayment of debentures.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">27
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left">
<A name='107'></A>
</DIV>

<!-- link1 "DILUTION" -->

<P align="center">
<B><FONT size="2">DILUTION</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The net tangible book value of our common stock
as of June&nbsp;30, 2004 was $62&nbsp;million, or $3.20&nbsp;per
share. After giving effect to the sale of common stock pursuant
to this offering at the initial public offering price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share, assuming the underwriters option to purchase additional
shares in this offering is not exercised, and after deducting
underwriting discounts and estimated offering expenses payable
by us, the adjusted pro forma net tangible book value as of
June&nbsp;30, 2004 would have been
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;or
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The net tangible book value per share before the
offering has been determined by dividing pro forma net tangible
book value, which is calculated as total tangible assets less
total liabilities, by the pro forma number of shares of common
stock outstanding, as of June&nbsp;30, 2004. This offering will
result in an increase in pro forma net tangible book value per
share of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;to
existing stockholders and dilution in pro forma net tangible
book value per share of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;to
new investors who purchase shares in this offering. Dilution is
determined by subtracting pro forma net tangible book value per
share from the initial public offering price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share. The following table illustrates this dilution:
</FONT>

<CENTER>
<TABLE width="60%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="90%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Initial public offering price per share
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net tangible book value per share as of
    June&nbsp;30, 2004
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.20</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Increase in net tangible book value per share
    attributable to this offering
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Pro forma net tangible book value per share as of
    June&nbsp;30, 2004 after giving effect to this offering
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Dilution of net tangible book value per share to
    new investors in this offering
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If the underwriters exercise their option to
purchase additional shares in this offering, the pro forma net
tangible book value per share after the offering would be
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share, the increase in net tangible book value per share to
existing stockholders would be
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share and the dilution to new investors would be
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table summarizes, on a pro forma
basis as of June&nbsp;30, 2004, the differences between the
number of shares of common stock purchased from us, the total
consideration paid to us and the average price per share paid by
existing stockholders and by new investors. The calculation
below is based on the initial public offering price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share, before deduction of underwriting discounts and
commissions and estimated offering expenses payable by us:
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="41%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Shares Purchased</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Total Consideration</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Average Price</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Percent</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Percent</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Per Share</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Existing stockholders
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">New investors
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">100.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The tables above do not include
15,814,172&nbsp;shares of common stock issuable upon exercise or
conversion of the following:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">2,751,262&nbsp;shares are issuable upon exercise
    of stock options with a weighted average exercise price of
    $5.45&nbsp;per share;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">686,875&nbsp;shares are issuable upon exercise of
    class&nbsp;A warrants at an exercise price of $10.00&nbsp;per
    share;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">506,250&nbsp;shares are issuable upon exercise of
    class&nbsp;B warrants at an exercise price of $12.50&nbsp;per
    share;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">5,317,111&nbsp;shares are issuable upon
    conversion of outstanding bonds with a weighted average exercise
    price of $7.11&nbsp;per share;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">6,552,674&nbsp;shares are issuable upon
    conversion of preferred stock with a conversion price of
    $12.00&nbsp;per share.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If all of such outstanding stock options and
warrants had been exercised and bonds and preferred stock
converted as of June&nbsp;30, 2004, net tangible book value per
share after this offering would be
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;and
total dilution per shares to new investors would be
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;.
</FONT>

<P align="center"><FONT size="2">28
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left">
<A name='108'></A>
</DIV>

<!-- link1 "SELECTED CONSOLIDATED FINANCIAL DATA" -->

<P align="center">
<B><FONT size="2">SELECTED CONSOLIDATED FINANCIAL DATA</FONT></B>

<DIV align="center">
<FONT size="2">(Dollars in thousands, except share and per share
data)
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">This section presents our selected consolidated
financial data. You should read the following selected
consolidated financial data in conjunction with
&#147;Management&#146;s Discussion and Analysis of Financial
Condition and Results of Operations&#148; and our consolidated
financial statements and related notes included elsewhere in
this prospectus. The selected data in this section is not
intended to replace the consolidated financial statements.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We derived the statement of operations data and
statement of cash flows data for the years ended
December&nbsp;31, 2003, 2002 and 2001, and balance sheet data as
of December&nbsp;31, 2003 and 2002 from the audited consolidated
financial statements included in this prospectus. We derived the
statement of operations data and statement of cash flows data
for the years ended December&nbsp;31, 2000 and 1999 and the
balance sheet data as of December&nbsp;31, 2001, 2000 and 1999
from audited consolidated financial statements that are not
included in this prospectus. We derived the statement of
operations data and statement of cash flows data for the six
months ended June&nbsp;30, 2004 and 2003, and balance sheet data
as of June&nbsp;30, 2004 from the unaudited consolidated
financial statements included in this prospectus. The interim
unaudited consolidated financial statements have been prepared
on the same basis as the annual audited financial statements and
include in the opinion of management, all adjustments,
consisting of normal recurring adjustments necessary to present
fairly the data for such periods and may not necessarily be
indicative of full year results.
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="29%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="19"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Six Months Ended</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><B><FONT size="1">Year Ended December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">June&nbsp;30,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2000</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">1999</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">(unaudited)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Statement of Operations Data:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Revenues:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Turnkey contracts with affiliated partnerships
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$11,301</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;&nbsp;5,841</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;30,103</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$33,985</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;25,406</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;3,250</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;1,877</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and gas sales from marketing activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,621</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,272</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,867</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15,421</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,795</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,790</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Well services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,168</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,895</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,574</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,297</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,611</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">512</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">501</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and gas sales
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,717</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">593</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">948</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">200</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">68</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,681</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,832</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total revenues
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">23,807</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">19,601</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">51,492</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">53,903</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">28,085</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,238</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Costs and operating expenses:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Turnkey contracts
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,285</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,965</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25,953</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">22,783</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">18,126</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,344</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,235</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cost of marketed oil and gas purchased from
    affiliated partnerships
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,121</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15,299</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15,800</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,725</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,731</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Well services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">662</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">839</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,519</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,168</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,351</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">261</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">330</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Production and exploration
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,812</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,326</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">568</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">355</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">43</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,046</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,952</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Depreciation, depletion, amortization and
    impairment
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,249</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,930</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,462</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,065</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,197</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,534</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">519</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">General and administrative
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,496</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,278</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,485</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,416</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,491</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,337</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,165</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Contingent repurchase obligation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,065</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,319</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total costs and operating expenses
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25,004</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">31,394</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">68,605</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">51,587</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">33,208</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,247</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,932</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Income (loss) from operations
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,197</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(11,793</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(17,113</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,316</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,123</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,009</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(932</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other income (expense):
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Interest and other income
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,340</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,258</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,977</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,457</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,641</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,092</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">752</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Interest expense
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,528</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6,313</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,776</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6,968</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,791</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(256</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,238</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Gain on sale of oil and gas properties
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">494</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,287</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">120</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net gain (loss) on investment
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">21</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">464</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(10</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">587</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,104</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(88</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">126</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total other income (expense)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">327</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,696</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,809</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,924</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,254</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">868</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(360</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Loss before income taxes, extraordinary item and
    cumulative effect of change in accounting principle
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(870</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(8,097</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(20,922</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,608</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(10,337</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,141</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,292</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Income tax expense (benefit)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">129</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(471</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">152</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(412</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">702</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">146</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(194</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">29
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="32%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="19"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Six Months Ended</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><B><FONT size="1">Year Ended December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">June&nbsp;30,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2000</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">1999</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">(unaudited)</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Loss before minority interest and cumulative
    effect of change in accounting principle
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(999</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,626</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(21,074</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,196</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(11,079</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,287</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,098</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Minority interest
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(112</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(32</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(62</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss before change in accounting principle
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,111</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,626</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(21,074</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,196</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(11,079</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,319</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,160</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cumulative effect of change in accounting
    principle
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(88</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(88</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,199</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,626</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(21,074</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,196</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(11,079</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,319</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,248</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Preferred dividends and accretion
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,562</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,290</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,736</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss applicable to common stockholders
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$(5,761</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$(7,642</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$(21,074</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$(1,196</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$(11,079</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$(5,609</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$(2,984</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Basic and diluted loss per common share
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;(0.34</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;(0.44</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;&nbsp;(1.20</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;(0.10</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;&nbsp;(1.00</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;(0.31</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;(0.17</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Weighted average shares outstanding basic and
    diluted
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16,827,857</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">17,339,869</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">17,532,882</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,461,814</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,115,522</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">18,357,891</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16,871,121</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="30"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Statement of Cash Flows Data:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net cash provided by (used in):
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Operating activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;&nbsp;5,278</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$(6,101</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$(15,712</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;10,659</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;16,502</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;(4,491</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;&nbsp;668</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Investing activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(13,524</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,317</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(17,635</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(19,012</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(21,540</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(10,032</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,723</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Financing activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,591</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,045</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,700</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">26,701</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16,726</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,027</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(102</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

</TABLE>
</CENTER>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="32%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><B><FONT size="1">At December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">At June&nbsp;30,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2000</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">1999</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(unaudited)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Balance Sheet Data:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash and cash equivalents
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$24,529</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$23,185</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$22,924</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$58,970</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$40,622</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$20,033</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and gas properties, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">94,950</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">48,684</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">39,975</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">35,930</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">17,449</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">102,423</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">151,054</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">108,262</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">94,900</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">128,649</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">82,144</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">153,295</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Long-term debt<BR>
    (including current maturities)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">49,916</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">56,202</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">61,880</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">60,447</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">56,306</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">48,667</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Convertible preferred stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">76,334</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">20,956</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">77,021</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total stockholders&#146; equity (deficit)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">56,394</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,002</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6,434</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,876</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(14,618</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">65,429</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">30
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left">
<A name='109'></A>
</DIV>

<!-- link1 "MANAGEMENT&#146;S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" -->

<P align="center">
<B><FONT size="2">MANAGEMENT&#146;S DISCUSSION AND ANALYSIS
OF</FONT></B>

<DIV align="center">
<B><FONT size="2">FINANCIAL CONDITION AND RESULTS OF
OPERATIONS</FONT></B>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">The discussion and analysis that follows
should be read together with the &#147;Selected Consolidated
Financial Data&#148; and the accompanying financial statements
and notes related thereto that are included elsewhere in this
prospectus. 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, and 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 prospectus, including in &#147;Risk
Factors&#148; and &#147;Cautionary Note Regarding
Forward-Looking Statements&#148;, all of which are difficult to
predict. As a result of these assumptions, risks, and
uncertainties, the forward-looking matters discussed may not
occur.</FONT></I>

<P align="left">
<B><FONT size="2">Overview</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are a growing independent energy company
engaged in the exploration and development of domestic onshore
natural gas and oil reserves. We focus our efforts primarily on
the exploration and development of coalbed methane, or CBM,
properties located in the Rocky Mountain region and on our
waterflood oil recovery program in the Wilmington Townlot Unit,
or the Wilmington unit, in the Wilmington field within the Los
Angeles Basin of California. As of June&nbsp;30, 2004, we owned
natural gas and oil leasehold interests in approximately
261,880&nbsp;gross (146,550&nbsp;net) acres, 95% 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 4% of our net acreage.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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
contribute drilling locations, pay tangible drilling costs and
provide turnkey drilling services, natural gas marketing
services and well services to the drilling partnerships and
retain an interest in the wells. Historically, a substantial
portion of our revenue was attributable to these turnkey
drilling services.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">From December 2002 to March 2003, 13 drilling
programs formed from 1994 though 1997 converted from Delaware
limited partnerships to Delaware limited liability companies. As
a result of these conversions, we issued an aggregate of
3,333,424 restricted convertible preferred shares to the 13 LLCs
as additional capital contributions and received as
consideration additional standard membership interests in the
LLCs. This increased our pro rata beneficial interests in the
oil and gas wells owned by the LLCs.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We anticipate that revenue from turnkey drilling
services will become increasingly less material to our business
in the future. Our future revenue growth is primarily dependent
on our ability to increase our oil and gas reserves and
production. We plan to participate in all our drilling
activities on a pro rata basis with our drilling programs until
the turnkey drilling contracts related to our existing deferred
income of approximately $19&nbsp;million have been completed.
Subsequently, after completion of these turnkey drilling
contracts, we intend to invest more of our own capital in
drilling operations in order to accelerate the growth of our
production and reserves. We also anticipate that any future
drilling activities that we undertake with third parties will be
through joint ventures and similar arrangements.
</FONT>

<P align="center"><FONT size="2">31
</FONT>
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The schedule below reflects revenue and expense
from gas and oil sales and from turnkey contracts for the years
ended December&nbsp;31, 2003 and 2002 and for the first six
months of 2004.
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="63%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Year Ended</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Six Months</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Ended</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">June&nbsp;30,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(unaudited)</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">(in thousands)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and gas sales
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,718</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">593</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,681</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Production and exploration expense
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,812</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,326</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,046</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Gross margin
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,906</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(733</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">635</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Turnkey contract revenue with affiliated
    partnerships
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,301</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,841</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,250</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Turnkey contract expense
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,285</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,965</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,343</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Gross margin
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,016</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">876</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(93</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We estimate that the completion of drilling
activities on behalf of our drilling programs and the subsequent
commencement of drilling activities primarily for our own
account will occur during the first half of 2005. We anticipate
that, depending upon our drilling results, our production
revenue may not be sufficient for us to achieve positive cash
flow from operating activities on or before the end of 2006.
Even if we are able to achieve positive cash flow from operating
activities on or before the end of 2006, which we cannot assume,
we may not be able to achieve positive cash flow from operating
activities on a cumulative basis for 2006. To the extent we are
able to achieve increases in natural gas and oil production
revenue, we also will experience increases in production and
exploration expense.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our capital expenditure budget for 2005 is
$40.8&nbsp;million, which includes participation in the drilling
of 142 gross (88.4&nbsp;net) wells. At the present time, we are
concentrating our drilling activities in our Atlantic Rim and
Pacific Rim projects of the Washakie Basin, where we are
planning to participate in the drilling of 52&nbsp;gross wells
and 38&nbsp;gross wells, respectively, during 2005. Although we
expect our activities in the Powder River Basin to continue to
produce additional revenues, we already have conducted drilling
activities on a substantial part of our acreage in that project.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In addition to our CBM activities, we intend to
pursue an active development program on our acreage in the
Wilmington unit. These activities in the Wilmington unit
currently are being delayed because our interests in this unit
are the subject of arbitration with Magness Petroleum, our joint
venture partner. Magness Petroleum is preventing us from
pursuing any additional activity in the field. This arbitration
is being conducted in two separate proceedings. We received a
favorable decision from one of these in August 2004. We
anticipate receiving a decision from the other arbitration by
the end of November 2004. As soon as both arbitrations have
concluded, or Magness Petroleum otherwise agrees with us to
proceed with drilling activity, we intend to resume drilling.
Compared with the development of our CBM properties, due to a
shorter period of time needed to obtain the required permits and
commence commercial production, we anticipate that development
of our oil properties in the Wilmington unit could have a more
immediate impact on our cash flows. We also anticipate that we
will be able to conduct drilling operations in the Wilmington
unit on a year-round basis without weather-induced or other
drilling delays as may occur in the Rocky Mountain areas where
our CBM properties are located.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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.
</FONT>

<P align="left">
<B><FONT size="2">Critical Accounting Policies</FONT></B>

<P align="left">
<B><I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Oil and Gas
Producing Activities</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We use the successful efforts method of
accounting for oil and gas properties. Under this methodology,
costs incurred to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that
</FONT>

<P align="center"><FONT size="2">32
</FONT>

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<DIV align="left">
<FONT size="2">find proved reserves and to drill and equip
development wells are capitalized. Costs to drill exploratory
wells that do not find proved reserves, geological and
geophysical costs and costs of carrying and retaining unproved
properties are expensed.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Unproved oil and gas properties that are
individually significant are periodically assessed for
impairment of value and a loss is recognized at the time of
impairment by providing an impairment allowance. Other unproved
properties are amortized based on our experience of successful
drilling, terms of leases and historical lease expirations.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Capitalized costs of producing oil and gas
properties are depleted by the units-of-production method on a
field-by-field basis. Lease costs are depleted using total
proved reserves while lease equipment and intangible development
costs are depleted using proved developed reserves. Our proved
properties are evaluated on a field-by-field basis for
impairment. An impairment loss is indicated whenever net
capitalized costs exceed expected future net cash flow based on
engineering estimates. In this circumstance, we recognize an
impairment loss for the amount by which the carrying value of
the properties exceeds the estimated fair value based on
discounted cash flow.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On the sale or retirement of a complete unit of a
proved property, the cost and related accumulated depletion and
amortization are eliminated from the property accounts, and the
resulting gain or loss is recognized. On the retirement or sale
of a partial unit of proved property, the cost is charged to
accumulated depletion and amortization with a resulting gain or
loss recognized in earnings.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On the sale of an entire interest in an unproved
property, a gain or loss on the sale is recognized, taking into
consideration the amount of any recorded impairment if the
property had been assessed individually. If a partial interest
in an unproved property is sold, the amount received is treated
as a reduction of the cost of the interest retained.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Revenue Recognition</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Affiliated partnerships enter into agreements
with us to drill wells to completion for a fixed price. We, in
turn, enter into drilling contracts primarily with unrelated
parties to drill wells on a day work basis. Therefore, if
problems are encountered on a well, the cost of that well will
increase and gross profit will decrease and could result in a
loss on the well. We recognize revenue from the turnkey drilling
agreements on a proportional performance method as services are
performed. This involves management making judgments and
estimates as to their various stage of completion of each well
based on the review of drilling logs, status reports from
engineers and historical experience in completing similar wells.
When estimates of revenues and expenses indicate a loss, the
total estimated loss is accrued. 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. Oil and gas
sales from marketing activities result from sales by us of oil
and gas produced by affiliated joint ventures and partnerships
and are recognized when delivered to purchasers.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Capitalized Interest</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Statement of Financial Accounting Standards
No.&nbsp;34, &#147;Capitalization of Interest Cost&#148;,
provides standards for the capitalization of interest cost as
part of the historical cost of acquiring assets. Costs of
</FONT>

<P align="center"><FONT size="2">33
</FONT>

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<DIV align="left">
<FONT size="2">investments in unproved properties on which
exploration or development activities are in progress or are the
subject of pending litigation qualify for capitalization of
interest. Capitalized interest is calculated by multiplying our
weighted-average interest rate on debt by the amount of
qualifying costs. Capitalized interest cannot exceed gross
interest expense.
</FONT>
</DIV>

<P align="left">
<B><FONT size="2">New Accounting Pronouncement</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In June 2001, the Financial Accounting Standard
Board issued Statements of Financial Accounting Standards
No.&nbsp;143, or SFAS&nbsp;143, &#147;Accounting for Asset
Retirement Obligations&#148;, which requires entities to record
the fair value of a liability for an asset retirement obligation
in the period in which it is incurred and a corresponding
increase in the carrying amount of the related long-lived asset.
This statement is effective for fiscal years beginning after
June&nbsp;15, 2002. We adopted SFAS&nbsp;143 on January&nbsp;1,
2003 and recorded a net asset of $557,000, a related liability
of $645,000, using a 10% discount rate, and a cumulative effect
on change in accounting principle on prior years of $88,000. As
of December&nbsp;31, 2002, we had an allowance for asset
retirement obligations of $434,000 relating to certain
nonproducing wells. The new standard had no material impact on
income before the cumulative effect of adoption in the first
quarter of 2003, nor would it have had a material impact on the
quarterly results for 2002, assuming an adoption of this
accounting standard on a pro forma basis. During 2003, the asset
retirement liability was increased by approximately $62,000 as a
result of accretion and recorded as interest expense. Also
during 2003, we sold certain non-strategic oil and gas
properties deemed not commercially productive, which resulted in
a decrease to the asset retirement liability of approximately
$245,000. We have treasury bonds held in escrow with a fair
market value as of June&nbsp;30, 2004 of $2,721,000 that are
legally restricted for potential plugging and abandonment
liability in the Wilmington unit.
</FONT>

<P align="left">
<B><FONT size="2">Results of Operations</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Six Months Ended June&nbsp;30, 2004
    Compared To Six Months Ended June&nbsp;30, 2003</FONT></I></B></TD>
</TR>

</TABLE>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Turnkey contract revenue and
    expenses.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Turnkey contract revenue increased
$1.4&nbsp;million in the first six months of 2004 to
$3.3&nbsp;million, a 73% increase compared to the corresponding
period of the preceding year. Additionally, turnkey contract
expense increased $2.1&nbsp;million during the first six months
of 2004 to $3.3&nbsp;million, a 171% increase compared to the
same period in 2003. The drilling activity was more active
during the first six months of 2004 compared to the
corresponding period of 2003.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Net loss from turnkey activities was
$94,000&nbsp;for the first six months of 2004. This compares to
net income of $642,000&nbsp;for the corresponding period in
2003. This decrease in net income during the first six months of
2004 results from drilling Washakie wells with lower profit
margins in the first six months of 2004 as compared to drilling
shallow re-entry wells in 2003 with higher profit margins.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Oil and gas sales and costs from marketing
    activities.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Oil and gas sales from marketing activities
increased $6,000 in the first six months of 2004 to
$2.8&nbsp;million, a nominal increase compared to the same
period last year. Cost of oil and gas marketing activities
decreased $7,000 in the first six months of 2004 to
$2.7&nbsp;million, a nominal decrease compared to the same
period in 2003. Oil and gas production from the wells in the
drilling programs in which we earn a marketing fee for the six
months ended June&nbsp;30, 2004 and 2003 was 0.66&nbsp;Bcfe and
0.66&nbsp;Bcfe, respectively. The average price per Mcfe during
the first six months of 2004 and 2003 was $4.20 and $4.22,
respectively.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The gross profit from marketing activities for
the first six months of 2004 was $71,000 as compared to $58,000
in the same period last year.
</FONT>

<P align="center"><FONT size="2">34
</FONT>

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<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Well services activities.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Well services revenue increased $11,000 in the
first six months of 2004 to $500,000, a 2% increase compared to
the corresponding period of the preceding year. Well services
expense decreased $68,000 in the first six months of 2004 to
$261,000.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Gross profit from well services activities was
$251,000 for the first six months of 2004 as compared to gross
profit of $172,000 for the corresponding period last year.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Oil and gas sales.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Revenue from oil and gas sales decreased $151,000
in the first six months of 2004 to $2.7&nbsp;million, a 5%
decrease compared to the same period in 2003. This decrease
resulted from a retroactive adjustment which reduced our oil and
gas sales in accordance with the reduction in our working
interest percentage in the Sun Dog unit in the Washakie Basin.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Net gain (loss) on investments.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Net loss on investments was $88,000 for the first
six months of 2004. Net gain on investments was $126,000 during
the first six months of 2003. Our investments consist primarily
of zero coupon U.S.&nbsp;treasury bonds held in our inventory.
Fluctuations in net gain or loss on investments resulted from
changes in long-term interest rates.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Interest and other income.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Interest and other income increased $340,000 in
the first six months of 2004 to $1.1&nbsp;million, a 45%
increase compared to the same period in 2003. The increase
reflects the reversal of a reserve related to the recognition of
drilling credits.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Production&nbsp;&#38; exploration
    expenses.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Production and exploration expense increased
$94,000 in the first six months of 2004 to $2.0&nbsp;million, a
5% increase compared to the same period in 2003. We incurred
increased lease operating expenses related to environmental
charges in our Washakie Basin properties. The increase was
offset by a retroactive adjustment which reduced our production
and exploration expense in accordance with the reduction in our
working interest percentage in the Sun Dog unit in the Washakie
Basin.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Depreciation, depletion, amortization and
    impairment.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Depreciation, depletion and amortization expense
increased $1.0&nbsp;million for the first six months of 2004 to
$1.5&nbsp;million, a 195% increase compared to the corresponding
period last year. This increase resulted from the expiration of
certain leases with a cost basis of approximately $700,000.
Additionally, this increase represents a higher cost basis in
oil and gas properties in 2004 due to the consent solicitation,
as compared to the same quarter in 2003, resulting in a higher
depletion expense.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">General and administrative expenses.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">General and administrative expenses increased
$172,000 in the first six months of 2004 to $2.3&nbsp;million,
an 8% increase compared to the corresponding quarter last year.
This increase reflects an increase in legal fees relating to our
California property. See &#147;Business&nbsp;&#151; Legal
Proceedings&#148;.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Interest expense.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Interest expense decreased $1.0&nbsp;million in
the first six months of 2004 to $256,000, a 79% decrease
compared to the same period last year. This decrease reflects an
increase in the amount of interest capitalized on our Wyoming
and California properties due to the consent solicitation.
</FONT>

<P align="center"><FONT size="2">35
</FONT>

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<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Income Taxes</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We follow the provisions of Statements of
Financial Accounting Standards No.&nbsp;109, &#147;Accounting
for Income Taxes&#148;, which provides for recognition of a
deferred tax liability or asset for deductible temporary timing
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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of June&nbsp;30, 2004, we had a net operating
loss carryforward of approximately $65&nbsp;million and no
alternative minimum tax credit carry forward. Our net operating
loss carryforwards expire in 2012 and subsequent years.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Year Ended December&nbsp;31, 2003 Compared
    To Year Ended December&nbsp;31, 2002</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Turnkey contract revenue and
expenses.</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Turnkey contract revenue increased
$5.5&nbsp;million in 2003 to $11.3&nbsp;million, a 93% increase
compared to 2002. Additionally, turnkey contract expense
increased $2.3&nbsp;million during 2003 to $7.3&nbsp;million, a
47% increase compared to 2002. These increases resulted from a
higher level of drilling activity during 2003 compared to 2002.
The level of drilling activity is affected by many factors
including obtaining the requisite governmental permits necessary
to commence drilling on the leases. Additionally, during the
fourth quarter of 2002, we entered into a joint venture with
Anadarko whereby we sold partial interests in wells that had
been previously allocated to drilling programs. As a result,
during the fourth quarter of 2002, previously recognized turnkey
revenue was reversed. During 2003, we were able to drill
38&nbsp;gross and 24.3&nbsp;net wells on behalf of the drilling
programs.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Gross profit from turnkey activities was
$4.0&nbsp;million or 36% for 2003. This compares to gross profit
of $876,000 or 15% for 2002. The increase in gross profit
percentage during 2003 results from drilling certain wells more
economically than the corresponding period of 2002 and changes
in the working interests of various wells in our drilling
programs resulting from the recapitalization of our drilling
programs in 2002.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Oil and gas sales and costs from marketing
    activities.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Oil and gas sales from marketing activities
decreased $5.7&nbsp;million in 2003 to $5.6&nbsp;million, a 50%
decrease compared to the previous year. Cost of oil and gas
marketing activities decreased $5.6&nbsp;million in 2003 to
$5.5&nbsp;million, a 51% decrease compared to 2002. These
decreases primarily resulted from the recapitalizations of our
drilling programs in 2002, whereby we now receive oil and gas
production previously allocated to drilling programs. Oil and
gas production from the wells in the drilling programs in which
we earn a marketing fee for 2003 and 2002 was 1.2&nbsp;Bcfe and
3.5&nbsp;Bcfe, respectively. This decrease was offset by higher
average gas prices. The average price per Mcfe during 2003 and
2002 was $3.92 and $2.40, respectively.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The gross profit from marketing activities for
2003 was $120,000 as compared to $151,000 in the same period of
the previous year.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Well services activities.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Well services revenue decreased $728,000 in 2003
to $1.2&nbsp;million, a 38% decrease compared to the preceding
year. Well services expense decreased $177,000&nbsp;million for
2003 to $662,000, a 21% decrease compared to 2002. The decreases
in well services revenue resulted from the sale of certain
assets of our drilling subsidiary, CJS Pinnacle Petroleum LLC on
February&nbsp;14, 2002, for total consideration of
$4.2&nbsp;million. Well services revenue from CJS Pinnacle
Petroleum LLC was approximately $400,000 during the first
quarter of 2002. Following the sale, Pinnacle ceased operations.
Additionally, certain well services revenue approximating
$300,000 earned on drilling program wells during 2002 was not
earned in 2003. We obtained oil and gas interests from our
drilling programs in these wells through the recapitalization of
our drilling programs in 2002.
</FONT>

<P align="center"><FONT size="2">36
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Oil and gas sales.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Revenue from oil and gas sales increased
$5.1&nbsp;million in 2003 to $5.7&nbsp;million, an 865% increase
compared to the previous year, due to increased ownership in our
drilling programs. We obtained oil and gas interests from our
drilling programs as a result of the recapitalization of our
drilling programs in 2002. Our share of pre-payout production
from drilling programs formed subsequent to 1998 is generally
25% of the production allocated to these drilling programs.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Net gain on investments.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Net gain on investments was $21,000 for 2003 and
$464,000 for 2002. Investments consist primarily of zero coupon
U.S.&nbsp;treasury bonds held in our inventory. Fluctuations in
net gain or loss on investments resulted from changes in
long-term interest rates.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Interest and other income.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Other income decreased $3.9&nbsp;million in 2003
to $1.3&nbsp;million, a 74% decrease compared to 2002. During
2002, our executive vice president, James&nbsp;C.
Johnson&nbsp;Jr., died. As a result, we received key man life
insurance proceeds of $3.8&nbsp;million.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Gain on sale of assets.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The gain on sale of assets was $494,000 in 2003
compared to $4.3&nbsp;million in 2002. The $494,000 gain in 2003
resulted from the sale of certain non-strategic properties in
New Mexico during the third quarter of 2003. The
$4.3&nbsp;million gain in 2002 resulted from the sale of certain
interests in our Atlantic Rim CBM reserves to Anadarko.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Production&nbsp;&#38; exploration
    expenses.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Production and exploration expense increased
$2.5&nbsp;million in 2003 to $3.8&nbsp;million, a 188% increase
compared to the previous year. This resulted from increased
ownership in our drilling programs. We obtained oil and gas
interests from our drilling programs as a result of the
recapitalization of our drilling programs in 2002 referred to
above. Additionally, a plugging and abandonment liability of
$1.2&nbsp;million was reversed during the third quarter of 2002.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Depreciation, depletion, amortization and
    impairment.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Depreciation, depletion and amortization expense
decreased $6.7&nbsp;million for 2003 to $3.2&nbsp;million, a 67%
decrease compared to the previous year. During 2002, we recorded
impairment expense totaling $9.3&nbsp;million relating to
certain properties primarily in Texas and Montana. This was
offset by impairment expense recorded in 2003 of
$1.6&nbsp;million related to expiring leases in the Atlantic Rim
Project in the Washakie Basin in Wyoming.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">General and administrative expenses.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">General and administrative expenses decreased
$1.8&nbsp;million in 2003 to $4.5&nbsp;million. During 2002, we
wrote off approximately $900,000 of previously capitalized
offering expenses. Additionally, the decrease resulted from a
reduction in the number of employees employed during 2003
compared to 2002.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Interest expense.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Interest expense decreased $4.8&nbsp;million in
2003 to $1.5&nbsp;million, a 76% decrease compared to the
previous year. Primarily, this decrease reflects an increase in
the amount of interest of $4.3&nbsp;million capitalized to our
Wyoming and California properties.
</FONT>

<P align="center"><FONT size="2">37
</FONT>

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<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Contingent repurchase obligation.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Repurchase obligation expense of
$3.3&nbsp;million was recorded in 2001 based on pricing at
March&nbsp;15, 2002. The repurchase obligation expense was
reversed during the first quarter of 2002. As stated above, the
determination of whether a repurchase liability exists is based
upon estimates of future net cash flows from reserve studies
prepared by petroleum engineers compared to the potential
repurchase of drilling program units. Significant decreases in
natural gas and oil prices at December&nbsp;31, 2001 lowered the
estimated future cash flows when compared to future potential
repurchase obligations. As a result, a repurchase liability and
a repurchase obligation expense of $3.3&nbsp;million was
recorded in 2001.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Year Ended December&nbsp;31, 2002 Compared
    To Year Ended December&nbsp;31, 2001</FONT></I></B></TD>
</TR>

</TABLE>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Turnkey contract revenue and
    expenses.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Turnkey contract revenue decreased
$24.3&nbsp;million in 2002 to $5.8&nbsp;million, an 81% decrease
compared to levels during 2001. The decrease in turnkey revenue
resulted from significantly less drilling and completion
activity on behalf of the drilling programs during 2002 compared
to 2001. The amount of funds raised from our drilling programs
in the prior fiscal year determines in large part the level of
drilling activity in the following fiscal year. We raised
$18.1&nbsp;million from our drilling programs during 2001
compared to $46.5&nbsp;million during 2000. During 2002 and
2001, we drilled zero and five East Texas James Lime wells,
respectively. These wells were multi-lateral, horizontal wells
that cost an average of approximately $3.0&nbsp;million to drill
and complete. Additionally, we contributed a 50% working
interest in 24 previously drilled or partially drilled wells in
the AMI to Anadarko as part of the joint venture. These wells
had been previously allocated to drilling programs. As a result,
we reversed previously recognized turnkey revenue during the
fourth quarter of 2002.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Turnkey contract expense decreased
$21.0&nbsp;million during 2002 to $5.0&nbsp;million, an 81%
decrease compared to 2001. This decrease resulted from the
decrease in drilling and completion activities on behalf of the
drilling programs during 2002 compared to 2001, as mentioned
above. Additionally, certain intangible drilling costs incurred
from August&nbsp;1, 2002 through December&nbsp;12, 2002 were
reimbursed by Anadarko at the closing of the joint venture on
December&nbsp;13, 2002. Lastly, a portion of the proceeds
received by Anadarko from the joint venture was allocated to
previously drilled wells in the AMI, thereby reducing turnkey
expense and reducing the gain recognized on the transaction.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Gross profit from turnkey contract revenue and
expenses was $876,000 or 15% in 2002. This is compared to gross
profit of $4.1&nbsp;million or 14% in 2001. The fluctuation in
gross profit percentage is not considered material.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Oil and gas sales and costs from marketing
    activities.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Natural gas and oil sales from marketing
activities decreased $3.6&nbsp;million in 2002 to
$11.3&nbsp;million, a 24% decrease compared to 2001. Cost of oil
and gas marketing activities decreased $4.2&nbsp;million in 2002
to $11.1&nbsp;million, a 27% decrease compared to 2001. These
decreases resulted from a decrease in the average prices of
natural gas and oil during 2002 compared to 2001. The average
price of natural gas and oil marketed and sold during 2002 was
$1.90&nbsp;per Mcf and $20.84&nbsp;per barrel, respectively, or
$2.40&nbsp;per Mcfe. This is compared to the average price of
natural gas and oil marketed and sold during 2001 of $2.83 and
$16.74, respectively, or $2.82&nbsp;per Mcfe. Additionally,
natural gas and oil related to our drilling programs being
purchased by us at the wellhead and subsequently marketed and
sold decreased. Natural gas and oil production allocated to
drilling programs totaled 3.5&nbsp;Bcfe in 2002 compared to
5.1&nbsp;Bcfe in 2001.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The gross profit (loss) from marketing activities
for 2002 was a $151,000 profit compared to a $432,000 loss in
2001. The 2001 loss resulted from a hedging transaction, which
expired on March&nbsp;31, 2001. We incurred a total hedging loss
of $500,000 from January 2001 to March 2001.
</FONT>

<P align="center"><FONT size="2">38
</FONT>

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<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Well services activities.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Well services revenue decreased $3.7&nbsp;million
in 2002 to $1.9&nbsp;million, a 66% decrease compared to 2001.
Well services expense decreased $2.7&nbsp;million in 2002 to
$839,000, a 76% decrease compared to 2001. These decreases
resulted from the sale of our drilling rig subsidiary in
February 2002.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Gross profit from well services activities was
$1.1&nbsp;million or 56% in 2002. This is compared to gross
profit of $2.1&nbsp;million or 37% in 2001. This increase in
gross profit percentage during 2002 resulted from the increase
in gross profit percentage related to drilling supervision and
administrative overhead. Drilling supervision and administrative
overhead revenue totaled $1.5&nbsp;million in 2002 compared to
the related expense of approximately $600,000, resulting in a
gross profit percentage of 60%. Drilling supervision and
administrative overhead revenue totaled $1.6&nbsp;million in
2001 compared to the related expense of approximately $900,000,
resulting in a gross profit percentage of 45%.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Oil and gas sales.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Natural gas and oil sales decreased $356,000 in
2002 to $593,000, a 38% decrease compared to 2001. The decrease
resulted from a settlement payment of $400,000 received by us in
2001 from an unaffiliated entity relating to previously held
suspense funds.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Net gain (loss) on investments.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Net gain on investments was $464,000 for 2002.
Net loss on investments was $10,000 for 2001. Originally, we
obtained U.S.&nbsp;treasury bonds, which typically represented
less than 1% of our total current assets, to assure the
financial capability to repurchase partnership units under the
partnership agreements and fund the repayment of outstanding
debentures. This obligation was eliminated for the majority of
partnership units and debenture holders in 1998. As a result,
U.S.&nbsp;treasury bonds held in escrow were released for our
unrestricted use and liquidated shortly thereafter.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Investments consist primarily of zero coupon
U.S.&nbsp;treasury bonds held in our inventory. Fluctuations in
net gain or loss on investments resulted from changes in long
term interest rates.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Gain on sale of assets.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The gain on the sale of assets of
$4.3&nbsp;million resulted from the joint venture with Anadarko.
Under the joint venture, we contributed 86,394&nbsp;net acres
and Anadarko contributed 49,846&nbsp;net acres to the joint
venture. Additionally, Anadarko paid to us $12.0&nbsp;million in
cash, $6.0&nbsp;million in future drilling credits and
$2.2&nbsp;million of expense reimbursements. As a result, we
recognized a $4.3&nbsp;million gain on sale of assets.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Interest and other income.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Interest and other income increased
$3.3&nbsp;million in 2002 to $5.3&nbsp;million, a 166% increase
compared to 2001. This increase resulted primarily from a key
man life insurance payment received by us relating to the death
of our executive vice president, James C. Johnson,&nbsp;Jr. in
December 2002. The insurance proceeds totaled $3.8&nbsp;million.
This increase was partially offset by lower interest income
earned during 2002 resulting from lower interest rates.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Production &#38; exploration
    expenses.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Production and exploration expense increased
$758,000 in 2002 to $1.3&nbsp;million, a 134% increase compared
to 2001. The increase resulted primarily from $310,000 of
plugging and abandonment expense and $190,000 of 3-D seismic
expense recorded in 2002.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Depreciation, depletion, amortization and
    impairment.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Depreciation, depletion and amortization expense
decreased $4.5&nbsp;million in 2002 to $9.9&nbsp;million, a 31%
decrease compared to 2001. This decrease resulted from depletion
and impairment expense of $9.3&nbsp;million
</FONT>

<P align="center"><FONT size="2">39
</FONT>

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<DIV align="left">
<FONT size="2">during 2002 compared to $10.3&nbsp;million during
2001. Additionally, during 2002, depletion expense on oil and
gas properties decreased $1.4&nbsp;million due to the lower oil
and gas property balances during 2002 compared to 2001. In 2001,
we recorded approximately $600,000 impairment expense related to
the fixed assets of Pinnacle. Depreciation and depletion related
to the Warren E&#38;P acquisition was approximately $300,000 in
2001.
</FONT>
</DIV>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">General and administrative expenses.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">General and administrative expenses increased
$793,000 in 2002 to $6.3&nbsp;million, a 14% increase compared
to 2001. This increase resulted primarily from allocating a
higher percentage of payroll and office expenses to general and
administrative expense and a lower percentage of these expenses
to turnkey expense.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Interest expense.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Interest expense increased $536,000 in 2002 to
$6.3&nbsp;million, a 9% increase compared to 2001. Primarily,
the increase is attributable to an decrease in capitalized
interest during 2002 compared to 2001. We recorded
$1.4&nbsp;million of capitalized interest during 2002 compared
to $2.3&nbsp;million during 2001. Primarily, capitalized
interest relates to our development project in the Washakie
Basin.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Contingent repurchase obligation.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Repurchase obligation expense of
$3.3&nbsp;million was recorded in 2001 based on pricing at
March&nbsp;15, 2002. The repurchase obligation expense was
reversed during the first&nbsp;quarter of 2002. As stated above,
the determination of whether a repurchase liability exists is
based upon estimates of future net cash flows from reserve
studies prepared by petroleum engineers compared to the
potential repurchase of drilling program units. Significant
decreases in natural gas and oil prices at December&nbsp;31,
2001 lowered the estimated future cash flows when compared to
future potential repurchase obligations. As a result, a
remarketing liability and a remarketing obligation expense of
$3.3&nbsp;million was recorded in 2001.
</FONT>

<P align="center"><FONT size="2">40
</FONT>

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<P align="left">
<B><FONT size="2">Liquidity and Capital Resources</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our primary source of liquidity since our
formation has been the private sale of our equity and debt
securities. These private placements primarily were made through
a network of independent broker dealers. Since 1992, we
sponsored 31&nbsp;drilling programs that raised an aggregate of
approximately $228.0&nbsp;million. Additionally, we have raised
$71.6&nbsp;million through the issuance of our debt securities
and $64.4&nbsp;million through the issuance of shares of our
common and preferred stock. In our drilling programs, we fund
the costs associated with acreage acquisition and the tangible
portion of drilling activities, while investors in the drilling
programs fund all intangible drilling costs. Our primary use of
capital has been for the acquisition, development and
exploration of our natural gas and oil properties. Additional
uses of capital include the payment of dividends on our
preferred stock, sinking fund requirements related to debentures
and operating losses from operations.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During the first six months of 2004, we raised
$14.2&nbsp;million from the sale of our common stock.
Additionally, during July 2004, we raised $5.9&nbsp;million from
the sale of our common stock. During 2003, we raised
$6.4&nbsp;million through the private placements of interests in
our drilling program. Cumulatively, we raised $29.9&nbsp;million
during fiscal years 2003, 2002 and 2001 through the private
placements of interests in our drilling programs. During 2003,
we raised $15.8&nbsp;million through the private placements of
our series&nbsp;A 8% cumulative convertible preferred stock.
Cumulatively, we raised $20.1&nbsp;million during fiscal years
2003, 2002 and 2001 through the private placements of our debt
or equity securities.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Cash Flow from Operating
    Activities</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Net cash provided from operating activities was
$5.3&nbsp;million for 2003. This compares to net cash used in
operating activities of $6.1&nbsp;million and $15.7&nbsp;million
in 2002 and 2001, respectively. Net cash used in operating
activities was $4.5&nbsp;million for the six months ended
June&nbsp;30, 2004 compared to net cash provided from operating
activities of $700,000 for the comparable period in 2003.
Primarily, in prior periods, increases and decreases in net cash
flows from operating activities resulted from turnkey contract
operations with our drilling programs.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our most material commitment of funds for 2004
relates to our drilling programs. Our deferred income balance
relating to our drilling commitments totaled $19.0&nbsp;million
at June&nbsp;30, 2004. We expect to drill the wells allocated to
drilling programs and satisfy our related drilling obligations
by the end of the first half of 2005.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We believe that the proceeds of this offering
will be sufficient to meet our planned capital expenditures and
our other cash needs during the next 12&nbsp;months. To
supplement our cash needs, we also intend to obtain a credit
facility based on our proved reserves. Additionally, we are
entitled to $2.0&nbsp;million of deferred drilling credits from
Anadarko.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">2005 Capital Expenditure
    Program</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our total net capital budget spending program for
2005 is $40.8&nbsp;million, exclusive of the intangible turnkey
drilling costs allocable to our participating drilling programs.
The majority of these estimated expenditures relate to the
development of our Atlantic Rim and Pacific Rim projects in the
Rocky Mountains and the development of our oil reserves in the
Wilmington unit. The development of these properties focuses our
resources on the primary objective to increase production
volumes and cash flow. For 2005, we plan to participate in the
drilling of 52 gross (20.0 net)&nbsp;wells in the Atlantic Rim,
38 gross (24.4&nbsp;net) wells in the Pacific Rim and 12 gross
(6.0 net) wells in the Powder River Basin projects.
Additionally, we plan to participate in the drilling of 40 gross
(38.0 net)&nbsp;wells in the Wilmington unit. However, our
working interests and the number of net wells in the Wilmington
unit activities, as well as our ability to undertake these
activities will depend on resolution of the arbitration with
Magness Petroleum. These spending programs and other cash
requirements will be funded by existing cash balances, cash flow
from operations and proceeds
</FONT>

<P align="center"><FONT size="2">41
</FONT>

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<DIV align="left">
<FONT size="2">from this offering. The final determination
regarding whether to drill the budgeted wells referred to above
is dependent upon many factors including:
</FONT>
</DIV>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the availability of sufficient capital resources;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the ability to acquire proper governmental
    permits and approvals;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">economic and industry conditions at the time of
    drilling such as prevailing and anticipated energy prices and
    the availability of drilling equipment;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the outcome of our litigation with Magness
    regarding the Wilmington unit.
    </FONT></TD>
</TR>

</TABLE>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Debentures</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of June&nbsp;30, 2004, we had
$46.9&nbsp;million of debentures of which $37.8&nbsp;million are
convertible into our common shares and $9.1&nbsp;million are not
convertible. Additionally, $14.2&nbsp;million of debentures are
currently callable by us, $9.1&nbsp;million are callable at our
option at 103% to 100% of par value ratably from 2004 to 2007,
and $5.1&nbsp;million are generally callable at our option at
107% to 100% of par value ratably from 2004 to 2011.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Further, all convertible debentures are callable
by us if the average bid price of our common shares publicly
trade 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&nbsp;days notice at a price of between 100% and 110% par
value plus accrued interest.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have issued secured debentures and sinking
fund debentures. The principal of the secured debentures is
secured at maturity by zero coupon U.S.&nbsp;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 principal of the sinking fund debentures is
required to be secured by equal annual deposits of zero coupon
U.S.&nbsp;treasury bonds, which shall be sufficient in the
aggregate to fund repayment of the principal of the outstanding
debentures at their respective maturity date.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The table below reflects the outstanding
debentures by issue, the fair market value of the zero coupon
U.S.&nbsp;treasury bonds held in escrow on behalf of the
debentures holders and the estimated cash outlay for the payment
of debenture interest for 2005 at June&nbsp;30, 2004. The
conversion prices listed below will increase in the future for
certain debentures.
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="51%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Conversion</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Fair Market</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Estimated</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Outstanding</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Price as of</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Value of</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Debenture</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">at June&nbsp;30,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">June&nbsp;30,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">U.S.</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Interest</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Debentures (in thousands, except for conversion prices)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Treasuries</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">for 2005</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">12% Sinking Fund Debentures due December&nbsp;31,
    2007
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,141</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">n/a</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,107</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,097</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">12% Secured Fund Debentures due December&nbsp;31,
    2009
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">770</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">623</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">92</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">12% Secured Fund Debentures due December&nbsp;31,
    2010
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,700</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,301</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">204</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">13.02% Sinking Fund Debentures due
    December&nbsp;31, 2010
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,545</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,674</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,894</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">13.02% Sinking Fund Debentures due
    December&nbsp;31, 2015
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,643</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,946</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,516</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">12% Secured Fund Debentures due December&nbsp;31,
    2016
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,365</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">715</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">164</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">12% Sinking Fund Debentures due December&nbsp;31,
    2017
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,135</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">598</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">616</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">12% Secured Fund Debentures due December&nbsp;31,
    2020
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,485</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">20.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">598</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">178</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">12% Secured Fund Debentures due December&nbsp;31,
    2022
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,136</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">20.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">405</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">136</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">46,920</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">13,967</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,897</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Preferred Stock</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of June&nbsp;30, 2004, we had
6,552,674&nbsp;shares of convertible preferred stock issued and
outstanding. See &#147;Description of Capital Stock&nbsp;&#151;
Preferred Stock&#148; for a description of our preferred stock.
</FONT>

<P align="center"><FONT size="2">42
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Dividends paid on preferred shares totaled
$3.3&nbsp;million and $1.7&nbsp;million for the six months ended
June&nbsp;30, 2004 and 2003, respectively. Dividends paid on
preferred shares totaled $4.6&nbsp;million, and $16,000 for the
years ended 2003 and 2002, respectively. Dividends may be paid
in cash or in kind at management&#146;s option.
</FONT>

<P align="left">
<B><FONT size="2">Contractual Obligations</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The contractual obligations table below assumes
the maximum amount is tendered each year, net of the effects of
the sinking fund requirements. The table does not give effect to
the conversion of any bonds to stock which would reduce payments
due. As described in more detail in the &#147;Debentures&#148;
section above, all debentures are secured at maturity, or
partially secured at maturity, by zero coupon U.S.&nbsp;treasury
bonds deposited into an escrow account equaling the par value of
the debentures maturing on or before the maturity of the
debentures. The table below reflects the release of
U.S.&nbsp;treasury bonds to us upon redemption. The estimated
annual sinking fund requirements disclosed below are calculated
using U.S.&nbsp;treasury bond pricing as of June&nbsp;30, 2004.
Additionally, the table reflects the redemption of certain
debentures callable by us utilizing certain proceeds from this
Offering to retire the related debentures.
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="38%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="19"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><B><FONT size="1">Payments Due by Period</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Less Than</FONT></B></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">More Than</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2" align="center" nowrap><B><FONT size="1">Contractual Obligations</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Total</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">1&nbsp;Year</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">1-3&nbsp;Years</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">3-5&nbsp;Years</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">5&nbsp;Years</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2" align="center" nowrap><B><FONT size="1">As of June&nbsp;30, 2004</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="19"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><B><FONT size="1">(in thousands)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Debentures&nbsp;&#151; Net of sinking fund
    requirements
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">24,092</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,858</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,289</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,325</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,620</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Debenture sinking fund requirements
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">22,828</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,834</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,095</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,059</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,840</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Leases
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">594</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">83</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">316</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">195</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">47,514</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,775</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,700</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,579</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">23,460</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The contractual obligation schedule above does
not reflect $20.5&nbsp;million principal amount of zero coupon
U.S.&nbsp;treasury bonds held by us in escrow to secure the
repayment of the debentures upon maturity. Such
U.S.&nbsp;treasury bonds have a fair market value of
$13.7&nbsp;million as of June&nbsp;30, 2004.
</FONT>

<P align="left">
<B><FONT size="2">Off-Balance Sheet Arrangements</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Under the terms of our drilling programs formed
from 1998 to 2001, investors have the right to tender their
interest back to the drilling program and other program
investors during the period from seven to 25&nbsp;years after
the date of the partnership&#146;s formation. To the extent that
an investor tenders a drilling program interest for sale and the
drilling program and other investors elect not to repurchase the
withdrawing partner&#146;s interest, we will be required to
repurchase the interest from the investor. The price of our
repurchase is fixed by the drilling program agreement to be the
lower of the PV-10 value of the assets of the program and a
formula based on the amount of the investor&#146;s cash
investment reduced by the amount of any cash distributions
received. As of June&nbsp;30, 2004, based on the
December&nbsp;31, 2003 reserve reports of the respective
drilling programs, the aggregate PV-10 value of the assets in
these programs is $15.8&nbsp;million. Because this PV-10 value
is less than the formula price of $96.5&nbsp;million at
June&nbsp;30, 2004, the maximum repurchase price obligation at
June&nbsp;30, 2004 was $15.8&nbsp;million. This PV-10 value
would be higher under current prices for crude oil and natural
gas and is anticipated to increase when we drill the remaining
22&nbsp;net wells on behalf of these seven drilling programs. In
the event of repurchase, we receive the investor&#146;s interest
in the program, which includes the investor&#146;s beneficial
share of the program&#146;s reserves and related future net cash
flows.
</FONT>

<P align="center"><FONT size="2">43
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The table below presents the projected timing of
our maximum potential repurchase commitment associated with
these programs as of June&nbsp;30, 2004:
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="41%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><B><FONT size="1">Amount of Repurchase Commitment Per Period</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Less Than</FONT></B></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">More Than</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">1&nbsp;Year</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">1-3&nbsp;Years</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">3-5&nbsp;Years</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">5&nbsp;Years</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Total</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><B><FONT size="1">(in thousands)</FONT></B></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Maximum potential repurchase commitment(1)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,806</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,609</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">382</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15,797</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Based on partnership reserves taken from the
    Williamson partnership reserve report as of December&nbsp;31,
    2003 and using pricing at that date. This report does not
    include reserves for 22&nbsp;net wells that are scheduled to be
    drilled for these programs through the first half of 2005.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<B><FONT size="2">Additional Repurchase Commitments</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Under the terms of 13 of our drilling programs
formed before 1998, the minority interest investors have the
right to require us to repurchase their interests in each
program for a formula price, to the extent that the drilling
programs and other program investors elect not to purchase a
withdrawing partner&#146;s interest. This right is effective
either seven years from the date of a partnership&#146;s
formation, or between the 15th and 25th anniversary of its
formation. The formula price is computed as the original capital
contribution of the investor reduced by the greater of cash
distributions we made to the investor, or 10% for every $1.00
which the oil price at the repurchase date is below
$13.00&nbsp;per barrel adjusted by the CPI changes since the
program&#146;s formation. If we purchase interests in drilling
programs, we receive the investor&#146;s interest in the
program, which includes the investor&#146;s beneficial share of
the reserves and related future net cash flows. The table below
presents the repurchase commitment associated with the pre-1998
drilling programs, giving no effect to any reserve value that is
acquired in repurchase.
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="38%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="19"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><B><FONT size="1">Amount of Repurchase Commitment per Period</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Less Than</FONT></B></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">More Than</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">1&nbsp;Year</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">1-3&nbsp;Years</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">3-5&nbsp;Years</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">5&nbsp;Years</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Total</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="19"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><B><FONT size="1">(in thousands)</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Partnership repurchase commitments:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Pre-1998 partnerships
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,532</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,353</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,885</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<B><FONT size="2">Quantitative and Qualitative Disclosures About
Market Risk</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Commodity Risk</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our major market risk exposure is the commodity
pricing applicable to our natural gas and oil production.
Realized commodity prices received for our production are
primarily driven by the prevailing worldwide price for crude oil
and spot prices applicable to natural gas. The effects of price
volatility are expected to continue.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Interest Rate Risk</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We hold investments in U.S.&nbsp;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.&nbsp;treasury
bonds trading securities, which predominantly represent
U.S.&nbsp;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.
</FONT>

<P align="center"><FONT size="2">44
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Financial Instruments</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our financial instruments consist of cash and
cash equivalents, U.S.&nbsp;treasury bonds, accounts receivable
and other long-term liabilities. The carrying amounts of cash
and cash equivalents, U.S.&nbsp;treasury bonds, accounts
receivables and accounts payable approximate fair market value
due to the highly liquid nature of these short-term instruments.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Inflation and Changes in
    Prices</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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.
</FONT>

<P align="center"><FONT size="2">45
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left">
<A name='110'></A>
</DIV>

<!-- link1 "BUSINESS" -->

<P align="center">
<B><FONT size="2">BUSINESS</FONT></B>

<P align="left">
<B><FONT size="2">Overview</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are a growing independent energy company
engaged in the exploration and development of domestic onshore
natural gas and oil reserves. We focus our efforts primarily on
the exploration and development of CBM properties located in the
Rocky Mountain region and on our waterflood oil recovery program
in the Wilmington Townlot Unit, or the Wilmington unit, in the
Wilmington field within the Los&nbsp;Angeles Basin of
California. Our CBM operations are located in two core areas:
the Washakie Basin, which comprises approximately the southeast
one-third of the Greater Green River Basin in southwestern
Wyoming, and the Powder River Basin in northeastern Wyoming. We
also own conventional production principally in Texas, New
Mexico and North Dakota. As of June&nbsp;30, 2004, we owned
natural gas and oil leasehold interests in approximately
261,880&nbsp;gross (146,550&nbsp;net) acres, 95% of which are
undeveloped. Substantially all our undeveloped acreage is
located in the Rocky Mountains. We have identified approximately
1,162 drilling locations on our acreage, primarily on 80-acre
and 160-acre well spacing.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In the Washakie Basin, we have assembled a large,
predominantly undeveloped CBM leasehold, which we believe
positions us for significant long-term growth. Our operations in
the Washakie Basin consist of the Atlantic Rim project located
along the Basin&#146;s eastern rim and the Pacific Rim project
located along its western rim. As of June&nbsp;30, 2004, we had
247,450&nbsp;gross (140,782&nbsp;net) acres prospective for CBM
development in this area, of which 136,157 are net undeveloped
acres. This acreage contains approximately 1,049 identified
drilling locations. We own a 57% average working interest in
this acreage.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our Atlantic Rim project comprises approximately
212,258&nbsp;gross (113,248&nbsp;net) acres. As of June&nbsp;30,
2004, we had participated in the drilling of 46 CBM wells in
this project. These wells included 22 producing wells and
24&nbsp;wells that are awaiting completion of production
facilities, all of which we believe are capable of commercial
production. Based on geological and seismic data, we previously
drilled 26 geological test wells, 11&nbsp;of which we believe
are capable of commercial production. As of December&nbsp;31,
2003, the proved reserves for the 22&nbsp;producing wells and
for their 23&nbsp;proved undeveloped offset locations
average&nbsp;1.01&nbsp;Bcfe per gross well on 80-acre and
160-acre spacing, based upon the reserve report prepared by
Williamson Petroleum Consultants, Inc., an independent petroleum
engineering firm. In 2004, we entered into an agreement to
jointly construct, own and operate gathering systems,
compression facilities and a pipeline in the Atlantic Rim with
Anadarko Petroleum Corporation. During 2005, we plan to increase
our drilling activity in the Atlantic Rim by participating in
the drilling of 52&nbsp;gross (20.0&nbsp;net) additional wells
in this area.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During the last half of 2003, we established our
Pacific Rim project which consists of approximately
35,192&nbsp;gross (27,534&nbsp;net) acres prospective for CBM
development. As of June&nbsp;30, 2004, we had drilled nine CBM
wells and acquired four previously drilled wells in this
project, all on 160-acre spacing. In our first pilot program, we
expect to complete construction of a gathering system and
commence production from these nine wells by the end of 2004.
During 2005, we also plan to increase our drilling activity in
the Pacific Rim by participating in the drilling of
38&nbsp;gross (24.4&nbsp;net) additional wells in this area.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of December 31, 2003, we had estimated net
proved reserves of 106.2 Bcfe, with a PV-10 value of $183.0
million, based on the reserve report prepared by Williamson
Petroleum Consultants. These estimated net proved reserves are
located on less than 4% of our net acreage. We currently have
interests in 205 gross (79.0 net) producing wells and are the
operator of record for 55% of these wells. Through our joint
venture agreements, we participate in operating activities for
most of the wells for which we are not operator of record. On
June&nbsp;30, 2004, total production from these wells was 18.6
MMcfe/d gross (5.5 MMcfe/d net). For 2005, we have a total
capital budget of approximately $40.8&nbsp;million to
participate in the drilling of 142&nbsp;gross (88.4&nbsp;net)
wells.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">From our inception in 1990 through 2003, we
functioned principally as the sponsor of privately placed
drilling programs and joint ventures. During that period, we
sponsored 31 drilling programs that raised an aggregate of
approximately $228&nbsp;million. Under these programs, we
contribute drilling locations, pay tangible drilling costs and
provide turnkey drilling services, natural gas marketing
services and well services to the drilling programs and retain
an interest in the wells drilled. The programs utilized these
funds to pay for intangible gas and oil drilling costs on
properties for which we had assembled the acreage and designated
the
</FONT>

<P align="center"><FONT size="2">46
</FONT>

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<DIV align="left">
<FONT size="2">drilling prospects. On behalf of the drilling
programs, we have participated in the drilling of approximately
470&nbsp;conventional, horizontal and CBM wells, of which
approximately 90% were completed as commercial producing wells.
At June&nbsp;30, 2004, we had deferred income from turnkey
drilling contracts of approximately $19&nbsp;million related to
the drilling programs. The drilling programs will participate
with us on a pro rata basis in our drilling activities until the
turnkey contracts have been completed, which we expect to occur
by the first half of 2005. We intend to participate with greater
working interests in the wells we drill in the future in order
to accelerate our growth in production and reserves. We
anticipate that future drilling activities with third parties
will consist of joint ventures and similar arrangements. As of
June&nbsp;30, 2004, we had distributed $59.9&nbsp;million in
cash and $60.1&nbsp;million in our securities to these programs.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In December 2002, we entered into a joint venture
with Anadarko Petroleum Corporation, one of the largest
independent oil and gas exploration and production companies.
This joint venture provides for the exploration and development
of the Atlantic Rim project on a 50/50&nbsp;basis covering over
141,000 net acres within a 211,000 acre area of mutual interest,
or AMI. Under the joint venture, we contributed 88,993 net
acres, and Anadarko contributed 52,444 net acres and paid us
$20.2&nbsp;million, which included reimbursement for
$2.2&nbsp;million of our prior drilling expenses. In 2004, we
expanded our relationship with Anadarko by entering into an
agreement to construct, own and operate gathering systems and a
pipeline in the Atlantic Rim project of the Washakie Basin on a
50/50 basis.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In 2003, we raised approximately
$56.7&nbsp;million of equity through the private placement of
our convertible preferred stock to accredited investors. These
placements included issuing $15.8&nbsp;million of preferred
stock for cash, issuing $36.1&nbsp;million of preferred stock in
exchange for oil and gas properties, and issuing
$4.8&nbsp;million of preferred stock for the redemption of
debentures. In February and July 2004, we raised a total of
$20&nbsp;million through the private placement of
2,850,000&nbsp;shares of our common stock, together with
warrants to purchase&nbsp;1,425,000&nbsp;shares of our common
stock to institutional investors managed by a large Boston-based
investment advisor.
</FONT>

<P align="left">
<B><FONT size="2">Our Business Strategy and Strengths</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our business strategy is designed to generate
growth in oil and gas reserves, production volumes and cash
flows at a positive return on invested capital while minimizing
geological risk. Key elements of our business strategy include
the following:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <B><I><FONT size="2">Exploit Existing Properties Through the
    Drillbit.</FONT></I></B><FONT size="2"> We intend to increase
    our proved reserves by drilling numerous locations identified on
    our Rocky Mountain CBM properties and on our Wilmington unit. As
    of June&nbsp;30, 2004, we have identified a total of 1,162
    drilling locations, of which we plan to participate in the
    drilling of 142&nbsp;gross wells during 2005.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <B><I><FONT size="2">Increase Our Working Interest in Future
    Wells.</FONT></I></B><FONT size="2"> We plan to increase our
    level of participation in future wells by investing more of our
    own capital to drilling operations in our high growth areas. We
    believe this will enable us to accelerate our growth in
    production, reserves and cash flows.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <B><I><FONT size="2">Pursue Selective Acquisitions and Joint
    Ventures.</FONT></I></B><FONT size="2"> We believe we are well
    positioned, given our asset base and technical expertise, to
    pursue selected acquisitions and attract industry joint venture
    partners. We expect to pursue further acquisitions of natural
    gas and oil properties in areas where we have specific technical
    knowledge and experience. We also plan to enter into additional
    joint ventures to increase our CBM acreage and develop our
    reserves.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <B><I><FONT size="2">Reduce Costs Through Economies of Scale and
    Efficient Operations.</FONT></I></B><FONT size="2"> As we
    continue to increase our production and develop our existing
    properties, we expect that our unit cost structure will benefit
    from economies of scale. With respect to our CBM operations, we
    anticipate reducing unit costs by greater utilization of our
    existing infrastructure over a larger number of wells. We seek
    to exert more control over costs and timing in our exploration,
    development and production activities through our operating
    activities and relationships with our joint venture partners.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">47
</FONT>
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As a result of the following strengths, we
believe we are well positioned to execute our business strategy:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <B><I><FONT size="2">Substantial Rocky Mountain Undeveloped CBM
    Acreage Position.</FONT></I></B><FONT size="2"> We believe that
    the Rocky Mountain region is one of the few remaining high
    potential CBM natural gas provinces in North&nbsp;America. We
    have assembled a substantial undeveloped acreage position in the
    Rocky Mountains of 240,170&nbsp;gross (136,610&nbsp;net) acres
    containing 1,059&nbsp;identified drilling locations. In the
    Rocky Mountains, our estimated total net proved reserves of
    12.4&nbsp;Bcf are located on approximately 2% of our net acreage.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <B><I><FONT size="2">Technical
    Expertise.</FONT></I></B><FONT size="2"> Since the beginning of
    our CBM operations in 1996, we have gained considerable
    expertise in advanced CBM drilling, completion and re-entry
    techniques. We also have expertise in directional and horizontal
    drilling relating to our waterflood recovery program in the
    Wilmington unit.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <B><I><FONT size="2">Experienced Management
    Team.</FONT></I></B><FONT size="2"> Our management team has
    25&nbsp;years of experience on average in the oil and gas
    industry, and our technical professionals have 17&nbsp;years of
    experience on average in oil and gas operations. Our personnel
    have extensive experience in managing large-scale operations in
    each of our areas of concentration. Most members of our senior
    management have been with us since the mid-1990&#146;s.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <B><I><FONT size="2">Incentivized Management
    Ownership.</FONT></I></B><FONT size="2"> The equity ownership of
    our management team is strongly aligned with that of our
    stockholders. As of August&nbsp;18, 2004, our 14&nbsp;directors
    and executive officers beneficially owned 5,610,544&nbsp;shares
    of our common stock, which includes exercisable options to
    purchase 1,278,252&nbsp;shares of our common stock.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<B><FONT size="2">Areas of Exploration and Development
Activities</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our exploration and development activities are
focused primarily on CBM projects in the Rocky Mountain region
and also on waterflood oil recovery in the Wilmington unit in
California. The table below highlights our main areas of
activity:
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="50%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Planned</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2005</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Gross</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Net</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Gross Wells</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Capital</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2" align="center" nowrap><B><FONT size="1">Area</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Acres</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Acres</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">in 2005</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Expenditures</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(in millions)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Washakie:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Atlantic Rim
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">212,258</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">113,248</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">52</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11.4</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(1)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Pacific Rim
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">35,192</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">27,534</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">38</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12.7</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Powder River
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,190</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,536</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1.3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Wilmington
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,440</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,243</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">40</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15.4</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other(2)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,800</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,989</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">261,880</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">146,550</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">142</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">40.8</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes $950,000 for the construction of
    gathering systems, compression facilities and a pipeline
    pursuant to our agreement with Anadarko.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(2)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes conventional oil and gas properties
    located primarily in New Mexico, Texas and North Dakota.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<B><FONT size="2">Rocky Mountain CBM Projects</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Washakie Basin</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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
June&nbsp;30, 2004, we had assembled 247,450&nbsp;gross
(140,782&nbsp;net) acres prospective for CBM&nbsp;development in
this area, of which 136,157 are net undeveloped. This area
contains approximately 1,049 identified drilling locations
primarily on 80-acre and 160-acre well spacing. The report
prepared by Williamson Petroleum Consultants as of
December&nbsp;31, 2003 estimates that the gross recoverable
proved reserves for the 22&nbsp;wells drilled and their
23&nbsp;well offsets in our
</FONT>

<P align="center"><FONT size="2">48
</FONT>
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<DIV align="left">
<FONT size="2">first two pilot programs in this basin were
45.5&nbsp;Bcfe on 80-acre and 160-acre spacing. We own a 57%
average working interest in this acreage.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Commercial CBM production in the Washakie Basin
was initially established in 2002 on the eastern rim of the
Washakie Basin both by us and by Double Eagle Petroleum Co., an
independent energy company. The Washakie Basin is generally
characterized by 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&#146;s Wash field in the Unit Basin of Utah. CBM
field development in the Washakie Basin is usually accomplished
by grouping wells into &#147;pods&#148; of 10 to 24&nbsp;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&nbsp;acres each, which facilitates development operations.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Atlantic Rim Project</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our Atlantic Rim project comprises approximately
212,258&nbsp;gross (113,248&nbsp;net) acres on the eastern rim
of the Washakie Basin. Following completion of the Doty Mountain
unit, we expect to have drilled a total of 56&nbsp;CBM wells in
the Atlantic Rim project in 2004. Additionally, upon completion
of an ongoing environmental impact study being conducted on the
Atlantic Rim area by the Rawlins Office of the BLM covering
approximately 310,000&nbsp;acres, we plan to significantly
increase drilling activities in the Atlantic Rim project. We
believe this EIS should be completed in 2005. We are jointly
developing all of our Atlantic Rim projects within the AMI with
Anadarko. Anadarko is the operator of record for the Atlantic
Rim project, and under the Anadarko agreements, our personnel
and Anadarko&#146;s personnel have equal input in
decision-making for most decisions, including budgets and
drilling.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Sun Dog Unit.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our initial pod, the Sun Dog unit, is a 10-well
pilot program drilled on 80-acre spacing. The Sun Dog unit
commenced production in April 2002 at a gross rate of
approximately 400&nbsp;Mcf/d of gas and 12,000&nbsp;Bbls/d of
water. Since April 2002, production rates from the Sun Dog unit
wells have increased steadily to over 3,600&nbsp;Mcf/d of gas
and 13,000&nbsp;Bbls/d of water. As of June&nbsp;30, 2004, the
wells have continued to exhibit a typical CBM negative decline
curve, increasing daily gas production with relative water
production rates decreasing as a percentage of gas production.
Based on a report from Williamson Petroleum Consultants, as of
December&nbsp;31, 2003, estimated gross ultimate recoverable
reserves for the 10&nbsp;producing wells and eight undrilled
offset locations in the Sun Dog unit average 1.1&nbsp;Bcfe per
well. We currently own a working interest of approximately 29.1%
in the wells drilled in the initial pod of the Sun Dog unit and,
together with our drilling programs, we own a working interest
of approximately 76.1%.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Blue Sky Unit.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our second producing pod in the Atlantic Rim
project, the Blue Sky unit, is a 12-well pilot program drilled
on 160-acre spacing. This program commenced production in August
2003 and as of June&nbsp;30, 2004, was producing 203&nbsp;Mcf/d
of natural gas and approximately 12,500&nbsp;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
negative decline curve similar to other CBM wells. In the first
half of 2004, we drilled a second water injection well in the
Blue Sky unit in order to reduce the water pressure on the
producing wells to potentially accelerate gas production from
these wells. Based on a report from Williamson Petroleum
Consultants, as of December&nbsp;31, 2003, estimated gross
ultimate recoverable reserves for the 12 producing wells and 13
undrilled offset locations in the Blue Sky unit average
1.0&nbsp;Bcfe per well. We currently own an approximate 39.7%
working interest in the wells drilled in the initial pod of the
Blue Sky unit and, together with our drilling programs, we own
an approximate 9.9% working interest.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Red Rim Unit.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are currently developing our first pod in the
Red Rim unit. This pod consists of 16&nbsp;planned wells on
160-acre spacing. We completed eight CBM producing wells and one
water injection well during 2003. We
</FONT>

<P align="center"><FONT size="2">49
</FONT>

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<DIV align="left">
<FONT size="2">plan to participate in the drilling of eight
additional wells in this pod by the end of 2004. We plan to
commence production from these 16 CBM wells by the end of 2004.
We currently own a working interest of approximately 11.8% in
the wells drilled in the initial pod of the Red Rim unit and,
together with our drilling programs, we own a working interest
of approximately 47.0%.
</FONT>
</DIV>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Doty Mountain Unit.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are currently developing our first pod in the
Doty Mountain unit. This pod consists of 24&nbsp;planned wells
on 80-acre spacing. We drilled eight wells in the second quarter
of 2004 and plan to participate in the drilling of the remaining
16&nbsp;wells and one water injection well by the end of 2004.
We plan to commence production from these wells by the end of
2004. We currently own an approximate 8.5% working interest in
the wells drilled in the initial pod of the Doty Mountain unit
and, together with our drilling programs, we own an approximate
34.0% working interest.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Jolly Roger Unit.</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are currently developing our first pod in the
Jolly Roger unit. This pod consists of 24&nbsp;planned wells on
160-acre spacing. We drilled eight wells and one water injection
well in 2002, and we expect to participate in the drilling of
the remaining 16&nbsp;wells by the end of 2005. We currently own
a working interest of approximately 11.8% in the wells drilled
in the initial pod of the Jolly Roger unit and, together with
our drilling programs, we own a working interest of
approximately 47.0%.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Pacific Rim Project</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Since 2003, we have been acquiring our Pacific
Rim acreage located on the western rim of the Washakie Basin,
60&nbsp;miles west of our Atlantic Rim project. At June&nbsp;30,
2004, our Pacific Rim project comprised approximately
35,192&nbsp;gross (27,534&nbsp;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 property
includes four previously drilled CBM test wells from which we
obtained technical test data, similar in many respects to the
data from our Atlantic Rim wells.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In April 2004, we entered into an agreement to
acquire an existing 6&nbsp;1/2-mile gas pipeline that connects
the Pacific Rim project to a 20-inch main gas pipeline. This
pipeline connects to the Kern River pipeline, which carries gas
to Bakersfield, California.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We plan to significantly increase our drilling
activity in the Pacific Rim project by up to 120&nbsp;CBM wells,
upon approval of a pending EA submitted by us to the Rock
Springs, Wyoming office of the BLM. We currently expect to
receive BLM approval by the end of 2004.
</FONT>

<P align="left">
<I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Pacific Isle
Unit.</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are currently developing our first pod in the
Pacific Isle unit. This pod consists of nine wells, two of which
we acquired with the property and seven of which we drilled in
late 2003. We also drilled a water injection well on this unit
in late 2003. We expect to complete construction of a gathering
system and to commence production from these nine wells by the
end of 2004. We currently own an approximate 20.0% working
interest in the wells drilled in the initial pod of the Pacific
Isle unit and, together with our drilling programs, we own an
approximate 80.0% working interest.
</FONT>

<P align="left">
<I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Rifes Rim
Unit.</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are currently developing our first pod in the
Rifes Rim unit. This pod consists of 10&nbsp;planned wells, two
of which we acquired with the property, one of which we drilled
in late 2003 and seven of which we intend to participate in the
drilling of by the end of 2005. We currently own a working
interest of approximately 17.9% in the wells drilled in the
initial pod of the Rifes Rim unit and, together with our
drilling programs, we own a working interest of approximately
71.8%.
</FONT>

<P align="left">
<I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Chicken Springs
Unit.</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are currently developing our first pod in the
Chicken Springs unit. This pod consists of four planned wells,
one of which we drilled in the second quarter of 2004. We intend
to participate in the drilling of the
</FONT>

<P align="center"><FONT size="2">50
</FONT>
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<DIV align="left">
<FONT size="2">three remaining wells by the end of 2004. We
currently own an approximate 15.0% working interest in the wells
drilled in the initial pod of the Chicken Springs unit and,
together with the drilling programs, we own an approximate 60.0%
working interest.
</FONT>
</DIV>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Powder River Basin</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">At June&nbsp;30, 2004, we owned and operated
interests in 119&nbsp;gross (57.0&nbsp;net) producing CBM wells
on approximately 5,190&nbsp;gross (2,536&nbsp;net) acres in the
Powder River Basin near Gillette, Wyoming. At June&nbsp;30,
2004, these wells were producing approximately 6,068&nbsp;Mcf/d
gross (2,788&nbsp;Mcf/d net). At December&nbsp;31, 2003, our
total estimated net proved reserves in this portion of the
Powder River Basin were 6.8&nbsp;Bcf gross (1.8&nbsp;Bcf net).
Since 2003, we have deepened and recompleted 21&nbsp;gross
(7.2&nbsp;net) wells in the LX-Bar field in the Powder River
Basin to a lower coal seam. At June&nbsp;30, 2004, gross
production from these formerly non-producing wells was
3,684&nbsp;Mcf/d gross (1,492&nbsp;Mcf/d net).
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><FONT size="2">Wilmington Townlot Unit</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our Wilmington unit is located in the Wilmington
field within the Los Angeles Basin of California. The Wilmington
field has produced over 2.5&nbsp;billion barrels of oil since
its discovery in the 1920&#146;s. Since that time, the
Wilmington unit, a unitized oil field consisting of
1,440&nbsp;gross (1,243 net) acres, has produced more than
149&nbsp;million barrels of oil from primary production. In
1999, through our wholly owned subsidiary, Warren Resources of
California, Inc., we acquired 50% of Magness Petroleum&#146;s
94% working interest in the Wilmington unit. All the working
interests in the Wilmington unit are subject to the terms and
provisions of a unit operating agreement. Magness Petroleum
currently serves as operator for the Wilmington unit.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our Wilmington unit oil reserves are primarily
PUDs. We seek to develop these reserves using directional and
horizontal drilling and secondary recovery techniques, such as a
waterflood recovery program. As of June&nbsp;30, 2004, we had
522&nbsp;Bbls/d gross (254&nbsp;Bbls/d net) production, compared
to 538&nbsp;Bbls/d gross (200&nbsp;Bbls/d net) production as of
June&nbsp;30, 2003. In addition, estimated proved reserves as of
December&nbsp;31, 2003 were 23.3&nbsp;MMbbls gross
(14.3&nbsp;MMbbls net), of which 97% are PUDs. Further, as of
June&nbsp;30, 2004, there were 31&nbsp;gross (14.6&nbsp;net)
producing wells.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Simultaneous with our acquisition of this
interest, we entered into a joint venture with Magness
Petroleum, referred to as the WRI-Magness joint venture. We and
Magness Petroleum each agreed to contribute our respective 47%
working interests in the wells to be developed by the joint
venture. The purpose of the joint venture was to develop the
property through directional drilling, applying secondary
recovery techniques, such as waterflood redevelopment. Magness
Petroleum was to serve as operator for the joint venture wells,
with Warren E&#38;P to supervise, coordinate and control the
drilling and completion operations. As of June&nbsp;30, 2004,
there were 31 producing wells in the Wilmington unit. Three of
these wells were drilled pursuant to the joint venture
agreement, and we acquired a 47% working interest in the other
28 wells, outside of the joint venture, at the time of our
original acquisition.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The WRI-Magness joint venture provides that we
are responsible, through our drilling funds or otherwise, to pay
for all the intangible drilling and development costs incurred
by the joint venture, and that we and Magness Petroleum each
will pay one-half of all tangible drilling and equipping costs.
Revenues and other operating expenses incurred by the joint
venture are to be allocated 90% to the party paying the
intangible costs, until repayment of 100% of those costs, and,
during that same period, 10% proportionately to the parties
paying the tangible costs. Thereafter, revenues and costs and
expenses incurred by the joint venture are to be allocated 60%
to the party paying the intangible costs and 40% proportionately
to the parties paying the tangible costs.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The joint venture also provides that we and
Magness Petroleum have mutual rights of first refusal to
purchase the other&#146;s interests in the Wilmington unit
before either of us may sell to a third party.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We currently are involved in an arbitration with
Magness Petroleum concerning our interests in the Wilmington
unit. In the arbitration proceeding Magness Petroleum is
asserting that the joint venture be dissolved. Although we do
not believe that this is the most likely outcome, if it were to
occur, we would retain our existing interest in the producing
wells and a 47% working interest in the undeveloped properties.
</FONT>

<P align="center"><FONT size="2">51
</FONT>
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<DIV align="left">
<FONT size="2">As a result, our estimated net proved reserves
and our estimated discounted net future cash flows from the
Wilmington unit would be reduced significantly. See
&#147;Business&nbsp;&#151; Legal Proceedings&#148;.
</FONT>
</DIV>

<P align="left">
<B><FONT size="2">Drilling Programs</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Since 1992, we have sponsored 31 drilling
programs that have raised approximately $228&nbsp;million. We
have decreased our sponsorship of drilling programs since 2001,
raising approximately $13&nbsp;million in one drilling program
in 2001, $5.4&nbsp;million in one drilling program in 2002 and
$6.5&nbsp;million in one drilling program in 2003. On behalf of
the drilling programs, we have participated in the drilling of
approximately 470 conventional, horizontal wells and CBM wells,
virtually all of which were operated by us, with approximately
90% of such wells being completed and commercially productive.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Under these programs, we contribute drilling
locations and pay all tangible drilling costs, while the other
investor partners in the drilling programs pay all intangible
drilling costs. Warren E&#38;P, Inc., our wholly owned
subsidiary, typically contracts with the drilling programs to
conduct drilling services on a turnkey, fixed-price basis. Under
such contracts, the drilling programs pay a specific price to
Warren E&#38;P, based on the depth of the well, for each well
drilled regardless of the actual amount of time, materials and
expenses required by Warren E&#38;P to drill the well.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We act as the sole managing general partner of
each drilling program, and we typically receive a before-payout
working interest of 25% (55% after-payout) and an average
turnkey drilling contract profit of approximately 20% to drill
the wells on a fixed-cost basis. As of December&nbsp;31, 2003,
none of the active 22&nbsp;drilling programs managed by us had
achieved payout status.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In addition, we have marketing agreements with
most of the drilling programs under which we purchase oil and
gas produced by affiliated joint ventures and partnerships at
current field prices, which we transport and market to third
parties. We construct our own gas gathering and transportation
lines that connect wells owned by joint ventures and
partnerships to the pipelines owned by gas transportation
companies. We enter into transportation contracts with these
companies and sales contracts for the sale of oil and gas to the
third party purchasers.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of June&nbsp;30, 2004, investor partners in
our drilling programs have received cash distributions ranging
from below 10% of original capital contributions for programs
formed since 2000; between 13% and 28%, or 52% to 68% after
federal tax benefits are included assuming the maximum marginal
federal income tax rate, for programs formed between 1997 and
1999; and between 40% and 80%, or 78% to 122% after federal tax
benefits are included, assuming the maximum marginal federal
income tax rate, for 13 of the 15 programs formed in 1996 or
earlier. Cash distributions to investor partners are made
monthly. Our drilling programs have distributed approximately
$59.9&nbsp;million to investor partners through June&nbsp;30,
2004, of which $55.7&nbsp;million were from cash flow generated
from oil and gas revenues from the respective drilling
programs&#146; wells and $4.2&nbsp;million were from sales of
wells or well equipment. Between December 2002 and March 2003,
13&nbsp;drilling programs converted from Delaware limited
partnerships to Delaware LLCs and on average&nbsp;75% of the
drilling program members elected to convert their interests to
preferred member interests in their respective LLCs. Preferred
member interests have the right to a preferential return and
other preferential rights senior to our and other standard
member interests. As a result of these conversions, we issued an
aggregate of 3,333,424 restricted convertible preferred shares
to the LLCs as additional capital contributions and received as
consideration additional standard membership interests in the
LLCs, which increased our pro&nbsp;rata beneficial interests in
the oil and gas wells owned by the LLCs. Additionally, during
1996 and 1997, we issued $6.3&nbsp;million of convertible
debentures and common stock to purchase investors&#146;
interests in the two remaining drilling programs. To the extent
that we have an existing obligation to drill program wells as of
June&nbsp;30, 2004, the drilling programs will continue to
participate with us on a pro rata basis in our drilling
activities until the wells have been drilled, which we
anticipate will continue through the first half of 2005.
</FONT>

<P align="left">
<B><FONT size="2">Natural Gas and Oil Reserves</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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&nbsp;31, 2003, 2002 and 2001 based on
</FONT>

<P align="center"><FONT size="2">52
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left">
<FONT size="2">reserve reports prepared by Williamson Petroleum
Consultants. 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.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">A significant portion of our proved developed
reserves has been accumulated through our interests in the
drilling programs for which we serve as managing general
partner. The estimates of future net cash flows and their
present values, based on period end prices, are based upon
certain assumptions of the drilling programs in which we own
interests will achieve payout status in the future. As of
December&nbsp;31, 2003, none of the active 22 drilling programs
managed by us had achieved payout status. As of July&nbsp;1,
2001, we began receiving our before payout share of production,
typically 25%, from all programs formed in 1999 and subsequent.
</FONT>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="60%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Year Ended December&nbsp;31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Estimated Net Proved Natural Gas and Oil
    Reserves:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net natural gas reserves (MMcf):
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Proved developed
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,006</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,544</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,648</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Proved undeveloped
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,442</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,959</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0,847</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total(1)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15,448</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,503</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,495</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net oil reserves (MBbls):
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Proved developed
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">476</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">404</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Proved undeveloped
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,648</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,920</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,470</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total(2)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15,124</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,324</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,478</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Total Net Proved Natural Gas&nbsp;&#38; Oil
    Reserves (MMcfe)</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">106,190</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">82,447</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">53,365</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Estimated Present Value of Net Proved
    Reserves:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">PV-10 value (in thousands)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Proved developed
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">20,461</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,041</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,246</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Proved undeveloped
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">162,524</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">103,913</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">19,236</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">182,985</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">113,954</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">20,482</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Standardized measure of discounted future net
    cash flows (in&nbsp;thousands)(3)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">146,126</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">71,418</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">19,512</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="15"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Prices Used in Calculating Reserves:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Natural gas (per Mcf)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.50</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.36</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1.76</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil (per Bbl)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">28.45</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">27.15</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">13.87</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="15"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Proved Developed Reserves (MMcfe)</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,862</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,967</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,697</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Included in 2003 and 2002 reserves,
    1,028&nbsp;MMcf and 577&nbsp;MMcf is attributable to
    consolidated subsidiaries in which there is an average minority
    interest of 25% and 34%, respectively.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(2)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Included in 2003 and 2002 reserves,
    2,469&nbsp;MBbls and 1,195&nbsp;MBbls is attributable to
    consolidated subsidiaries in which there is an average minority
    interest of 25% and 34%, respectively.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(3)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Standardized measure of discounted future net
    cash flows differ from PV-10 value because it includes the
    effect of future income taxes. Included in 2003 and 2002
    standardized measure of discounted future net cash flows,
    $23,017 and $10,462 is attributable to consolidated subsidiaries
    in which there is an average minority interest of 25% and 34%,
    respectively.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">53
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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 registration statement 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 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 therefrom, 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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">With respect to the estimates prepared by
Williamson Petroleum Consultants, 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 registration statement. 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.
</FONT>

<P align="left">
<B><FONT size="2">Productive Wells</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table sets forth our gross and net
productive wells as of June&nbsp;30, 2004:
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="49%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Natural Gas</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Oil</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Total</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Gross</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Net</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Gross</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Net</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Gross</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Net</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">California
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">31.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14.6</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">31.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14.6</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">New Mexico
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">19.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.6</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">24.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.9</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Texas
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1.5</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1.5</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Wyoming
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">138.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">58.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">141.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">61.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.8</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.9</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">164.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">61.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">41.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">18.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">205.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">79.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="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.
</FONT>

<P align="center"><FONT size="2">54
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<P align="left">
<B><FONT size="2">Drilling Activity</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table sets forth our drilling
activity for the periods indicated:
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="38%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="23"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="23" align="center" nowrap><B><FONT size="1">Year Ended December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Six Months</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="23" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Ended</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">June&nbsp;30,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Gross</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Net</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Gross</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Net</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Gross</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Net</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Gross</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Net</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Exploratory Wells(1)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Productive(2)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2.8</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1.9</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">18.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1.6</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Nonproductive(3)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.8</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Development Wells(1)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Productive(2)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">19.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2.3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1.6</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Nonproductive(3)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">36.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">27.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">31.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5.5</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1.8</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">An exploratory well is a well drilled either in
    search of a new, as yet undiscovered oil or gas reservoir or to
    greatly extend the known limits of a previously discovered
    reservoir. A development well is a well drilled within the
    presently proved productive area of an oil or gas reservoir, as
    indicated by reasonable interpretation of available data, with
    the objective of completing in that reservoir.
    </FONT></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(2)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">A productive well is an exploratory or
    development well found to be capable of producing either oil or
    gas in sufficient quantities to justify completion as an oil or
    gas well.
    </FONT></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(3)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">A nonproductive well is an exploratory or
    development well that is not a producing well.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<B><FONT size="2">Natural Gas and Oil Acreage</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table sets forth our acreage
position as of June&nbsp;30, 2004:
</FONT>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="40%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Developed</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Undeveloped</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Total</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Gross</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Net</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Gross</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Net</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Gross</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Net</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">California
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">388</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">334</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,052</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">908</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,440</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,243</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">New Mexico
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,386</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">105</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,602</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">398</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,988</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">503</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Texas
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">704</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">176</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">704</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">176</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Wyoming
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,470</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,708</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">240,170</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">136,610</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">252,640</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">143,318</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other(1)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">948</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">418</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,160</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">893</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,108</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,310</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15,896</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,741</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">245,984</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">138,809</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">261,880</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">146,550</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes our natural gas and oil acreage
    positions primarily in Utah, Colorado and North Dakota.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<B><FONT size="2">Production Volumes, Sales Prices and
Production Costs</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table summarizes our net natural
gas and oil production volumes, our average sales prices and
expenses for the periods indicated. Our volumes are attributable
to our direct interests in producing properties and the
production we are allocated from our 1999 and subsequent
drilling programs where we typically receive 25% of the
production from such programs. For these purposes, our net
production will be
</FONT>

<P align="center"><FONT size="2">55
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left">
<FONT size="2">production that is owned by us either directly or
indirectly through our drilling programs, after deducting
royalty, limited partner and other similar interests. The lease
operating expenses shown are related only to our net production.
</FONT>
</DIV>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="52%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Six</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Months</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Year Ended December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Ended</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">June&nbsp;30,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Production:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Natural gas (MMcf)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">785.8</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">54.8</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">32.6</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">359.3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil (MBbls)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">87.4</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2.3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">33.4</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total equivalents (MMcfe)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,310.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">80.3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">46.7</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">559.7</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Average Sales Price Per Unit:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Natural gas (per Mcf)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$&nbsp;3.70</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1.90</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2.83</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.58</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil (per Bbl)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25.42</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">20.84</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16.74</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">30.97</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Weighted average (per Mcfe)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.92</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2.40</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2.82</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.79</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Expenses (per Mcfe):</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Lease operating expense(2)(3)(4)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$2.94</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$1.50</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$1.50</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$3.65</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Average sales price for natural gas in 2001
    includes $0.24 per Mcf hedging loss.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(2)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Lease operating expenses for 2002 and 2001
    exclude operating expenses incurred by the drilling programs and
    paid for by us of approximately $1,200,000 and $497,000,
    respectively.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(3)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">The lease operating expenses for the Wilmington
    unit that were utilized for this calculation include direct
    labor that was improperly charged to us by the operator of the
    Wilmington unit. We have received an arbitration award that
    requires the operator to refund these improperly charged
    expenses to us. The arbitration award also orders the operator
    to refrain from charging these unauthorized operating expenses
    currently and in the future.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(4)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Lease operating expenses related to our CBM
    operations include costs for operating our commercially
    productive CBM wells, together with the costs for operating our
    CBM wells that are still in the dewatering phase and are not
    commercially productive.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<B><FONT size="2">Purchasers and Marketing</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We sell our natural gas and oil production and
that of our drilling programs 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. We are currently able to
sell all of the natural gas and oil produced on our behalf and
that of our drilling programs. 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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In addition, approximately 65% of our natural gas
production was subject to a firm commitment contract for
transportation space, but not sales, with Williston Basin
Interstate relating to its LX-Bar lease for 6,000&nbsp;Mcf/d,
which will terminate in October 2006. We sell our natural gas at
market price. Further, we have a firm commitment contract
relating to our Piper Federal lease covering requirements for us
to deliver 2,500&nbsp;Mcf/d. The maximum penalty for any
deficiency below 90% of cumulative contracted volumes would be
$0.47&nbsp;per Mcf. This contract terminates on
December&nbsp;31, 2004. 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
&#147;Management&#146;s Discussion and Analysis of Financial
Condition and Results of Operation&#148; and &#147;Risk
Factors&nbsp;&#151; Risks Related to Our Business&nbsp;&#151;
Market conditions or operation impediments may hinder our access
to natural gas and oil markets or delay our production&#148;.
</FONT>

<P align="center"><FONT size="2">56
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">For the six months ended June&nbsp;30, 2004, the
largest purchasers for our production and that of our drilling
programs primarily included Tenaska Marketing Ventures, Anadarko
Energy Services and Lunday-Thagard Company, which accounted for
49%, 17% and 22%, respectively, of the total natural gas and oil
sold by us and our drilling programs. 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.
</FONT>

<P align="left">
<B><FONT size="2">Our Service and Operational
Activities</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our drilling, completion, production, re-entry
and land operations are conducted, managed and supervised for us
and our drilling programs through Warren E&#38;P, Inc., our
wholly owned subsidiary. After a long-term joint venture
relationship that began in 1990, we acquired Warren E&#38;P on
September&nbsp;1, 2000. See &#147;Certain Relationships and
Related Transactions&#148;. Through Warren E&#38;P, we employ
petroleum engineers, drilling supervisors, landmen and field
supervisors. Warren E&#38;P also employs geologists on a
contract basis. As of June&nbsp;30, 2004, Warren E&#38;P was the
operator of approximately 55% of the wells in which we and our
drilling programs had interests.
</FONT>

<P align="left">
<B><FONT size="2">Competition</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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 or
that we can sell natural gas and oil leases or obtain financing
for, or participants to join in, the development of prospects.
</FONT>

<P align="left">
<B><FONT size="2">Regulations</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">General</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our business is affected by numerous laws and
regulations, including energy, environmental, conservation, tax
and other laws and regulations relating to the energy industry.
Most of our drilling operations require permits or
authorizations from federal, state or local agencies,
respectively, for both the drilling of the well and the
production of the CBM and the disposal of associated wastes,
principally water. Changes in any of these laws and regulations
or the denial or vacation of permits could have a material
adverse effect on our business. In view of the many
uncertainties with respect to current and future laws and
regulations, including their applicability to us, we cannot
predict the overall effect of such laws and regulations on our
future operations.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We believe that our operations comply in all
material respects with applicable laws and regulations. There
are no pending or threatened enforcement actions related to any
such laws or 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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Proposals and proceedings that might affect the
oil and gas industry are pending before Congress, the BLM, the
Federal Energy Regulatory Commission, or FERC, the Minerals
Management Service, or 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.
</FONT>

<P align="center"><FONT size="2">57
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Federal Regulation of Sales and
    Transportation of Natural Gas</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Historically, the transportation and sale of
natural gas and its component parts in interstate commerce has
been regulated under several laws enacted by Congress and the
regulations passed under these laws by FERC. Our sales of
natural gas, including condensate and liquids, are affected by
the availability, terms and cost of transportation. The price
and terms of access to pipeline transportation are subject to
extensive federal and state regulation. From 1985 to the
present, several major regulatory changes have been implemented
by Congress and FERC that affect the economics of natural gas
production, transportation and sales. In addition, FERC is
continually proposing and implementing new rules and regulations
affecting those segments of the natural gas industry, most
notably interstate natural gas transmission companies that
remain subject to FERC&#146;s jurisdiction. These initiatives
may also affect the intrastate transportation of gas under
certain circumstances. The stated purpose of many of these
regulatory changes is to promote competition among the various
sectors of the natural gas industry.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The ultimate impact of the complex rules and
regulations issued by FERC cannot be predicted. In addition,
many aspects of these regulatory developments have not become
final but are still pending judicial and final FERC decisions.
We cannot predict what further action FERC will take on these
matters. Some of FERC&#146;s more recent proposals may, however,
adversely affect the availability and reliability of
interruptible transportation service on interstate pipelines. We
do not believe that we will be affected by any action taken
materially differently than other natural gas producers,
gatherers and marketers with whom we compete.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Operations on Federal Oil and Gas
    Leases</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We conduct a sizeable portion of our operations
on federal oil and natural gas leases which are administered by
the BLM and the 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 new rule, which became effective June&nbsp;1, 2000,
provides that the MMS will collect royalties based on the market
value of oil and gas produced from federal leases. The
lawfulness of the new rule has been challenged in federal court.
We cannot predict whether this new rule will be upheld in
federal court, nor can we predict whether the MMS will take
further action on this matter. However, we do not believe that
this new rule will affect us any differently than other
producers and marketers of oil and gas.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">State Regulation</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our operations are also subject to regulation at
the state and in some cases, county, municipal and local
governmental levels. Such regulation includes requiring permits
for the drilling of wells, maintaining bonding requirements in
order to drill or operate wells and regulating 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 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 and spacing units or
proration units and the unitization or pooling of oil and gas
properties.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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 profitability, but we are unable to predict
the future cost or impact of complying with such regulations.
</FONT>

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<P align="left">
<B><FONT size="2">Environmental Matters</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">General</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are subject to extensive federal, state and
local environmental laws and regulations relating to water, air,
hazardous substances and wastes, and threatened or endangered
species that restrict or limit our business activities for
purposes of protecting human health and the environment.
Compliance with the multitude of regulations issued by federal,
state, and local administrative agencies can be burdensome and
costly. State environmental regulatory programs are generally
very similar to the corresponding federal environmental
regulatory programs, and federal environmental regulatory
programs are often delegated to the states.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our oil and gas exploration and production
operations are subject to state and/or federal solid waste
regulations that govern the storage, treatment and disposal of
solid and hazardous wastes. However, much of the solid waste
generated by our oil and gas exploration and production
activities is exempt from regulation under federal, and many
state, regulatory programs. To the extent our operations
generate solid waste, such waste is generally subject to state
regulations. We have complied with solid waste regulations in
the normal course of business.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In addition to solid and hazardous waste, our
production operations generate produced water as a waste
material. This water can sometimes be disposed of by discharging
it to surface waters under discharge permits issued pursuant to
the Clean Water Act, or an equivalent state program. We have
obtained surface discharge permits from the Wyoming DEQ for our
operations in some areas, such as the Powder River Basin.
Another common method of produced water disposal is subsurface
injection in disposal wells. Such disposal wells are permitted
under the Safe Drinking Water Act, or an equivalent state
regulatory program. The drilling, completion, and operation of
produced water disposal wells are integral to oil and gas
operations. We already operate produced water disposal wells,
particularly in association with our coalbed methane production
operations. We are experienced in these activities and are able
to perform these activities in a cost-effective manner.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Air emissions and exhaust from gas-fired
generators and from some of our equipment, such as gas
compressors, are potentially subject to regulations under the
Clean Air Act, or equivalent state regulatory programs. To the
extent that our air emissions are regulated, they are generally
regulated by permits issued by state regulatory agencies. We
have obtained air permits, where needed, in the normal course of
business.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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 BLM after preparation of 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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In the event that spills or releases of crude oil
or produced water occur, we would be subject to spill
notification and response regulations under the Clean Water Act,
or equivalent state regulatory programs. Depending on the nature
and location of our operations, we may also be required to
prepare spill prevention, control and countermeasure response
plans under the Clean Water Act, or equivalent state regulatory
programs. Response costs could be high and may have a material
adverse effect on our operations. We may not be fully insured
for these costs.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We believe that we are in compliance with current
applicable environmental laws and regulations. Costs associated
with responding to a major spill of crude oil or produced water,
or costs associated with
</FONT>

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<DIV align="left">
<FONT size="2">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.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We anticipate no material estimated capital
expenditures to comply with federal and state environmental
requirements. In addition, state-wide reclamation bonds and our
$50.0&nbsp;million casualty and environmental insurance have
been adequate to meet the applicable Wyoming bonding and
insurance requirements to date. Finally, we have posted a
$3.0&nbsp;million U.S. treasury bond as collateral for a
$4.0&nbsp;million reclamation bond for the Wilmington unit.
</FONT>

<DIV>&nbsp;</DIV>

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<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Coalbed Methane Operations</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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 production
operations. This produced water is disposed of by re-injection
into the subsurface through disposal wells, 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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Atlantic Rim</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The eastern Washakie Basin is currently the
subject of the Atlantic Rim EIS being developed by the BLM under
the jurisdiction of the Rawlins, Wyoming regional office. The
initial, or scoping, phase of the Atlantic Rim EIS covering our
coalbed methane leases in the Washakie Basin is under way.
Completion of the environmental impact statement and issuance of
a record of decision is expected during the fourth quarter of
2005.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The BLM has issued an interim drilling policy
allowing limited CBM drilling and production activity in the
Atlantic Rim project pending completion of the EIS. The interim
drilling policy authorizes drilling,
</FONT>

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<DIV align="left">
<FONT size="2">completing, and producing no more than
200&nbsp;wells until completion of the Atlantic Rim EIS. We and
our drilling partners have been allocated approximately
165&nbsp;gross wells of the 200 authorized wells. The interim
policy requires the wells to be drilled in nine pods of no more
than 24&nbsp;wells per pod. A pod is defined as two or more
production wells with supporting infrastructure, such as access
roads, injection wells, product pipelines, water pipelines,
power lines and other necessary or ancillary facilities. The
Atlantic Rim project contains federally designated threatened
and endangered species and two wildlife habitat areas that have
been designated as areas of critical environmental concern.
Sensitive areas such as critical habitat and archeological sites
must be avoided in constructing the pods. Federal and
non-federal leases in the Atlantic Rim project are subject to
the 200&nbsp;well limit. To date, we have received BLM and state
approval of drilling permits for 72 producing wells, and
approval of right-of-ways for four pods.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The BLM may modify the interim drilling policy at
any time and the policy, as with any agency decision, is subject
to legal challenges by interested parties. The interim policy
requires an environmental assessment for each of the nine pods.
Public comment is allowed on each environmental assessment, and
BLM approval of each environmental assessment must be obtained
before pod construction can commence. Several of the
environmental assessments have been challenged by environmental
groups and individuals. In addition, many of the restrictions,
conditions and limitations on our drilling, production and
construction activities in the Washakie Basin will be specified
by the BLM in the final Atlantic Rim EIS record of decision.
Finally, conditions and restrictions on drilling, production and
construction activities may be imposed through site-specific BLM
approvals required for applications for permits to drill and
plans of development. As a result, such development activities
will remain contingent on BLM approval for several years.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our eastern 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. Produced water disposal 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.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Pacific Rim</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The western Washakie Basin is currently the
subject to the 1997 updated resource management plan, or RMP,
under the jurisdiction of the Rock Springs, Wyoming regional
office of the BLM. The Rock Springs RMP currently allows the
drilling of up to 250 CBM wells that are not contemplated by a
separate EIS. In October 2003, at our request, the BLM began the
scoping process for an EA that covers approximately
42,721&nbsp;acres, including the majority of the
35,192&nbsp;gross (27,534&nbsp;net) acres comprising our Pacific
Rim project area. The Pacific Rim EA contemplates the drilling
of 120 CBM wells in the study area. We anticipate receiving a
record of decision on this EA by the end of 2004. Based on
information currently available, we anticipate being allocated
approximately 80 of the 120&nbsp;wells in the EA study area.
Upon the completion of the 120 authorized wells, a more
comprehensive EIS may be required for additional development in
the project. We do not believe that an EIS for the Pacific Rim
project will be necessary before 2006.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Powder River Basin</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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 the
</FONT>

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<DIV align="left">
<FONT size="2">construction of rights-of-way, before it approves
required applications for permits to drill and plans of
development. We believe that we have operated our Powder River
Basin federal leases in compliance with the BLM&#146;s current
requirements.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Wilmington Unit</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Wilmington unit is located in a mixed light
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 unit 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 urban
environment could be significant. This potential liability is
accentuated by the location of our Wilmington unit leases near
residential areas. To date and to our knowledge, there are no
environmentally related lawsuits or other third-party claims or
complaints pending against us relating to our interests or
activities in the Wilmington unit.
</FONT>

<P align="left">
<B><FONT size="2">Operating Hazards And Insurance</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The oil and natural gas business involves a
variety of operating risks, including fires, explosions,
blowouts, environmental hazards, including 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
properties.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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.
</FONT>

<P align="left">
<B><FONT size="2">Title to Properties</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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. 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.
</FONT>

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<P align="left">
<B><FONT size="2">Employees</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">At June&nbsp;30, 2004, we had 29&nbsp;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. Independent contractors often
perform well drilling and production operations, including
pumping, maintenance, dispatching, inspection and testing.
</FONT>

<P align="left">
<B><FONT size="2">Facilities</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our principal executive offices are located at
489&nbsp;Fifth Avenue, 32nd&nbsp;Floor, New York,&nbsp;NY 10017,
and our telephone number is (212)&nbsp;697-9660. We lease
approximately 4,097&nbsp;square feet of office space for our New
York office under a lease that expires in 2008. Our oil and gas
administrative office in Casper, Wyoming occupies
3,750&nbsp;square feet under a lease currently being negotiated.
In June 2003, we entered into an office lease in Roswell, New
Mexico, which expires in May 2005. We believe that suitable
additional space to accommodate our anticipated growth will be
available in the future on commercially reasonable terms.
</FONT>

<P align="left">
<B><FONT size="2">Legal Proceedings</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Arbitrations vs. Magness Petroleum
Company.</FONT></I><FONT size="2"> On September&nbsp;28, 1999,
Magness Petroleum Company, our joint venture partner in the
Wilmington field, filed a complaint against us, Warren E&#38;P,
Inc., our principal operating subsidiary, and certain of our
other subsidiaries in the Superior Court of Los Angeles County,
California, alleging that we had breached our joint venture
agreement with Magness Petroleum, as well as an alleged oral
agreement regarding advance payment of expenses for drilling and
completion operations. Magness Petroleum sought dissolution of
the joint venture, an accounting and a declaratory judgment as
to the rights of the parties under the joint venture agreement.
We successfully enforced the arbitration provision contained in
the joint venture agreement and entered into a written
stipulation with Magness Petroleum to submit the matter for
arbitration by the Judicial Arbitration and Mediation Services,
or JAMS, before the Honorable Keith J. Wisot, a retired Los
Angeles Superior Court Judge. Judge Wisot, as the arbitrator,
ruled that the joint venture agreement is a valid enforceable
agreement, declined to dissolve the joint venture, denied
Magness Petroleum&#146;s claims for breach of contract,
determined that Magness Petroleum was not entitled to
reimbursement of direct labor charges to the field and tangible
well costs, and held that he and JAMS would retain jurisdiction
to enforce the final award. In addition, the parties stipulated
on the record that Judge Wisot retain jurisdiction to adjudicate
any future disputes among the parties. The Superior Court case
was dismissed in January 2000.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On August&nbsp;8, 2001, Magness Petroleum filed a
demand with the American Arbitration Association, or AAA,
reasserting its claims for dissolution of the joint venture
under a new dissolution theory and breach of contract. The
dissolution theory was based on Magness Petroleum&#146;s claim
that voting rights within the joint venture should be based on
ownership of working interests in the Wilmington unit, which
includes property never contributed to the joint venture,
instead of ownership of joint venture working interests. We then
brought suit in the California Superior Court seeking to enforce
the original final award issued by Judge Wisot in the JAMS
arbitration and to enforce the oral stipulation among the
parties to have JAMS retain jurisdiction to adjudicate any
future disputes. On September&nbsp;24, 2003, after a number of
court proceedings, the California Superior Court ordered JAMS to
hear our motion to enforce the final award covering unauthorized
direct labor charges and tangible costs and for the AAA to hear
Magness Petroleum&#146;s new theory of dissolution of the joint
venture, to make a determination as to whether Magness Petroleum
can independently drill new wells in the Wilmington unit without
our consent if the joint venture is not dissolved, and whether
we were entitled to damages as a result of Magness Petroleum
preventing the resumption of drilling activities by us as set
forth in the final award issued by Judge Wisot in the JAMS
arbitration.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On January&nbsp;14, 2004, we filed an amended
answer in the AAA arbitration denying Magness Petroleum&#146;s
request to dissolve the joint venture, together with
counterclaims seeking damages against Magness Petroleum
initially in the amount of $15&nbsp;million, which was
subsequently increased to in excess of $40&nbsp;million, on a
number of grounds, including breach of contract. We also
requested that Magness Petroleum be removed as
</FONT>

<P align="center"><FONT size="2">63
</FONT>

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<DIV align="left">
<FONT size="2">operator for the joint venture wells in the
Wilmington Field due to a breach of its duties and that an
independent operator be appointed in its place. We asserted a
further claim against Magness Petroleum that in the event the
joint venture is dissolved prior to completion of the venture,
we would be entitled to damages in the amount of
$26&nbsp;million. The AAA arbitration was held from May&nbsp;3,
2004 through May&nbsp;14, 2004 and further expert oral testimony
is scheduled in Los Angeles on September&nbsp;29, 2004. A ruling
is expected in the AAA arbitration by the end of 2004. The JAMS
arbitration hearing on the motion to enforce the final award was
held from May&nbsp;19, 2004 through May&nbsp;21, 2004. On
August&nbsp;16, 2004, Judge Wisot issued an order granting our
motion to enforce the final award covering unauthorized direct
labor charges, ruling that these charges are recoverable by us
as improperly billed to the joint venture.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We believe that we have meritorious defenses to
Magness Petroleum&#146;s claims, as well as valid claims and
counterclaims against Magness Petroleum. We believe that we will
prevail in upholding the validity and enforceability of the
joint venture agreement. However, this is not certain, and
although the consequences of Magness Petroleum prevailing in a
dissolution of the joint venture are not entirely predictable,
if Magness Petroleum does prevail in dissolving the joint
venture, we believe that we would retain a 47% working interest
in the undeveloped properties and our existing working interest
in the joint venture wells. If that were to occur, our estimated
proved natural gas and oil reserves, as
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2004, would decrease from 106.2&nbsp;Bcfe to
approximately &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Bcfe and the
estimated discounted future net revenues from our estimated
proved reserves would decrease from $183.0&nbsp;million to
approximately
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;million.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Gotham Insurance Company&nbsp;v.
Warren.</FONT></I><FONT size="2"> In 1998, we and our
subsidiary, Warren E&#38;P, Inc., were sued in the
81st&nbsp;Judicial District Court of Frio County, Texas by
Stricker Drilling Company, Inc. and Manning Safety Systems to
recover the value of lost equipment based on a well blow-out. As
a result of the lawsuit, Gotham Insurance Company, Warren
E&#38;P&#146;s well blow-out insurer, intervened. The suit was
settled in 1999 with all parties except Gotham. Gotham paid over
$1.7&nbsp;million under the insurance policy and now seeks a
refund of approximately $1.5&nbsp;million of monies paid,
denying coverage, and alleging fraud and misrepresentation and a
failure of Warren E&#38;P to act with due diligence and pursuant
to safety regulations. Warren E&#38;P countersued for the
remaining proceeds under the policy coverage. In the summer and
fall of 2000, summary judgments were entered for Warren E&#38;P
on essentially all claims except its bad faith claims against
Gotham. Gotham&#146;s claims against Warren E&#38;P and us were
rejected. Final judgment was rendered by the District Court on
May&nbsp;14, 2001 in Warren E&#38;P&#146;s favor for the
remaining policy proceeds, interest and attorneys&#146; fees.
Gotham appealed the final judgment to the San&nbsp;Antonio Court
of Appeals seeking a refund of approximately $1.5&nbsp;million.
On July&nbsp;23, 2003, the San&nbsp;Antonio Court of Appeals
reversed the trial court&#146;s earlier summary judgment for
Warren E&#38;P and remanded the case to the trial court. In
November 2003, Warren E&#38;P appealed the San&nbsp;Antonio
Court of Appeals&#146; panel decision to the Texas Supreme
Court, and in July 2004, the Court denied appellate review. If
we elect not to appeal, the matter will be remanded to the trial
court in the 81st&nbsp;Judicial District Court of Frio County,
Texas, for further proceedings consistent with the
San&nbsp;Antonio Court of Appeals&#146; decision.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are also a party to legal actions arising in
the ordinary course of our business. In the opinion of our
management, based in part on consultation with legal counsel,
the liability, if any, under these claims is either adequately
covered by insurance or would not have a material adverse effect
on us.
</FONT>

<P align="center"><FONT size="2">64
</FONT>

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<DIV align="left">
<A name='111'></A>
</DIV>

<!-- link1 "MANAGEMENT" -->

<P align="center">
<B><FONT size="2">MANAGEMENT</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table sets forth information
regarding our executive officers and directors as of
June&nbsp;30, 2004:
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="36%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="54%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Name</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Age</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Position</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Norman F. Swanton
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">65</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">President, Chairman of the Board and Chief
    Executive Officer
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Timothy A. Larkin
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">41</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Executive Vice President and Chief Financial
    Officer
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Lloyd G. Davies
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">68</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Executive Vice President and Director of Warren
    Resources, Inc. and Chairman of the Board and Chief Executive
    Officer of Warren E&#38;P, Inc., our principal operating
    subsidiary
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">David E. Fleming
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">49</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Senior Vice President, General Counsel and
    Corporate Secretary
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Kenneth A. Gobble
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">45</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Senior Vice President of Warren Resources, Inc.
    and President and Chief Operating Officer of Warren E&#38;P, Inc.
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Ellis G. Vickers
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">47</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Senior Vice President&nbsp;&#151; Land
    Management&nbsp;&#38; Regulatory Affairs and Associate General
    Counsel
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Stewart P. Skelly
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">29</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Vice President and Controller
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Chet Borgida(2)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">59</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Director
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Anthony L. Coelho(1)(3)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">62</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Director
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Dominick D&#146;Alleva(1)(2)(3)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">52</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Director
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Marshall Miller(1)(2)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">53</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Director
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Thomas G. Noonan
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">66</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Director
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Michael R. Quinlan(3)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">59</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Director
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Member of the compensation committee.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(2)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Member of the audit committee.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(3)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Member of the corporate governance committee.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Norman F.
Swanton.</FONT></I></B><FONT size="2"> Mr.&nbsp;Swanton has
served as our President, Chairman of the Board and Chief
Executive Officer since Warren Resources, Inc. was founded in
June 1990. From October 1986 to 1990, he served as an
independent financial advisor, arranging debt restructuring,
credit facilities, leveraged buy-out financing, debt-for-equity
exchanges, equity financing and providing other financial
services. From 1972 to 1985, he served as Chairman of the Board,
President and Chief Executive Officer of Swanton Corporation, a
publicly held company engaged in financial services and energy
operations, and President and founder of Low Sulphur Fuel
Company, a marine terminal residual fuel oil blending operation.
From 1970 to 1972, he served as a principal consultant to the
Trust Fund of the New York Stock Exchange serving as its
representative in the liquidation of several former New York
Stock Exchange member firms. From 1961 to 1970, he served as an
executive officer of Glore, Forgan, Staats, Inc. and a
divisional controller for Hayden Stone, Inc., which were New
York Stock Exchange member securities and underwriting firms.
Mr.&nbsp;Swanton received his Bachelor of Arts degree in History
and Political Science from Long Island University in 1962 and
attended Bernard Baruch Graduate School of Business in a
graduate degree program in Accountancy and Finance from 1963 to
1966. He is the brother-in-law of Thomas G. Noonan, one of our
directors.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Timothy A.
Larkin.</FONT></I></B><FONT size="2"> Mr.&nbsp;Larkin has served
as our Senior Vice President and Chief Financial Officer since
January 1995. On March&nbsp;17, 2004, Mr.&nbsp;Larkin was
appointed as our Executive Vice President. From 1991 to 1994, he
served as Accounting Manager of Palmeri Fund Administrators,
Inc., an administrative services company providing accounting,
administrative and investment advisory support to over 50,000
limited partners in investment funds primarily sponsored by
Merrill Lynch and Oppenheimer&nbsp;&#38; Co. Inc. From 1985 to
1991, he was employed in the audit department of
Deloitte&nbsp;&#38; Touche, LLP, an international public
</FONT>

<P align="center"><FONT size="2">65
</FONT>

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<DIV align="left">
<FONT size="2">accounting firm, attaining the level of audit
manager. Mr.&nbsp;Larkin received his Bachelor of Science degree
in Accounting from Villanova University in 1985.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Lloyd G.
Davies.</FONT></I></B><FONT size="2"> Mr.&nbsp;Davies joined the
board of directors in July 2001 and until March&nbsp;16, 2004,
he served on the audit committee of the Board. On March&nbsp;17,
2004, Mr.&nbsp;Davies was appointed our Executive Vice President
and Chairman and Chief Executive Officer of Warren E&#38;P,
Inc., our principal operating subsidiary, Warren E&#38;P, Inc.,
based in Casper, Wyoming. Mr.&nbsp;Davies retired in 1995, after
35&nbsp;years with Texaco, Inc. From 1992 through 1994,
Mr.&nbsp;Davies was the Assistant Division Manager for the
Western U.S.&nbsp;area for Texaco. Prior to that, from 1990
through 1992, Mr.&nbsp;Davies was the Manager and Director of
Operations for Texaco&#146;s Far East Operations Division.
During his years with Texaco, Mr.&nbsp;Davies also served on
several of Texaco&#146;s subsidiaries&#146; board of directors
and management committees in the Far East, Mid East and South
America. Mr.&nbsp;Davies received a Bachelor of Science degree
in Petroleum Engineering from the University of Oklahoma in
1958. In 1966, he received a Master of Science degree in
Petroleum Engineering with a Minor in Math from the University
of Texas.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">David E.
Fleming.</FONT></I></B><FONT size="2"> Mr.&nbsp;Fleming joined
us in July 2001 as a Senior Vice President and General Counsel.
In September 2002, Mr.&nbsp;Fleming was also elected our
Corporate Secretary. From January 1999 to June 2001, he was a
partner with the law firm of Cummings&nbsp;&#38; Lockwood, where
he practiced corporate and securities law. For the five years
prior thereto, he practiced corporate law at Epstein,
Becker&nbsp;&#38; Green,&nbsp;P.C., New York, New York, where he
was a member of the firm and currently maintains Of Counsel
status. Mr.&nbsp;Fleming does not provide any legal services to
the Company on behalf of Epstein, Becker&nbsp;&#38;
Green,&nbsp;P.C. Mr.&nbsp;Fleming received a Bachelor of Arts
degree from Cornell University in 1976 and a Juris Doctor,
<I>cum laude,</I> from the University of Maryland School of Law
in 1980. He is admitted to practice law in the states of New
York, Connecticut and Maryland.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Kenneth A.
Gobble.</FONT></I></B><FONT size="2"> Mr.&nbsp;Gobble became our
Senior Vice President in January 2003. On March&nbsp;17, 2004,
Mr.&nbsp;Gobble was appointed President and Chief Operating
Officer of Warren E&#38;P, Inc., our principal operating
subsidiary, based in Casper, Wyoming. From 1996 to December
2002, he was Vice President&nbsp;&#151; Rocky Mountain Region
for Warren E&#38;P. Prior to joining Warren E&#38;P in 1996,
Mr.&nbsp;Gobble had extensive experience with major service
companies including Schlumberger Well Services. Additionally,
Mr.&nbsp;Gobble has extensive experience in numerous advanced
applications for natural gas and oil drilling operations
including logging-while-drilling, formation evaluation, 3-D
seismic vertical seismic profiling, horizontal drilling and
coalbed methane development. Mr.&nbsp;Gobble received his
Bachelor of Science degree in Petroleum Engineering and a
Bachelor of Science degree in Mathematics from New Mexico
Institute of Mining and Technology in 1986.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Ellis G.
Vickers.</FONT></I></B><FONT size="2"> Mr.&nbsp;Vickers became
our Senior Vice President&nbsp;&#151; Land Management&nbsp;&#38;
Regulatory Affairs in January 2003. From September 2001 through
December 2002, he was Vice President and Associate General
Counsel and Senior Vice President and General Counsel of Warren
E&#38;P, Inc. From 1995 through December 2001, Mr.&nbsp;Vickers
practiced law with the New Mexico based law firm of
Bozarth&nbsp;&#38; Vickers. He focused his practice on
corporate, securities, oil and gas, real estate and partnership
law and is a New Mexico Board of Legal Specialization Recognized
Specialist in Oil and Gas Natural Resources. Mr.&nbsp;Vickers
received his Bachelor of Science degree in Political Science,
<I>summa cum laude,</I> from Eastern New Mexico University in
1979 and a Juris Doctor from the University of New Mexico in
1982. He is admitted to practice law in the states of New Mexico
and Texas.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Stewart P.
Skelly.</FONT></I></B><FONT size="2"> Mr.&nbsp;Skelly has served
as our Corporate Controller since 2002 and as a Vice President
since March 2004. From 2000 to 2002, he served as our Assistant
Controller. From 1997 to 2000, Mr.&nbsp;Skelly was employed by
News Corp., a global media conglomerate, attaining the level of
Accounting Manager. From 1992 to 1997, Mr.&nbsp;Skelly was
employed by Kearney McArdle, a midsize public accounting firm in
Ireland, attaining the level of audit senior. Mr.&nbsp;Skelly is
a graduate of Griffith College Dublin and is a Chartered
Certified Accountant.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Chet Borgida.</FONT></I></B><FONT size="2">
Mr.&nbsp;Borgida was elected to the Board of Directors in
November 2003 and also serves as Chairman of our audit
committee. Mr.&nbsp;Borgida was a partner at Grant Thornton LLP,
our independent auditors, from 1977 to 2001. While at Grant
Thornton LLP, Mr.&nbsp;Borgida had no involvement in the review
or
</FONT>

<P align="center"><FONT size="2">66
</FONT>

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<DIV align="left">
<FONT size="2">preparation of our audited financial statements.
Since March 2004, Mr.&nbsp;Borgida has been a partner in Drager
and Fenton LLP (Florida). From 2001 to 2003, Mr.&nbsp;Borgida
was Senior Vice President Finance and Chief Financial Officer of
Cross Media Marketing Corporation. From March 2003 to October
2003, Mr.&nbsp;Borgida was also a director and Chairman of the
audit committee of Brand Partners Group, Inc., and since
November 2001 has been a director and Chairman of the audit
committee of Correctional Services Corporation, an owner and
operator of prison facilities. He graduated from Hunter College
with a Bachelor Degree in Accounting in 1967. He is a member of
the American Institute of Certified Public Accountants, the New
York State Society of Certified Public Accountants and the
Florida Institute of Certified Public Accountants.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Anthony L.
Coelho.</FONT></I></B><FONT size="2"> Congressman Coelho joined
our Board as an independent director in May 2001 and serves on
the compensation and corporate governance committees of the
Board. From December 2000 to the present, Congressman Coelho has
devoted his time to serving on the boards of directors listed
below and as an independent consultant and adviser. From 1998
through November 2000, he served as the General Chairman for the
U.S.&nbsp;Presidential campaign of Vice President Al Gore. From
1995 to 1998, he was Chairman and Chief Executive Officer of ETC
w/tci, Inc, an education and training technology company in
Washington,&nbsp;D.C. and from 1990 to 1995, he served as
President and CEO of Wertheim Schroeder Investment Services,
Inc. From 1978 to 1989, he served five terms in the
U.S.&nbsp;Congress, representing the State of California as a
member of the U.S.&nbsp;House of Representatives. During his
congressional terms, he served as Democratic Majority Whip from
1987 to 1989 and authored the Americans with Disabilities Act.
Congressman Coelho was also appointed chairman of the
President&#146;s Committee on the Employment of People with
Disabilities by President Clinton. Congressman Coelho has served
on a number of corporate boards and currently serves on the
boards of Cyberonics, Inc., DeFrancesco&nbsp;&#38; Sons, Inc.,
Ripplewood Holdings, LLC and Service Corporation International,
a funeral services company. Congressman Coelho earned a Bachelor
of Arts degree in Political Science from Loyola Marymount
University in 1964.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Dominick
D&#146;Alleva.</FONT></I></B><FONT size="2">
Mr.&nbsp;D&#146;Alleva was our Secretary until September 2002
and has been a director since June 1992. He serves on the
compensation, audit and corporate governance committees of the
Board. Additionally, from 1995 to the present, he has been a
principal with D and D Realty Company, LLC, a privately owned
New York limited liability company involved in the acquisition
and financing of real estate. From 1986 to 1995, he was engaged
in residential New York City real estate for his own account and
as general counsel to various real estate acquisition firms,
where he negotiated contracts for the acquisition and financing
of commercial real estate. From 1983 to 1985, he served as
Executive Vice President, Director and General Counsel of
Swanton Corporation, which engaged in financial services and
energy operations. From 1980 to 1983 he was Associate Counsel of
Damson Oil Corporation. From 1977 to 1980 he was an associate
with Simpson, Thatcher&nbsp;&#38; Bartlett specializing in
securities and corporate law. Mr.&nbsp;D&#146;Alleva received a
Bachelor of Arts degree, <I>summa cum laude </I>from Fordham
University in 1974 and earned his Juris Doctor degree with
honors from Yale University in 1977.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Marshall
Miller.</FONT></I></B><FONT size="2"> Mr.&nbsp;Miller joined the
Board as an independent director in February 1998 and serves on
the audit committee and as chairman of the compensation
committee of the Board. Since 1988, Mr.&nbsp;Miller served in
various senior management capacities at financial institutions
including Fair, Isaac Companies and Providian Financial
Corporation and specialized in advanced computer systems for
credit risk management. Until retiring in 2000, Mr.&nbsp;Miller
was Executive Vice President of Strategic Risk Management at
Wells Fargo Bank in San&nbsp;Francisco. Mr.&nbsp;Miller received
a Bachelor of Arts degree in Mathematics from the University of
California at Los Angeles, a Master of Arts degree in
Mathematics from the University of California at Berkley and a
Masters of Science Degree in Operations Research from Stanford
University in 1976.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Thomas G.
Noonan.</FONT></I></B><FONT size="2"> Mr.&nbsp;Noonan joined the
Board as a director in November 1997 and served as Chairman of
the compensation committee until March 2004. For the past
17&nbsp;years, he has served as Manager of Quality Assurance for
Mars Inc., an international food and candy company. From 1961 to
1979, he was a microbiologist for the New York State Department
of Health. Mr.&nbsp;Noonan received a Bachelor of Science degree
from Fordham University in New York in 1959. He is the
brother-in-law of Mr.&nbsp;Swanton.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Michael R.
Quinlan.</FONT></I></B><FONT size="2"> Mr.&nbsp;Quinlan joined
the Board as a director in January 2002 and serves as Chairman
of the corporate governance committee and presiding director of
the executive sessions of the
</FONT>

<P align="center"><FONT size="2">67
</FONT>
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<DIV align="left">
<FONT size="2">independent directors of the Board. From 1963 to
the present Mr.&nbsp;Quinlan has been employed by the
McDonald&#146;s Corporation. In 1979, Mr.&nbsp;Quinlan was
appointed to the board of directors of McDonald&#146;s and
served as the Chairman of the Board and Chief Executive Officer
from 1990 to 1998. From 1998 to 1999, he served as Chairman of
the Board of McDonald&#146;s Corporation. From 1987 to 1990, he
served as the President and Chief Executive Officer. Currently
he serves as the Chairman of the Executive Committee.
Mr.&nbsp;Quinlan is Chairman of the board of trustees of both
Ronald McDonald House Charities and Loyola University Chicago.
Additionally, he is a member of the board of trustees of Loyola
University Health System. He is also on the board of directors
of Dun and Bradstreet Corporation, a financial services company,
and the May Department Stores Company, a retailer.
Mr.&nbsp;Quinlan earned a Bachelor of Science degree in 1967 and
a Master&#146;s of Business Administration from Loyola
University Chicago in 1970. He has been awarded Honorary Doctors
of Law Degrees from Loyola University Chicago, Elmhurst College
and Illinois Benedictine College.
</FONT>
</DIV>

<P align="left">
<B><FONT size="2">Committees of the Board of Directors</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our Board is comprised of a majority of
independent directors. The Board has established the following
standing committees: audit, compensation and corporate
governance that are comprised entirely of independent directors.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Audit Committee</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The audit committee is comprised entirely of
independent, non-employee directors. We intend to maintain an
audit committee consisting solely of at least three independent
directors. Independent directors are persons who are, among
other things, neither officers nor employees of Warren or its
subsidiaries or any other person who has a relationship with any
person or entity which, in the opinion of the board of
directors, would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director. The
audit committee held four meetings in 2003. The audit committee
has direct access to the independent auditors and counsel to us
and currently consists of Messrs.&nbsp;Borgida, D&#146;Alleva
and Miller. Mr.&nbsp;Borgida currently acts as chairman of the
audit committee and is deemed by us to be an &#147;audit
committee financial expert&#148;. The purposes of the audit
committee include without limitation to:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">review the preparation and scope of the audit of
    our annual consolidated financial statements;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">review and approve drafts of these financial
    statements;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">make recommendations as to the engagement and
    fees of the independent auditors;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">monitor the functioning of our accounting and
    internal control systems by meeting with representatives of
    management and the independent auditors;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">perform any other duties relating to the
    maintenance of our proper books of account and records and other
    matters as the Board may assign from time to time.
    </FONT></TD>
</TR>

</TABLE>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Compensation Committee</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The compensation committee is responsible for
establishing the compensation and evaluating annual and
long-term performance goals of our elected officers. The
compensation committee currently consists of
Messrs.&nbsp;Coelho, D&#146;Alleva and Miller. Mr.&nbsp;Miller
currently serves as chairman of the compensation committee. The
purposes of the compensation committee include without
limitation to:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">administer and grant options under our equity
    compensation plans;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">make decisions regarding compensation of our
    executive officers;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">publish an annual compensation report for our
    stockholders.
    </FONT></TD>
</TR>

</TABLE>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Corporate Governance
    Committee</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The corporate governance committee has adopted
written charters for all three of our independent committees
that provide, among other things, for an annual self-evaluation.
In addition, the Board has adopted
</FONT>

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</FONT>

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<DIV align="left">
<FONT size="2">a Code of Business Conduct and a Code of Ethics
for the Senior Financial Officers. The corporate governance
committee currently consists of Messrs.&nbsp;Coelho,
D&#146;Alleva and Quinlan, with Mr.&nbsp;Quinlan serving as
chairman. The purposes of the corporate governance committee
include without limitation to:
</FONT>
</DIV>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">determine compensation for the Board;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">assist the Board in identifying qualified
    individuals to become directors;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">recommend to the Board qualified director
    nominees for election at the stockholders&#146; annual meeting;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">determine membership on the Board committees;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">recommend corporate governance guidelines;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">conduct annual self-evaluations of the Board and
    the corporate governance committee;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">report annually to the Board on the Chief
    Executive Officer succession plan.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<B><FONT size="2">Code of Business Conduct for All Directors,
Officers and Employees</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Board has adopted a Code of Business Conduct
for all directors, officers and employees. It is the
responsibility of each of our directors, officers and employees
to maintain a commitment to high standards of conduct and
ethics. It is the intent of the Code of Business Conduct to
inspire continuing dedication to the fundamental principles of
honesty, loyalty, fairness and forthrightness. No waiver of any
part of this Code may be granted for any director or officer
except by a vote of the Board of Directors or a designated Board
committee that ascertains whether a waiver is appropriate under
all the circumstances.
</FONT>

<P align="left">
<B><FONT size="2">Code of Ethics for Senior Financial
Officers</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Board has also adopted a separate Code of
Ethics for our Chief Executive Officer, Chief Financial Officer
and Chief Accounting Officer. Each of the covered officers has
to certify on an annual basis that the officer shall:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">act with honesty and integrity, avoiding actual
    or apparent conflicts of interest in personal and professional
    relationships;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">provide constituents with information that is
    accurate, complete, objective, relevant, timely and
    understandable;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">comply with all applicable laws, rules and
    regulations of federal, state and local governments, and other
    appropriate private and public regulatory agencies;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">act in good faith, responsibly, with due care,
    competence and diligence, without misrepresenting material facts
    or allowing the officer&#146;s independent judgment to be
    subordinated;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">respect the confidentiality of information
    acquired in the course of business except when authorized or
    otherwise legally obligated to disclose the information,
    acknowledging that confidential information acquired in the
    course of business is not to be used for personal advantage;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">proactively promote ethical behavior among our
    employees and as a responsible partner with industry peers and
    associates;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">maintain control over and responsibly manage all
    assets and resources employed or entrusted to the officer by
    us;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">report illegal or unethical conduct by any
    director, officer or employee that has occurred, is occurring or
    may occur, including any potential violations of the Code of
    Ethics or the Code of Business Conduct.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">No waiver of any part of the Code of Ethics may
be granted except by a vote of the Board of Directors or a
designated Board committee that ascertains whether a waiver is
appropriate under all the circumstances. In case a waiver of the
Code of Ethics is granted, the notice of such waiver will be
posted on our website at
</FONT>

<P align="center"><FONT size="2">69
</FONT>

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<DIV align="left">
<FONT size="2">www.warrenresources.com. A copy of the Code of
Ethics that has been adopted by the Board of Directors is
available on our website at www.warrenresources.com.
</FONT>
</DIV>

<P align="left">
<B><FONT size="2">Compensation of Directors</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Directors who are also our employees receive no
additional compensation for their services as directors.
Non-employee directors currently receive $1,000 for each meeting
of the Board of Directors or committees of the Board of
Directors that they attend and are reimbursed for travel
expenses and other out-of-pocket costs incurred in connection
with their attendance at these meetings. In addition, prior to
the completion of this offering, each non-employee director is
entitled to receive:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">upon becoming a member of the Board, options to
    purchase&nbsp;25,000&nbsp;shares of our common stock exercisable
    at the then current fair market price for a period of five
    years;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">an annual grant of options to
    purchase&nbsp;10,000&nbsp;shares of our common stock exercisable
    at the then current fair market price for a period of five years.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<FONT size="2">Upon completion of this offering, each
non-employee director will be entitled to receive in lieu of the
above:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">upon becoming a member of the Board, options to
    purchase&nbsp;10,000&nbsp;shares of our common stock exercisable
    at the then current fair market price for a period of five years;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">an annual grant of options to
    purchase&nbsp;5,000&nbsp;shares of our common stock exercisable
    at the then current fair market price for a period of five years;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">annual retainer fee of $20,000 and reimbursement
    for travel expenses and other out-of-pocket costs incurred in
    connection with attending Board and committee meetings;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">annual retainer fee of $7,500 for the chairman of
    the audit committee and $5,000 for the chairman of the corporate
    governance and compensation committee; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">$2,000 for each Board meeting attended, $1,500
    for each audit committee meeting attended and $1,000 for each
    corporate governance and compensation committee meeting attended.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<B><FONT size="2">Indemnification Agreements</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have entered into an indemnification agreement
with each of our directors and officers against liabilities that
may arise by reason of their status or service as directors or
officers and to advance their expenses incurred as a result of a
proceeding as to which they may be indemnified. These
indemnification agreements are intended to be in addition to any
other rights that the indemnitee may have under our certificate
of incorporation, bylaws and applicable law.
</FONT>

<P align="left">
<B><FONT size="2">Compensation Committee Interlocks and Insider
Participation</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">None of the members of our compensation committee
is currently or has been at any time since our founding, our
officer or employee. No member of our compensation committee
serves as a member of the board of directors or compensation
committee of any entity that has one or more executive officers
serving as a member of our Board of Directors or compensation
committee.
</FONT>

<P align="left">
<B><FONT size="2">Executive Compensation</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table sets forth the total
compensation earned by our Chief Executive Officer and each of
the four most highly compensated other officers who received
annual compensation in excess of $100,000 for the year ended
December&nbsp;31, 2003. The compensation set forth in the table
below for the fiscal years ended December&nbsp;31, 2003, 2002
and 2001 does not include medical, group life or other benefits
which are available to all of our salaried employees, and
perquisites and other benefits, securities or property which do
not exceed the lesser of $50,000 or 10% of the person&#146;s
salary and bonus shown in the table.
</FONT>

<P align="center"><FONT size="2">70
</FONT>

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<DIV align="left">
<A name='112'></A>
</DIV>

<!-- link1 "Summary Compensation Table" -->

<P align="center">
<B><FONT size="2">Summary Compensation Table</FONT></B>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="27%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Long-Term Compensation</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Awards</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Annual Compensation</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Securities</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Other Annual</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Underlying</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">All Other</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2" align="center" nowrap><B><FONT size="1">Name and Principal Position</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Year</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Salary</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Bonus(1)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Compensation(2)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Options</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Compensation</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Norman F. Swanton
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2003</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">385,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">250,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16,274</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">300,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Chief Executive Officer
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2002</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">375,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">187,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16,274</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">and Chairman of the Board
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2001</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">375,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">220,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">18,814</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">600,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(3)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Timothy A. Larkin
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2003</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">205,400</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">125,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">413</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">310,750</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Executive Vice President
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2002</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">200,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">100,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">819</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">and Chief Financial Officer
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2001</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">185,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">92,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">819</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">676,875</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(3)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">David E. Fleming
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2003</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">210,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">105,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">66,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Senior Vice President,
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2002</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">210,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">105,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">General Counsel and
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2001</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">105,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">26,250</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">150,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(3)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Secretary
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Ellis G. Vickers
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2003</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">215,670</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">107,835</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">66,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Senior Vice President&nbsp;&#151;
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2002</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">210,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">105,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Land Management&nbsp;&#38;
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2001</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">105,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">26,250</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">150,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(3)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Regulatory Affairs and Associate General Counsel
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Jack B. King
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2003</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">120,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">187,817</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">157,250</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Vice President and Director
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2002</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">200,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">13,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">of National Sales And
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2001</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">200,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">348,261</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">380,630</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(3)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Marketing
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Bonus amounts reported for 2003, 2002 and 2001
    include bonuses earned in the reported year and actually paid in
    the subsequent year.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(2)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Amounts reflect insurance premiums paid by the
    company during the covered fiscal year with respect to life
    insurance for the benefit of the named executive officer or his
    designee.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(3)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">On October&nbsp;1, 2002, in order to improve our
    capital structure, senior management and other employees
    voluntarily surrendered to us and we terminated 2,255,783 stock
    options issued in 2001, including all of the 2001 stock options
    granted to the named executive officers in the above table.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<B><FONT size="2">Option Grants in Last Fiscal Year</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following stock options to purchase shares of
our common stock were granted to the named executive officers
during the fiscal year ended December&nbsp;31, 2003.
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="26%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="15"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="15" align="center" nowrap><B><FONT size="1">Individual Grants</FONT></B></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="15" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Potential Realizable</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Percent of</FONT></B></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Value at Assumed</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number of</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Total</FONT></B></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Annual Rate of Stock</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Securities</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Options</FONT></B></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Price Appreciation for</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Underlying</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Granted to</FONT></B></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Option Term(2)</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Options</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Employees in</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exercise</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Expiration</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Granted</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Fiscal Year</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Price(1)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Date</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">5%</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">10%</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Norman F. Swanton
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">300,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">22</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">04/30/08</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">331,538</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">732,612</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Timothy A. Larkin
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">310,750</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">23</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">04/30/08</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">343,418</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">758,864</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">David E. Fleming
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">66,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">04/30/08</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">72,938</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">161,175</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Ellis G. Vickers
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">66,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">04/30/08</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">72,938</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">161,175</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Jack B. King
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">157,252</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">04/30/08</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">173,783</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">384,016</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">The exercise price per share of each option was
    determined to be equal to the fair market value per share of the
    underlying stock on the date of grant, as determined by the
    Board.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">71
</FONT>

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<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(2)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">The potential realizable value shown is
    calculated based on the term of the option at the time of grant.
    Stock price appreciation of 5% and 10% is assumed pursuant to
    the rules and regulations of the SEC and does not represent our
    prediction of our stock price performance. The potential
    realizable values at 5% and 10% appreciation are calculated by
    assuming that the exercise price on the date of grant
    appreciates at the indicated rate for the entire term of the
    option and that the option is exercised at the exercise price
    and sold on the last day of its term at the appreciated price.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<B><FONT size="2">Employment Agreements</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have entered into employment agreements with
Messrs.&nbsp;Swanton, Larkin, Davies, Fleming and Vickers. In
addition to the specific provisions of each employment agreement
as described below, each of these employment agreements provides
that if the executive&#146;s employment is terminated without
cause, due to death or disability or for &#147;good
reason&#148;, including a change of control, all unvested stock
options granted to the executive shall be kept in effect and not
terminated.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Norman F.
Swanton.</FONT></I></B><FONT size="2"> We entered into an
employment agreement effective January&nbsp;1, 2001, as amended
effective January&nbsp;1, 2004 with Norman F. Swanton, our
President, Chief Executive Officer and Chairman, that provides
for a salary of $375,000&nbsp;per year, participation in our
standard insurance plans for our executives and participation in
our other incentive compensation programs at the discretion of
the Board of Directors. Under his employment agreement,
Mr.&nbsp;Swanton received stock options to purchase 600,000
shares of common stock at an exercise price of $10.00&nbsp;per
share for a period expiring five years from date of grant. On
October&nbsp;1, 2002, in order to improve our capital structure,
Mr.&nbsp;Swanton voluntarily surrendered and terminated his
600,000 stock options. Under his agreement, if
Mr.&nbsp;Swanton&#146;s employment is terminated without cause
and he executes a full and general release in favor of, and
satisfactory to, us, Mr.&nbsp;Swanton will be entitled to
termination compensation equal to the greater of two years&#146;
annual base salary, or all of the base salary for the remainder
of the employment term. Mr.&nbsp;Swanton&#146;s employment
agreement automatically renews on each anniversary of the
effective date after the initial three-year employment term, for
an additional year unless we notify Mr.&nbsp;Swanton in writing
90&nbsp;days prior to such anniversary that we will not be
renewing his employment agreement. During the initial three
years of the employment agreement, Mr.&nbsp;Swanton was entitled
to a 50% minimum bonus, but he voluntarily agreed to waive this
provision in connection with the January&nbsp;1, 2004 amendment.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Timothy A.
Larkin.</FONT></I></B><FONT size="2"> We entered into an
employment agreement effective January&nbsp;1, 2001, as amended
effective January&nbsp;1, 2004, with Timothy A. Larkin, our
Executive Vice President and Chief Financial Officer, that
provides for a salary of $185,000&nbsp;per year, participation
in our standard insurance plans for our executives and
participation in our other incentive compensation programs at
the discretion of the Board of Directors. Under his employment
agreement, Mr.&nbsp;Larkin received stock options to
purchase&nbsp;676,875&nbsp;shares of common stock at an exercise
price of $10.00&nbsp;per share for a period expiring five years
from date of grant. On October&nbsp;1, 2002, in order to improve
our capital structure, Mr.&nbsp;Larkin voluntarily surrendered
and terminated his 676,875 stock options. Under his agreement,
if Mr.&nbsp;Larkin&#146;s employment is terminated without cause
and he executes a full and general release in favor of, and
satisfactory to, us, Mr.&nbsp;Larkin will be entitled to
termination compensation equal to the greater of two years&#146;
annual base salary, or all of the base salary for the remainder
of the employment term. Mr.&nbsp;Larkin&#146;s employment
agreement automatically renews on each anniversary of the
effective date after the initial three-year employment term, for
an additional year unless we notify Mr.&nbsp;Larkin in writing
90&nbsp;days prior to such anniversary that we will not be
renewing his employment agreement. During the initial three
years of the employment agreement, Mr.&nbsp;Larkin was entitled
to a 50% minimum bonus, but he voluntarily agreed to waive this
provision in connection with the January&nbsp;1, 2004 amendment.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Lloyd G.
Davies.</FONT></I></B><FONT size="2"> We entered into an
employment agreement effective March&nbsp;1, 2004 with Lloyd G.
Davies, our Executive Vice President and the Chairman and Chief
Executive Officer of Warren E&#38;P, Inc. that provides for a
base salary of $200,000&nbsp;per year, participation in our
standard insurance plans for our executives and participation in
our other incentive compensation programs at the discretion of
the Board of Directors. Under his employment agreement,
Mr.&nbsp;Davies received stock options to
purchase&nbsp;60,000&nbsp;shares of common stock at an exercise
price of $7.00&nbsp;per share for a period expiring five years
from date of grant.
</FONT>

<P align="center"><FONT size="2">72
</FONT>

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<DIV align="left">
<FONT size="2">Mr.&nbsp;Davies is obligated to devote&nbsp;60%
percent of his business time to the performance of his duties
and responsibilities to us. Under his agreement, if
Mr.&nbsp;Davies&#146; employment is terminated without cause and
he executes a full and general release in favor of, and
satisfactory to, us, Mr.&nbsp;Davies will be entitled to
termination compensation equal to the greater of three
month&#146;s base salary or all of the base salary for the
remainder of the employment term. Mr.&nbsp;Davies&#146;
employment agreement expires on December&nbsp;31, 2004, but will
automatically renew on each anniversary of the effective date
for an additional year unless we notify Mr.&nbsp;Davies or he
notifies us in writing 90&nbsp;days prior to such anniversary
that we, or he, will not be renewing his employment agreement.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">David E.
Fleming.</FONT></I></B><FONT size="2"> We entered into an
employment agreement effective January&nbsp;1, 2004 with David
E. Fleming, our Senior Vice President, General Counsel and
Corporate Secretary, that provides for a base salary of
$223,438&nbsp;per year, participation in our standard insurance
plans for our executives and participation in our other
incentive compensation programs at the discretion of the Board
of Directors. Under his employment agreement, Mr.&nbsp;Fleming
is obligated to devote&nbsp;60% percent of his business time to
the performance of his duties and responsibilities to us. Under
his agreement, if Mr.&nbsp;Fleming&#146;s employment is
terminated without cause and he executes a full and general
release in favor of, and satisfactory to, us, Mr.&nbsp;Fleming
will be entitled to termination compensation equal to the
greater of three month&#146;s base salary or all of the base
salary for the remainder of the employment term.
Mr.&nbsp;Fleming&#146;s employment agreement expires on
December&nbsp;31, 2004, but will automatically renew on each
anniversary of the effective date for an additional year unless
we notify Mr.&nbsp;Fleming or he notifies us in writing
90&nbsp;days prior to such anniversary that we, or he, will not
be renewing his employment agreement.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Ellis G.
Vickers.</FONT></I></B><FONT size="2"> We entered into an
employment agreement effective January&nbsp;1, 2004 with Ellis
G. Vickers, our Senior Vice President and Associate General
Counsel and Senior Vice President and General Counsel of Warren
E&#38;P, Inc., that provides for a salary of $218,905&nbsp;per
year, participation in our standard insurance plans for our
executives and participation in our other incentive compensation
programs at the discretion of the Board of Directors. Under his
employment agreement, Mr.&nbsp;Vickers received stock options to
purchase&nbsp;20,000&nbsp;shares of common stock at the exercise
price of $7.00&nbsp;per share for a period expiring five years
from date of grant. Under his agreement, if
Mr.&nbsp;Vickers&#146; employment is terminated without cause
and he executes a full and general release in favor of, and
satisfactory to, us, Mr.&nbsp;Vickers is entitled to termination
compensation equal to the greater of 90&nbsp;days&#146; base
salary or all of his base salary for the employment term.
Mr.&nbsp;Vickers&#146; employment agreement expires on
December&nbsp;31, 2004, but will automatically renew on each
anniversary of the effective date for an additional one year
unless we notify Mr.&nbsp;Vickers or he notifies us in writing
90&nbsp;days prior to such anniversary that we, or he, will not
be renewing his employment agreement.
</FONT>

<P align="left">
<B><FONT size="2">Employee Benefit Plans</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">2000 Equity Incentive Plan for Employees of
    Warren E&#38;P, Inc.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our 2000 Equity Incentive Plan for Employees of
Warren E&#38;P, Inc. was adopted by the Board in September 2000,
amended by the board in September 2001 and approved by our
stockholders on September&nbsp;5, 2002. Any awards granted
before stockholder approval of the plan are subject to, and may
not be exercised or realized before, approval of the plan by the
stockholders. The plan is administered by our compensation
committee.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Share Reserve.</FONT></I><FONT size="2"> A
total of 1,975,000&nbsp;shares of common stock have been
authorized for issuance under the plan. In addition, no
participant in the plan may be granted stock options and direct
stock issuances for more than 750,000&nbsp;shares of common
stock in total per calendar year.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Awards.</FONT></I><FONT size="2"> The plan
provides for the following types of awards:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">eligible individuals in the employ of, or
    rendering services to, Warren E&#38;P and its subsidiaries may
    be granted options to purchase shares of common stock at an
    exercise price determined by the compensation committee;
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">73
</FONT>

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<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">eligible individuals may be issued shares of
    common stock that may be subject to certain restrictions and
    conditions directly through the purchase of shares at a price
    determined by the compensation committee.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Plan Features.</FONT></I><FONT size="2"> The
plan will include the following features:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">eligible participants under the plan are
    employees, consultants and directors of Warren E&#38;P and its
    subsidiaries;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the plan sets forth various restrictions upon the
    exercise of awards. The compensation committee has the
    discretion to alter any restrictions or conditions upon any
    awards;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the exercise price for any options granted under
    the plan may be paid in cash, by certified or cashier&#146;s
    check or, if acceptable to the compensation committee, in
    property valued at fair market value, by delivery of a
    promissory note, or in currently owned shares of common stock
    valued at fair market value on the last business day prior to
    the date of exercise. An option may, in the discretion of the
    compensation committee, be exercised through a sale or loan
    program with a broker acceptable to the compensation committee
    without any cash outlay by the optionee;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">grants of restricted stock awards can be made to
    participants. Restricted stock awards may be subject to certain
    restrictions, vesting requirements or other conditions,
    including the attainment of performance goals;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">if a participant&#146;s employment is terminated
    for any reason other than cause, including death or disability,
    any vested options held by the participant will remain
    exercisable for a specified period of time after the
    termination. If a participant&#146;s employment is terminated
    for cause, all outstanding options held by the participant will
    expire immediately. If a participant&#146;s employment is
    terminated for any reason other than cause, any unvested
    restricted stock awards will generally be forfeited unless the
    compensation committee provides otherwise. If a
    participant&#146;s employment is terminated for cause, all
    restricted stock awards will be forfeited. Warren may require
    the return of any dividends previously paid on the restricted
    stock and, in all events, will repay to the participant (or the
    participant&#146;s estate) any amounts paid for the restricted
    stock awards.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Change in Control.</FONT></I><FONT size="2">
In the event that Warren or Warren E&#38;P is acquired by
merger, consolidation, asset sale or equity sale, outstanding
options will be assumed, or equivalent options will be issued by
the successor corporation. If the successor corporation refuses
to assume or substitute the options, the compensation committee
may accelerate the participants&#146; rights to exercise for a
limited period of time after which the options would terminate.
With respect to restricted stock awards, the compensation
committee could also elect to terminate any vested awards in
exchange for cash payments.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Recapitalization or
Reorganization.</FONT></I><FONT size="2"> In the event of a
recapitalization or reorganization of Warren or of Warren
E&#38;P that does not constitute a change-in-control as
described above, a participant will be entitled to receive, upon
exercising an option, that which the participant would have
received had the participant exercised prior to the
recapitalization or reorganization.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Amendment.</FONT></I><FONT size="2"> The board
may amend or modify the 2000 plan at any time, pending any
required stockholder approval. The 2000 Plan will terminate no
later than September&nbsp;1, 2010.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of June&nbsp;30, 2004, nonqualified stock
options to purchase&nbsp;710,500&nbsp;shares of our common stock
were granted to eligible persons pursuant to this plan at an
exercise price of $4.00 and $7.00&nbsp;per share. None of these
options has been exercised. The shares that may be issued
pursuant to the exercise of an option awarded under this plan
have not been registered under the Securities Act of 1933.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">2001 Stock Incentive Plan</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our 2001 Stock Incentive Plan was adopted by the
Board in September 2001 and approved by our stockholders on
September&nbsp;5, 2002. Any awards granted before stockholder
approval of the plan are subject
</FONT>

<P align="center"><FONT size="2">74
</FONT>

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<DIV align="left">
<FONT size="2">to, and may not be exercised or realized, before
approval of the plan by the stockholders. The plan will be
administered by our compensation committee.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Share Reserve.</FONT></I><FONT size="2"> A
total of 2,500,000&nbsp;shares of our common stock have been
authorized for issuance of options under the plan. In addition,
no participant in the plan may be granted stock options,
separately exercisable stock appreciation rights, direct stock
issuances and stock units for more than 750,000&nbsp;shares of
our common stock in total per calendar year.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Programs.</FONT></I><FONT size="2"> The plan
is divided into three separate programs:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">an option grant program under which eligible
    individuals may be granted options to purchase shares of common
    stock at an exercise price determined by the compensation
    committee;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">a stock appreciation rights program under which
    eligible individuals may be granted rights to receive payments
    equal to the fair market value of shares of common stock to
    which the right is subject on the date of exercise over the fair
    market value of such shares of common stock on the date of
    grant;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">a stock issuance program under which eligible
    individuals may be issued shares of common stock directly
    through the purchase of shares at a price determined by the
    compensation committee, or units representing such shares.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Plan Features.</FONT></I><FONT size="2"> The
plan includes the following features:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">eligible individuals under the plan are
    employees, consultants and directors of Warren and our
    subsidiaries.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the plan sets forth various restrictions upon the
    exercise of awards. Our compensation committee has the
    discretion to accelerate the vesting or exercisability of
    options under certain events.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the exercise price for any options granted under
    the plan may be paid in cash or, if acceptable to the
    compensation committee, in currently owned shares of common
    stock valued at fair market value on the exercise date. The
    option may, in the discretion of the compensation committee, be
    exercised through a sale or loan program with a broker
    acceptable to the compensation committee without any cash
    payment by the option holder.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">deferred compensation stock options may be issued
    under the stock option program. These options will provide a
    means by which compensation payments can be deferred to future
    dates, with the number of shares of common stock subject to a
    deferred compensation stock option being determined by the
    compensation committee in accordance with a formula where the
    number of shares subject to the option is equal to the amount of
    compensation to be deferred divided by the excess of the fair
    market value of the common stock at the time of exercise over
    the exercise price of the option.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">stock appreciation rights may be separately
    issued entitling a participant to receive an amount equal to the
    excess of the fair market value of the shares of common stock
    subject to such right on the date of exercise over the fair
    market value of such shares on the date of grant. Payment to a
    participant may be made in: cash, shares of common stock, a
    deferred compensation option, or any combination of the above,
    as the compensation committee shall determine.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">outright grants of stock awards, as well as
    grants of restricted stock awards and restricted stock units can
    be made to participants. In order for a participant to vest in
    an award of either restricted stock or a restricted stock unit,
    the participant must generally provide services for a continuous
    period of not less than two years. A participant shall be
    entitled to receive payment for a restricted stock unit in an
    amount equal to aggregate fair market value of the units covered
    by the award at the end of the applicable vesting restriction
    period, which payment can be made in cash, shares of common
    stock, deferred compensation stock options, or any combination
    of the above, as the compensation committee shall determine.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">75
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">if a participant&#146;s employment is terminated
    for any reason, including death and disability, any vested
    awards held by the participant will remain exercisable for a
    specified period of time after the termination. If a participant
    retires, but continues or begins to serve as a director, the
    participant may continue to hold any awards granted under the
    original terms thereof.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Change in Control.</FONT></I><FONT size="2">
The plan includes change in control provisions which may result
in the accelerated vesting of outstanding option grants and
stock issuances:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">In the event that Warren is acquired by merger or
    asset sale or there is an acquisition of more than fifty percent
    of the capital stock of Warren by an individual, entity or
    group, the vesting schedule of each outstanding award will be,
    except to the extent specifically provided to the contrary in
    the instrument evidencing the award, or any other agreement
    between a participant and us, accelerated in part so that
    one-half of the number of shares subject to such award shall
    become immediately exercisable or realizable and the remaining
    one-half of such number of shares shall continue to be
    exercisable or realizable in accordance with the original
    vesting schedule.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">In the event there is a merger of Warren, or an
    exchange of shares for cash, securities or other property in
    connection with an exchange transaction, which does not
    constitute a change-in-control as described above, the board
    shall provide that all outstanding options will be assumed or
    equivalent options substituted by the acquiring or succeeding
    corporation. With respect to all other awards, the board will
    determine the effect the transaction will have on such awards at
    the time the transaction takes place.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Amendment.</FONT></I><FONT size="2"> The board
may amend or modify the 2001 plan at any time, pending any
required stockholder approval. The 2001 Plan will terminate no
later than September&nbsp;5, 2011.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of June&nbsp;30, 2004, non-qualified stock
options to purchase&nbsp;398,199&nbsp;shares of our common stock
at the exercise price of $10.00&nbsp;per share have been granted
to eligible persons pursuant to this plan, non-qualified stock
options to purchase&nbsp;479,563&nbsp;shares of our common stock
at the exercise price of $4.00&nbsp;per share have been granted
to eligible persons pursuant to this plan and non-qualified
stock options to purchase 96,250&nbsp;shares of our common stock
at the exercise price of $7.00&nbsp;per share have been granted
to eligible persons pursuant to this plan. On October&nbsp;1,
2002, in order to improve our capital structure, senior
management and other employees voluntarily surrendered to the
company and terminated stock options issued in 2001 that were
exercisable at $10.00&nbsp;per share through September&nbsp;4,
2006. The shares that may be issued pursuant to the exercise of
an option awarded under this plan have not been registered under
the Securities Act of 1933.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">2001 Key Employee Stock Incentive
    Plan</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our 2001 Key Employee Stock Incentive Plan was
adopted by the Board on September&nbsp;6, 2001 and approved by
our stockholders on September&nbsp;5, 2002. A total of
2,500,000&nbsp;shares of our common stock have been authorized
for issuance under this plan. In addition, no participant in the
plan may be granted stock options, separately exercisable stock
appreciated rights or direct stock issuances for more than
750,000&nbsp;shares of common stock in total per calendar year.
This plan will be administered by our compensation committee.
The plan is modeled after the 2001 Employee Stock Incentive Plan
and its terms are substantially similar except that participants
eligible to be granted awards under the plan will be limited to
our key employees.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of June&nbsp;30, 2004, there were 742,750
outstanding non-qualified stock options to purchase shares of
our common stock pursuant to this plan exercisable at
$4.00&nbsp;per share through April&nbsp;30, 2008 and 324,000
outstanding non-qualified stock options to purchase shares of
our common stock at $7.00&nbsp;per share. On October&nbsp;1,
2002, in order to improve our capital structure, senior
management and other employees voluntarily surrendered to the
company and terminated stock options issued in 2001 that were
exercisable at $10.00&nbsp;per share through September&nbsp;4,
2006. The shares that may be issued pursuant to the exercise of
any option awarded by this plan have not been registered under
the Securities Act of 1933.
</FONT>

<P align="center"><FONT size="2">76
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<P align="left">
<B><FONT size="2">Equity Compensation Plan Information</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table provides information as of
June&nbsp;30, 2004, with respect to shares of our common stock
that may be issued under our existing equity compensation plans,
all of which have been approved by our stockholders.
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="31%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number of</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Securities to be</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Weighted-</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Issued Upon</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Average</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number of</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number of</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exercise of</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exercise Price of</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Securities</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Shares</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Outstanding</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Outstanding</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Remaining Available</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Authorized</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Options,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Options,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">for Future Issuance</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">for Issuance</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Warrants and</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Warrants and</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Under Equity</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Under Plan</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Rights</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Rights</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Compensation Plans</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2000 Equity Incentive Plan
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,975,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">710,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.49</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,264,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2001 Stock Incentive Plan
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,500,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">974,012</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6.75</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,525,988</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2001 Key Employee Stock Incentive Plan
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,500,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,066,750</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.91</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,433,250</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,975,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,751,262</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,223,738</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<B><FONT size="2">Related Matters</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">A private investigation by the SEC involving
events which occurred in the mid to late 1970&#146;s was
concluded by settlement between Swanton Corporation and certain
affiliates, including Mr.&nbsp;Swanton, and the SEC in 1981. As
a result of the settlement, Mr.&nbsp;Swanton and Swanton
Corporation, without admitting or denying any of the
allegations, consented to the entry of a final judgment
enjoining them from violations of anti-fraud, periodic reporting
and beneficial ownership provisions of the Exchange Act of 1934
and agreed to engage a Special Review Person to determine
whether there had been any improper use of corporate funds. The
Special Review Person found that, although there was no
wrongdoing on the part of Mr.&nbsp;Swanton, $20,400 received by
him from an unaffiliated debtor should have been paid to Swanton
Corporation. Mr.&nbsp;Swanton thereafter paid the $20,400 to
Swanton Corporation.
</FONT>

<P align="left">
<B><FONT size="2">Section&nbsp;16(a) Beneficial Ownership
Reporting Compliance</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Section&nbsp;16(a) of the Exchange Act requires
our directors and executive officers, and persons who
beneficially own more than 10% of our common stock, to file with
the SEC initial reports of beneficial ownership on Forms 3 and
reports of changes in beneficial ownership of our common stock
and other equity securities on Forms 4. Our executive officers,
directors and greater than 10% stockholders are required by SEC
rules to furnish to us copies of all Section&nbsp;16(a) reports
that they file. To our knowledge, based solely on a review of
the copies of such reports furnished to us and written
representations that no other reports were required, all
Section&nbsp;16(a) filing requirements applicable to our
executive officers, directors and greater than 10% beneficial
owners were complied with for fiscal 2003.
</FONT>

<P align="center"><FONT size="2">77
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left">
<A name='113'></A>
</DIV>

<!-- link1 "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" -->

<P align="center">
<B><FONT size="2">CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our officers and directors own, in the aggregate,
limited partnership interests valued at $2,738,333 at the time
of purchase in 14 of our drilling programs. Mr.&nbsp;Swanton
owns $628,333 of interests in thirteen programs. Mr.&nbsp;King
owns $310,000 of interests in three programs. Mr.&nbsp;Quinlan
owns $1,800,000 of interests in four programs. including a 28.6%
interest in one program. Other than Mr.&nbsp;Quinlan&#146;s
interest in one drilling program, no officer or director owns
greater than a 10% interest in any particular drilling program.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Gregory S. Johnson, who had been the Executive
Vice President of Warren E&#38;P, Inc. and was a Senior Vice
President&nbsp;&#151; Oil and Gas Operations for Warren, died in
June 2002. Effective as of August&nbsp;1, 2002, we entered into
a Stock Redemption and Purchase Agreement with the Estate of
Gregory S. Johnson to acquire 702,500&nbsp;shares of our common
stock owned by the estate for the price of $2.28&nbsp;per share.
The purchase price is payable over ten years in equal monthly
installments of $13,333.34, $160,000&nbsp;per annum. Gregory S.
Johnson originally obtained his common shares when we acquired
Warren E&#38;P of which he was a 50% stockholder in September
2000. The shares being acquired are subject to a collateral
escrow agreement wherein 70,250&nbsp;shares will be delivered to
us on each anniversary date until the purchase price is paid in
full on July&nbsp;31, 2012. Additionally, as part of the
transaction stock options held by Mr.&nbsp;Johnson to acquire
400,000&nbsp;shares of our common stock for a price of
$4.00&nbsp;per share were terminated and cancelled.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In July 2004, we completed a follow-on private
placement of common stock and warrants to certain institutional
investors managed by Wellington Management Company LLP that were
major stockholders of us. Together with the initial private
placement of common stock and warrants to these investors in
February 2004, we raised a total of $20&nbsp;million. The
February and July private placements consisted of a total of
2,850,000&nbsp;shares of our common stock, together with
class&nbsp;A warrants to purchase&nbsp;712,500&nbsp;shares of
common stock at an exercise price of $10.00&nbsp;per share and
class&nbsp;B warrants to purchase&nbsp;712,500&nbsp;shares of
common stock at an exercise price of $12.50&nbsp;per share. The
warrants are exercisable one year from the date of grant. We
also agreed to provide registration rights to these investors,
which are described in &#147;Description of Capital
Stock&nbsp;&#151; Registration Rights&#148; below.
</FONT>

<P align="center"><FONT size="2">78
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left">
<A name='114'></A>
</DIV>

<!-- link1 "PRINCIPAL STOCKHOLDERS" -->

<P align="center">
<B><FONT size="2">PRINCIPAL STOCKHOLDERS</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table sets forth information
regarding the beneficial ownership of our common stock as of
August&nbsp;18, 2004 by:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">each person known to us to beneficially owned
    more than 5% of the outstanding shares of our common stock;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">each of our directors;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">our chief executive officer and four most highly
    compensated executive officers;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">all directors and executive officers as a group.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Beneficial ownership is determined in accordance
with the rules of the SEC and includes voting or investment
power with respect to the securities. Common stock subject to
options or warrants that are currently exercisable or
exercisable within 60&nbsp;days of August&nbsp;18, 2004 are
deemed to be outstanding and beneficially owned by the person
holding such options or warrants. Such shares, however, are not
deemed outstanding for the purposes of computing the percentage
ownership of any other person. Percentage of beneficial
ownership is based on 20,322,820&nbsp;shares of common stock
outstanding as of August&nbsp;18, 2004,
and &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock to be outstanding after the offering.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Unless otherwise indicated, each person named in
the table has sole voting power and investment power, or shares
this power with his or her spouse, with respect to the shares of
our common stock listed as beneficially owned by such person and
has the same address as Warren. Our address is 489 Fifth Avenue,
32nd&nbsp;Floor, New York, NY 10017.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The table includes all shares beneficially owned
by each stockholder, which includes any shares as to which the
individual has sole or shared voting power or investment power
and any shares which the individual has the right to acquire
within 60&nbsp;days of August&nbsp;18, 2004, through the
exercise of any stock option or other right.
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="43%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Percent</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Shares of Common</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Beneficially</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Stock Beneficially</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Owned Before</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Percent Beneficially</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2" align="center" nowrap><B><FONT size="1">Name of Beneficial Owner</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Owned</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Offering</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Owned After Offering</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">5% Stockholders:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Wellington Management Company, LLP(1)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,850,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14.0%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">75 State Street
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Boston, MA 02109
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="14"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Officers and Directors:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Norman F. Swanton(2)(3)(6)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,766,893</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">13.4%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Timothy A. Larkin(3)(6)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">410,750</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2.0%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Lloyd G. Davies(3)(6)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">65,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">David E. Fleming(3)(6)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">88,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Ellis G. Vickers(3)(6)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">76,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Jack B. King(3)(6)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">181,804</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Chet Borgida(4)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">30,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Anthony L. Coelho(4)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">50,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Dominick D&#146;Alleva(4)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">80,521</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Marshall Miller(4)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">774,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.8%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Thomas G. Noonan(4)(5)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">764,533</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.8%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Michael R. Quinlan(4)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">128,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">All directors and executive officers as a group
    (14&nbsp;persons)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,610,544</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25.7%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">&nbsp;*&nbsp;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Less than 1% of the outstanding common stock.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">79
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<P>

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<TR>
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<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">These shares are deemed beneficially owned by
    Wellington Management Company, LLP, in its capacity as
    investment advisor to Spindrift Partners, L.P., Spindrift
    Investors (Bermuda) L.P., Placer Creek Partners, L.P., Placer
    Creek Investors (Bermuda) L.P. and Global Natural
    Resources&nbsp;III. Includes 939,400 shares held by Spindrift
    Partners, L.P., 1,099,700 shares held by Spindrift Investors
    (Bermuda) L.P., 234,900 shares held by Placer Creek Partners,
    L.P., 100,000 shares held by Placer Creek Investors (Bermuda)
    L.P., and 476,000 shares held by Global Resources
    Group&nbsp;III. Does not include unvested (i)&nbsp;class&nbsp;A
    warrants to purchase&nbsp;234,850&nbsp;shares and
    274,925&nbsp;shares held by Spindrift Partners, L.P. and
    Spindrift Investors (Bermuda) L.P., respectively, at
    $10.00&nbsp;per share; (ii)&nbsp;class&nbsp;B warrants to
    purchase&nbsp;234,850&nbsp;shares and 274,925&nbsp;shares held
    by Spindrift Partners, L.P. and Spindrift Investors (Bermuda)
    L.P., respectively, at $12.50&nbsp;per share;
    (iii)&nbsp;class&nbsp;A warrants to
    purchase&nbsp;58,725&nbsp;shares and 25,000&nbsp;shares held by
    Placer Creek Partners, L.P. and Placer Creek Investors (Bermuda)
    L.P., respectively, at $10.00&nbsp;per share;
    (iv)&nbsp;class&nbsp;B warrants to
    purchase&nbsp;58,725&nbsp;shares and 25,000&nbsp;shares held by
    Placer Creek Partners, L.P. and Placer Creek Investors (Bermuda)
    L.P., respectively, at $12.50&nbsp;per share;
    (v)&nbsp;class&nbsp;A warrants to
    purchase&nbsp;119,000&nbsp;shares at $10.00&nbsp;per share; and
    (vi)&nbsp;class&nbsp;B warrants to
    purchase&nbsp;119,000&nbsp;shares at $12.50&nbsp;per share held
    by Global Resources Group&nbsp;III.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(2)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Does not include 361,000&nbsp;shares of common
    stock owned by the Swanton Family Trust and 360,200&nbsp;shares
    of common stock owned by the Virginia Trust of Eire, as to which
    Mr.&nbsp;Noonan and his wife are the trustees. Mrs.&nbsp;Noonan
    is Mr.&nbsp;Swanton&#146;s sister, and the nieces and nephews of
    Mr.&nbsp;Swanton are the sole beneficiaries of these trusts.
    Does not include 53,500&nbsp;shares owned by a charitable
    foundation or 62,840&nbsp;shares owned by the Ingalls Family
    Trust, for which Mr.&nbsp;Swanton and his wife are trustees.
    Mr.&nbsp;Swanton disclaims all beneficial ownership of these
    shares.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(3)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes stock options currently exercisable as
    follows: 300,000 at $4.00&nbsp;per share and 100,000 at
    $7.00&nbsp;per share for Mr.&nbsp;Swanton; 310,750 at
    $4.00&nbsp;per share and 50,000 at $7.00&nbsp;per share for
    Mr.&nbsp;Larkin; 66,000 at $4.00&nbsp;per share and 12,000 at
    $7.00&nbsp;per share for Mr.&nbsp;Fleming; 66,000 at
    $4.00&nbsp;per share and 10,000 at $7.00&nbsp;per share for
    Mr.&nbsp;Vickers; 58,502 at $4.00&nbsp;per share and 5,000 at
    $7.00&nbsp;per share for Mr.&nbsp;King; and 45,000 at
    $10.00&nbsp;per share and 20,000 at $7.00&nbsp;per share for
    Mr.&nbsp;Davies.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(4)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes stock options currently exercisable at
    between $4.00 and $10.00&nbsp;per share as follows: 30,000 for
    Mr.&nbsp;Borgida; 50,000 for Mr.&nbsp;Coelho; 35,000 for
    Mr.&nbsp;D&#146;Alleva; 35,000 for Mr.&nbsp;Miller; 35,000 for
    Mr.&nbsp;Noonan; and 50,000 for Mr.&nbsp;Quinlan.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(5)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes 361,000&nbsp;shares of common stock
    owned by the Swanton Family Trust and 360,200&nbsp;shares of
    common stock owned by the Virginia Trust of Eire, as to which
    Mr.&nbsp;Noonan and his wife are the trustees. Mrs.&nbsp;Noonan
    is Mr.&nbsp;Swanton&#146;s sister, and the nieces and nephews of
    Mr.&nbsp;Swanton are the sole beneficiaries of these trusts.
    Mr.&nbsp;Swanton and Mr.&nbsp;Noonan disclaim beneficial
    ownership of the shares of common stock held by the Swanton
    Family Trust and the Virginia Trust of Eire.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(6)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Does not include unvested stock options
    exercisable at $7.00&nbsp;per share as follows: 100,000 for
    Mr.&nbsp;Swanton; 50,000 for Mr.&nbsp;Larkin; 12,000 for
    Mr.&nbsp;Fleming; 40,000 for Mr.&nbsp;Davies; 10,000 for
    Mr.&nbsp;Vickers; 5,000 for Mr.&nbsp;King; 5,000 for
    Mr.&nbsp;Borgida; 5,000 for Mr.&nbsp;Coelho; 5,000 for
    Mr.&nbsp;D&#146;Alleva; 5,000 for Mr.&nbsp;Miller; 5,000 for
    Mr.&nbsp;Noonan; and 5,000 for Mr.&nbsp;Quinlan.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">80
</FONT>

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<DIV align="left">
<A name='115'></A>
</DIV>

<!-- link1 "DESCRIPTION OF CAPITAL STOCK" -->

<P align="center">
<B><FONT size="2">DESCRIPTION OF CAPITAL STOCK</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The description of our capital stock below is
only a summary and is not intended to be complete. For a
complete description, please read our certificate of
incorporation and bylaws, which have been filed as exhibits to
the registration statement of which this prospectus is a part.
</FONT>

<P align="left">
<B><FONT size="2">General</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our authorized capital stock consists of
100,000,000&nbsp;shares of common stock, par value
$.0001&nbsp;per share, and 10,000,000&nbsp;shares of preferred
stock, $.0001&nbsp;par value per share. As of August&nbsp;18,
2004, there were outstanding:
</FONT>
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    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">19,690,570&nbsp;shares of common stock, net of
    632,250&nbsp;shares held in treasury;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">6,552,674&nbsp;shares of preferred stock;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">options to purchase a total of
    2,712,512&nbsp;shares of common stock, of which options to
    purchase 2,373,887&nbsp;shares were exercisable;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">warrants to purchase a total of
    1,618,125&nbsp;shares of common stock.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">There will
be &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock outstanding after giving effect to the sale of
the shares of common stock to the public in this offering
assuming:
</FONT>
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    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">no exercise of the underwriters over-allotment
    option;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">no exercise of outstanding stock options.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<B><FONT size="2">Common Stock</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The holders of our common stock are entitled to
one vote per share on all matters to be voted on by stockholders
and have no cumulative voting rights. Each share of our common
stock has identical rights and privileges in every respect.
Subject to the prior rights and preferences applicable to shares
of the preferred stock, the holders of shares of common stock
are entitled to receive such dividends payable in cash, stock,
or otherwise out of funds legally available, when and if
declared from time to time by the board of directors. In the
event of our liquidation, dissolution or winding up, the holders
of shares of the common stock will be entitled to share ratably
in all assets remaining after the payment of liabilities,
subject to the rights of any then outstanding preferred stock or
any series thereof. The common stock has no preemptive,
subscription or conversion rights and there are no redemption or
sinking fund provisions in our certificate of incorporation. The
rights, preferences and privileges of holders of common stock
are subject to, and may be adversely affected by, the rights of
holders of shares of any preferred stock or series of preferred
stock currently outstanding or that we may designate and/or
issued in the future. The issued and outstanding shares of our
common stock are fully paid and non-assessable.
</FONT>

<P align="left">
<B><FONT size="2">Preferred Stock</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our board of directors is empowered, without
approval of the stockholders, to cause shares of preferred stock
to be issued from time to time in one or more series, and the
board of directors may determine the numbers of shares of each
series and the designation, powers, privileges, preferences and
rights and the qualifications, limitations and restrictions of
the shares of each series. The specific matters that our board
of directors may determine include:
</FONT>
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    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
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    <FONT size="2">the designation of each series;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the number of shares of each series;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the rate of any dividends;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">whether any dividends shall be cumulative or
    non-cumulative;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the terms of any redemption;
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">81
</FONT>

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    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the amount payable in the event of any voluntary
    or involuntary liquidation, dissolution or winding up of the
    affairs of our company;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">rights and terms of any conversion or
    exchange;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">restrictions on the issuance of shares of the
    same series or any other series.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Pursuant to articles supplementary filed with the
State of Maryland, 6,100,000&nbsp;shares of our preferred stock
have been designated series&nbsp;A 8% cumulative convertible
preferred stock and 2,100,000&nbsp;shares of our preferred stock
have been designated series&nbsp;A institutional 8% cumulative
convertible preferred stock.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The series&nbsp;A preferred stock has a dividend
equal to 8%&nbsp;per annum, payable quarter-annually in arrears,
and a liquidation preference of $12.00&nbsp;per share. Any
accrued but unpaid dividends shall be cumulative and paid upon
liquidation, optional redemption or mandatory repurchase. No
dividends may be paid on the common stock as long as there are
any accrued and unpaid dividends on the preferred stock.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of June&nbsp;30, 2004, there were 6,552,674
shares of our 8% convertible preferred stock, including both our
series A 8% cumulative convertible preferred stock and our
series&nbsp;A institutional 8% cumulative convertible preferred
stock. The following describes the conversion rate applicable to
5,504,338 of these preferred shares:
</FONT>
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<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">At the election of the holder of our convertible
    preferred stock, until June&nbsp;30, 2005, each share of
    preferred stock is convertible into one share of our common
    stock. Commencing July&nbsp;1, 2005 and until June&nbsp;30,
    2006, each share of preferred stock is convertible into
    0.75&nbsp;shares of common stock, and commencing July&nbsp;1,
    2006 and thereafter, each share of preferred stock is
    convertible into 0.50&nbsp;shares of common stock.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">With respect to the 1,048,336&nbsp;shares of
preferred stock that are not subject to the foregoing conversion
rates, all of which consist of series&nbsp;A institutional 8%
cumulative convertible preferred stock, the following conversion
rate applies:
</FONT>
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    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">At the election of the holder, until the later to
    occur of June&nbsp;30, 2005 and one year after the effective
    date with the SEC of the registration statement of which this
    prospectus is a part, each share of preferred stock is
    convertible into one share of our common stock. Thereafter,
    until June&nbsp;30, 2006, each share of preferred stock is
    convertible into 0.75&nbsp;shares of common stock, and
    commencing July&nbsp;1, 2006 and thereafter, each share of
    preferred stock is convertible into 0.50&nbsp;shares of common
    stock.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The conversion rate for our convertible preferred
stock is subject to adjustment in the event of:
</FONT>
<P>

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    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the issuance of common stock as a dividend or
    distribution on any class of our capital stock;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the combination, subdivision or reclassification
    of the common stock;&nbsp;or
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the distribution to all holders of common stock
    of evidences of indebtedness or assets, including securities,
    but excluding cash dividends or distributions paid out of
    surplus.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Beginning seven years after the date of issuance,
holders of the convertible preferred stock may elect to require
us to redeem their preferred stock at a redemption price equal
to the liquidation value of $12.00&nbsp;per share, plus accrued
but unpaid dividends, if any. Upon receipt of a redemption
election, we, at our option, shall either:
</FONT>
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    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">pay the holder cash in an amount equal to
    $12.00&nbsp;per convertible preferred share, subject to
    adjustment for stock splits, stock dividends or stock exchanges,
    plus accrued and unpaid dividends, to the extent that it has
    funds legally available for redemption,&nbsp;or
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">issue to the holder shares of common stock in an
    amount equal to 125% of the redemption price and any accrued and
    unpaid dividends, based on the average of the closing sale
    prices of our common stock for the 30 trading days immediately
    preceding the date of the receipt of the written redemption
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">82
</FONT>

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    <TD>&nbsp;</TD>
    <TD></TD>
    <TD align="left">
    <FONT size="2">election by the holder, 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.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If we are not listed on an exchange or our common
stock has no trading volume, the Board shall determine the fair
market value of the common stock.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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&nbsp;trading days during any 30-day period, we, at our
option, may either:
</FONT>
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    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">redeem the preferred stock in whole or in part,
    at a redemption price of $12.00&nbsp;per share plus accrued and
    unpaid dividends,&nbsp;or
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">convert the preferred stock, plus any accrued and
    unpaid dividends, into common stock at the then applicable
    conversion rate, based on the average closing sale prices of our
    common stock for the 30&nbsp;trading days immediately preceding
    the date fixed for redemption.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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 66&nbsp;2/3% of the then outstanding
preferred stock, voting together as a class.
</FONT>

<P align="left">
<B><FONT size="2">Class&nbsp;A and B Warrants</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We issued class&nbsp;A warrants and class&nbsp;B
warrants to purchase shares of our common stock in connection
with our private offerings in February and July, 2004. The
class&nbsp;A warrants are exercisable at $10.00&nbsp;per share,
and the class&nbsp;B warrants are exercisable at $12.50&nbsp;per
share. We also granted registration rights in connection with
the issuance of these warrants. See
&#147;&#151;&nbsp;Registration Rights&#148;.
</FONT>

<P align="left">
<B><FONT size="2">Registration Rights</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In February and July 2004, we entered into
subscription and registration rights agreements with the holders
of 2,875,000&nbsp;shares of our common stock and
1,437,500&nbsp;shares of our common stock issuable upon exercise
of our class&nbsp;A and class&nbsp;B warrants. Under the terms
of these agreements, commencing February&nbsp;3, 2005, we are
obligated to file a registration statement covering the resale
of these securities. However, these securities will be subject
to agreements with the underwriters that restrict their ability
to sell or transfer their stock for 180&nbsp;days from the date
of this prospectus. We have agreed to use our reasonable best
efforts to cause the registration statement to become effective
as soon as possible after filing it with the SEC. We have also
agreed to keep it effective for a period ending on the earlier
of two years, until the registrable shares are eligible for sale
under Rule&nbsp;144(k) of the Securities Act or until
distribution of all registrable shares covered by the
registration statement has been completed.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In addition, in accordance with the
December&nbsp;12, 2002 registration rights agreement, the
holders of at least 50% of the 6,552,674&nbsp;shares of our
preferred stock as of June&nbsp;30, 2004 have a one-time right
to demand that their shares of common stock issuable upon
conversion of the convertible preferred stock be registered
under the Securities Act, commencing 180&nbsp;days after
completion of this offering. No securities other than the
converted shares may be included in this registration statement
without the prior written consent of a majority of the preferred
holders that requested the registration statement. In addition,
from the date of filing the registration statement for these
shares and until its withdrawal or abandonment, or until
90&nbsp;days after the effective date of the registration
statement, we cannot file or cause to be effected any other
registration of any of our equity securities. The registration
rights agreement with the preferred holders also provides that
commencing 180&nbsp;days after completion of this offering, the
holders of at least 50% of the preferred stock may request
piggyback rights for their converted shares on a registration
statements filed by us, except for demand registrations or
registrations on Form&nbsp;S-8 for employee stock option or
benefit plans or a Form&nbsp;S-4 for stock issued in an
acquisition, subject to the right of the underwriters in an
underwritten secondary offering to limit the number of shares
included in the registration under some circumstances.
</FONT>

<P align="center"><FONT size="2">83
</FONT>

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<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In the event we decide to file a registration
statement with the SEC, other than on Form&nbsp;S-8 or
Form&nbsp;S-4, to register an offering of our common stock, we
must give written notice to the holders of our intention as soon
as reasonably practicable offer to include the holders&#146;
shares of common stock issuable upon conversion of the preferred
stock in such registration. If a holder wants to include his
shares in the registration, he must give notice to us within
20&nbsp;days of his receipt of notice, and we must then register
those common shares. We may reduce the number of securities each
holder intends to register on a pro rata basis to the greatest
amount that would not adversely affect the distribution of those
securities.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In addition, at any time after consummation of
this offering, holders of shares of our common stock acquired
upon exercise of class&nbsp;A, B, C and D warrants granted in
connection with our secured and sinking fund convertible funds
from 1994 through 1999 are entitled to the following:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">not less than 121&nbsp;days after this offering,
    holders of 51% or more of the common stock issued upon exercise
    of these warrants may demand that we file to register these
    shares, which may be reduced or eliminated from registration if
    their inclusion would adversely affect the marketability of our
    securities to be sold;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">holders of these shares also have conditional
    piggyback registration rights to participate pro rata in
    eligible registration statements we file, which may be reduced
    or eliminated from registration if their inclusion would
    adversely affect the marketability of our securities to be sold.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<B><FONT size="2">Anti-Takeover Effects of Provisions of Our
Articles of Incorporation and Bylaws</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our articles of incorporation and our bylaws
contain provisions that might be characterized as anti-takeover
provisions. These provisions may deter or render more difficult
proposals to acquire control of our company, including proposals
a stockholder might consider to be in his or her best interest,
impede or lengthen a change in membership of the board of
directors and make removal of our management more difficult.
</FONT>

<DIV>&nbsp;</DIV>

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<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Classified Board</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Upon completion of the offering, our articles of
incorporation and bylaws will provide that our board of
directors will be divided into three classes of directors, with
the classes to be as nearly equal in number as possible. As a
result, approximately one-third of our board of directors will
be elected each year. The classification of directors will have
the effect of making it more difficult for stockholders to
change their composition of our board. Upon consummation of this
offering, our articles of incorporation and bylaws provide that
the number of directors will be fixed from time to time
exclusively pursuant to a resolution adopted by the board.
</FONT>

<DIV>&nbsp;</DIV>

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    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Filling Board of Directors Vacancies;
    Removal</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Under our articles of incorporation and bylaws,
prior to completion of this offering any director may be removed
with or without cause at any special meeting of the stockholders
called for that purpose. Vacancies and newly created
directorships resulting from any increase in the authorized
number of directors may be filled only by a majority vote of the
directors then in office, though less than a quorum. Each
director will hold office until his or her successor is elected
and qualified, or until the director&#146;s earlier death,
resignation or removal from office. Following this offering, any
director may be removed from office at any time, but only for
cause and only by the affirmative vote of the holders of at
least 66&nbsp;2/3% of the voting power of the shares entitled to
vote.
</FONT>

<DIV>&nbsp;</DIV>

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<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Special Meetings of
    Stockholders</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Upon consummation of the offering, special
meetings of stockholders may be called only by the Board of
Directors pursuant to a resolution adopted by a majority of the
Board, either upon motion or upon written request by holders of
at least 66&nbsp;2/3% of the voting power of all shares entitled
to vote, or by our president.
</FONT>

<P align="center"><FONT size="2">84
</FONT>

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<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Unanimous Consent of Stockholders Required
    for Action by Written Consent</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Under our articles of incorporation, stockholder
action may be taken without a meeting only by unanimous written
consent of all of our stockholders.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Issuance of Preferred Stock</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As described above, our articles of incorporation
authorize the board of directors to issue preferred stock from
time to time, in one or more series, and the board of directors,
without further approval of the stockholders, is authorized to
fix the rights, preferences, privileges and restrictions
applicable to each series of preferred stock. The purpose of
authorizing the board of directors to determine these rights,
preferences, privileges and restrictions is to eliminate delays
associated with a stockholder vote on specific issuances. The
issuance of any class of preferred stock, including the
outstanding shares of preferred stock, while providing
flexibility for many corporate purposes, could, among other
things, adversely affect the voting power of the holders of our
common stock and, under certain circumstances, make it more
difficult for a third party to gain control of us.
</FONT>

<DIV>&nbsp;</DIV>

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    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">No Cumulative Voting</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Maryland General Corporation Law provides
that stockholders are not entitled to cumulative votes in the
election of directors unless the articles of incorporation
provide otherwise. Our articles of incorporation expressly
prohibit cumulative voting.
</FONT>

<DIV>&nbsp;</DIV>

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    <TD width="3%"></TD>
    <TD width="97%"></TD>
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    <TD></TD>
    <TD>
    <B><I><FONT size="2">Maryland Business Statutes</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As a Maryland corporation, we are subject to the
provisions of the Maryland General Corporation Law. Maryland law
imposes restrictions on some business combinations and requires
compliance with statutory procedures before some mergers and
acquisitions can occur. These provisions of Maryland law may
have the effect of discouraging offers to acquire us even if the
acquisition would be advantageous to our stockholders. These
provisions include:
</FONT>
<P>

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    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <B><I><FONT size="2">Unsolicited takeover
    provisions.</FONT></I></B><FONT size="2"> Maryland law provides
    that the Board of Directors of a Maryland corporation is not
    subject to higher duties with regard to actions taken in a
    takeover context. These provisions may make it more difficult to
    effect an unsolicited takeover of a Maryland corporation.
    Maryland law also allows publicly held corporations with at
    least three independent directors to elect to be governed by all
    or any part of Maryland law provisions relating to extraordinary
    actions and unsolicited takeovers.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <B><I><FONT size="2">Business combination with interested
    stockholders.</FONT></I></B><FONT size="2"> The Maryland
    Business Combination Act provides that a Maryland corporation
    may not engage in business combinations with an &#147;interested
    stockholder&#148; or its affiliates, for five years after the
    most recent date on which the interested stockholder became an
    interested stockholder and thereafter unless the board approved
    the transaction the interested stockholder became an interested
    stockholder, or the Maryland corporation has exempted itself
    from the statute in its articles of incorporation. We have
    elected not to exempt the company from this statute. After the
    five-year period has elapsed, a corporation subject to the
    statute may not consummate a business combination with an
    interested stockholder unless:
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="5%"></TD>
    <TD width="1%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the board of directors recommended the
    transaction,&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the transaction was approved by 80% of the
    outstanding shares of voting stock entitled to be cast and by
    66&nbsp;2/3% of the votes entitled to be cast by holders of
    voting stock other than shares owned by the interested
    stockholder.
    </FONT></TD>
</TR>

</TABLE>

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</FONT>

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<P>

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<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <B><I><FONT size="2">Acquisition of control
    shares.</FONT></I></B><FONT size="2"> The Maryland Control Share
    Acquisition Act provides, unless the Maryland corporation opts
    out of this statute, where a stockholder acquires issued and
    outstanding shares of a corporation&#146;s voting stock within
    one of the following ranges:
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="5%"></TD>
    <TD width="1%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">one-tenth or more but less than one-third,
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">one-third of more but less than a
    majority,&nbsp;or
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">a majority or more,
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <FONT size="2">stockholder approval of the acquisition must be
    obtained before the stockholder may vote the shares. The
    required stockholder vote is two-thirds of all votes entitled to
    be cast is required each time a stockholder acquires control
    shares in an amount sufficient to cross one of the thresholds
    noted above, excluding shares held by the corporation&#146;s
    directors.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">A person who has made or proposes to make a
control share acquisition, upon satisfaction of the conditions
set forth in the statute, including an acquiring person
statement and an undertaking to pay expenses for a special
meeting, may compel the board of directors of the corporation to
call a special meeting of stockholders to be held within
50&nbsp;days after the demand to consider the voting rights of
the acquired shares. If no request for a special meeting is
made, the corporation may present the matter at a
stockholders&#146; meeting.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If voting rights are not approved at the meeting
or if the acquiring person does not deliver an acquiring person
statement as required by the statute, then the corporation may
redeem any or all of the control shares for fair value
determined as of the date of the last control share acquisition
by the acquiror or of any meeting of stockholders at which the
voting rights of those shares are considered and not approved.
The corporation may not redeem shares for which voting rights
have previously been approved. Fair value is determined without
regard to the absence of voting rights for the control shares.
If voting rights for control shares are approved at a
stockholders&#146; meeting and the acquiror becomes entitled to
vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of
the shares for purposes of these appraisal rights may not be
less than the highest price per share paid by the acquiror in
the control share acquisition. A control share acquisition does
not include any merger, consolidation or share exchange were we
are a party to such transaction. Our bylaws contain a provision
exempting any and all acquisitions by any person of our shares
of common stock from the control share acquisition statute.
Though not expected, our Board could cause us to become subject
to this statute by amendment of our bylaws to eliminate the
opt-out provision.
</FONT>

<P align="left">
<B><FONT size="2">Transfer Agent and Registrar</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The transfer agent and registrar for our common
stock is American Stock Transfer and Trust Company.
</FONT>

<P align="left">
<B><FONT size="2">Listing</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our common shares are expected to be listed on
the Nasdaq National Market under the symbol &#147;WRES&#148;.
</FONT>

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<DIV align="left">
<A name='116'></A>
</DIV>

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<P align="center">
<B><FONT size="2">SHARES ELIGIBLE FOR FUTURE SALE</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Immediately prior to this offering, there was no
public market for our common stock. Future sales of substantial
amounts of common stock in the public market could adversely
affect the market price of our common stock. Upon the completion
of the
offering, &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock will be
outstanding, &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock if the underwriters over-allotment option is
exercised in full. Of those
shares, &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock sold by us in the offering will be freely
tradable without restriction or further registration under the
Securities Act, unless held by our affiliates, as defined under
the Securities Act. Our affiliates include our officers,
directors and major stockholders. Any such affiliate will be
subject to the resale limitations of Rule&nbsp;144 adopted under
the Securities Act.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In addition, 13,310,571&nbsp;shares of our common
stock outstanding prior to the offering will immediately be
eligible for sale in the public market. An additional
4,038,499&nbsp;shares held by our affiliates will immediately be
eligible for sale in the public market subject to the volume and
other limitations of Rule&nbsp;144. Further, upon conversion by
the holders of our convertible debt and preferred stock into
common stock, an aggregate of 8,456,888&nbsp;shares will
immediately be eligible for sale in the public market and
3,341,559&nbsp;shares held by our affiliates will immediately be
eligible for sale subject to the volume and other limitations of
Rule&nbsp;144. These holders may also have rights, subject to
some conditions including the consent of any underwriter, to
include their shares in any registration statements that we file
to register our shares under the Securities Act for ourselves or
other stockholders.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In general, under Rule&nbsp;144, a person who is
deemed to be our affiliate is entitled to sell within any
three-month period a number of shares beneficially owned for at
least one year that does not exceed the greater of 1.0% of the
then outstanding shares of common stock or the average weekly
trading volume of the outstanding shares of common stock during
the four calendar weeks preceding such sale. Sales under
Rule&nbsp;144 are also subject to requirements as to the manner
of sale, notice and the availability of current public
information about us. However, a person who is not deemed to be
an affiliate of Warren at any time during the 90&nbsp;days
preceding a proposed sale and who has beneficially owned
restricted securities for at least two years is entitled to sell
such shares under Rule&nbsp;144 without regard to the volume,
manner of sale or notice requirements.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In accordance with the December&nbsp;12, 2002
registration rights agreement, commencing 180&nbsp;days after
completion of this offering, holders of at least 50% of the
6,552,674&nbsp;shares of our convertible preferred stock as of
June&nbsp;30, 2004 have a one-time right to demand that their
shares of common stock issuable upon conversion of the
convertible preferred stock be registered under the Securities
Act. Also, commencing 180&nbsp;days after completion of this
offering, these holders may have the right to include their
shares of common stock, subject to the consent of any
underwriter, in registration statements that we may file, if
any, to register shares of our common stock under the Securities
Act for ourselves or other stockholders. Additionally,
commencing February&nbsp;3, 2005, we are required to file a
registration statement for 2,875,000&nbsp;shares of outstanding
common stock and 1,437,500&nbsp;shares of common stock issuable
upon exercise of our class&nbsp;A and class&nbsp;B warrants
under the Securities Act. The holders of these securities have
agreed to certain restrictions on the transfer of their stock
for a period of 180&nbsp;days after this offering.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We, together with each of our executive officers,
directors and certain of our stockholders, who collectively,
upon completion of the offering, will own an aggregate of
8,322,009&nbsp;shares of common stock, have agreed not to sell,
pledge, or otherwise dispose of any shares of common stock or
securities convertible into or exercisable for shares of common
stock for a period of 180&nbsp;days following the date of this
prospectus without the prior written consent of KeyBanc Capital
Markets, as representative for the underwriters. Upon expiration
of the lock-up agreements, these shares will become eligible for
sale subject in most cases to the limitations of Rule&nbsp;144
under the Securities Act.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have reserved an aggregate of
6,876,250&nbsp;shares of common stock for issuance upon exercise
of options granted or to be granted under our various stock
option plans. See &#147;Management&nbsp;&#151; Employee Benefit
Plans&#148; and note&nbsp;E, Stockholders&#146; Equity, to our
consolidated financial statements included elsewhere in this
prospectus. We intend to file a registration statement on
Form&nbsp;S-8 under the Securities Act to register
</FONT>

<P align="center"><FONT size="2">87
</FONT>

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<DIV align="left">
<FONT size="2">all of the shares of common stock reserved for
grant or previously granted under these plans. This registration
statement is expected to be filed as soon as practicable after
the consummation of the offering and will automatically become
effective upon filing. Shares issued under our stock option
plans after such registration statement is filed may thereafter
be sold in the public market, subject, however, to the
limitations imposed by Rule&nbsp;144 on our affiliates, the
lock-up agreements described above and any transfer or vesting
restrictions imposed on options at the time of grant.
</FONT>
</DIV>

<P align="center"><FONT size="2">88
</FONT>

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<DIV align="left">
<A name='117'></A>
</DIV>

<!-- link1 "UNDERWRITING" -->

<P align="center">
<B><FONT size="2">UNDERWRITING</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Subject to the terms and conditions set forth in
an underwriting agreement by and among KeyBanc Capital Markets,
a division of McDonald Investments Inc., Jefferies&nbsp;&#38;
Company, Inc., and Sanders Morris Harris, as representatives for
the underwriters named in the agreement, and us, we have agreed
to sell to each underwriter, and each underwriter has severally
agreed to purchase from us, the number of common shares set
forth opposite its name in the table below.
</FONT>

<CENTER>
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<TR>
    <TD width="76%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="9%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="9%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Underwriter</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number of Shares</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">KeyBanc Capital Markets, a division of McDonald
    Investments Inc.&nbsp;</FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Jefferies&nbsp;&#38; Company, Inc.&nbsp;</FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Sanders Morris Harris, Inc.&nbsp;</FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Under the terms of the underwriting agreement,
the underwriters are committed to purchase all of these shares
if any shares are purchased. If an underwriter defaults, the
underwriting agreement provides that the purchase commitments of
the nondefaulting underwriters may be increased or the
underwriting agreement may be terminated.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments
the underwriters may be required to make because of any of those
liabilities.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The underwriting agreement provides that the
underwriters&#146; obligations to purchase the common stock
depends on the satisfaction of the conditions contained in the
underwriting agreement. The conditions contained in the
underwriting agreement include the requirement that the
representations and warranties made by us to the underwriters
are true, that there is no material change in the financial
markets and that we deliver to the underwriters customary
closing documents.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The underwriters propose to offer our common
stock directly to the public at
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share and to certain dealers at such price less a concession not
in excess of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share. The underwriters may allow, and such dealers may reallow,
a concession not in excess of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share to other dealers. If all of the shares are not sold at the
public offering price, the representatives of the underwriters
may change the public offering price and the other selling terms.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We intend to distribute and deliver this
prospectus by hand or by mail only and not by electronic
delivery. Also, we intend to use printed prospectuses only and
not other forms of prospectuses.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have granted the underwriters an option to
purchase up
to &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;additional
shares at the public offering price less the underwriting
discount. The underwriters may exercise the option for
30&nbsp;days from the date of this prospectus solely to cover
any over-allotments. If the underwriters exercise this option,
each will be obligated, subject to conditions contained in the
underwriting agreement, to purchase a number of additional
common shares proportionate to that underwriter&#146;s initial
amount reflected in the above table.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table shows the per share and total
underwriting discount that we will pay to the underwriters.
These amounts are shown assuming both no exercise and full
exercise of the underwriters&#146; option to
purchase &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;additional
shares.
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="44%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="9%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="9%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Total Without Opinion</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Total With Option</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Per share</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exercised</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exercised</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Public offering price
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Underwriting discount(1)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Proceeds (before expenses)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">The underwriting discount
    is &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;%,
    or
    $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
    share.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">89
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We estimate that the total expenses related to
this offering payable by us, excluding underwriting discounts
and commissions, will be approximately
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We, our executive officers and directors and
certain major stockholders have agreed with the underwriters,
for a period of 180&nbsp;days after the date of this prospectus,
subject to certain exceptions, not to offer, sell, hedge or
otherwise dispose of any common shares or any securities
convertible into or exchangeable for common stock, without the
prior written consent of McDonald Investments Inc. As
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2004, &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock (including shares underlying options exercisable
within 60&nbsp;days) were beneficially owned by our executive
officers and directors and such stockholders. However, McDonald
Investments Inc. may, in its sole discretion and at any time
without notice, release all or any portion of the securities
subject to these lock-up agreements.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Until the distribution of common shares is
completed, SEC rules may limit the underwriters from bidding for
and purchasing our common stock. However, the underwriters may
engage in transactions that stabilize the price of the common
shares, such as bids or purchases of shares in the open market
while the offering is in progress to peg, fix, or maintain that
price. These transactions also may include short sales and
purchases to cover positions created by short sales. Short sales
involve the sale by the underwriters of a greater number of
shares than they are required to purchase in the offering.
&#147;Covered&#148; short sales are sales made in an amount not
greater than the underwriters&#146; option to purchase
additional shares from us. The underwriters may reduce that
short position by purchasing shares in the open market and/or by
exercising all or part of the over-allotment option described
above. In determining the source of shares to close out the
covered short position, the underwriters will consider, among
other things, the price of shares available for purchase in the
open market as compared to the price at which they may purchase
additional shares pursuant to the option granted to them.
&#147;Naked&#148; short sales are any sales in excess of such
option. The underwriters must close out any naked short position
by purchasing shares in the open market. A naked short position
is more likely to be created if the underwriters are concerned
that there may be downward pressure on the price of the common
shares in the open market after pricing that could adversely
affect investors who purchase in the offering.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The underwriters may also impose a penalty bid.
This occurs when a particular underwriter repays to the
underwriters a portion of the underwriting discount received by
it because the representative has repurchased shares sold by or
for the account of such underwriter in stabilizing or short
covering transactions.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Neither we nor the underwriters makes any
representation or prediction as to the effect the transactions
described above may have on the price of the common stock. Any
of these activities may have the effect of preventing or
retarding a decline in the market price of our common stock.
They may also cause the price of our common stock to be higher
than the price that would otherwise exist on the open market in
the absence of these transactions. The underwriters may conduct
these transactions on the Nasdaq National Market or in the
over-the-counter market, or otherwise. If the underwriters
commence any of these transactions, they may discontinue them
without notice at any time.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">KeyBank National Association and other affiliates
of McDonald Investments Inc. have investment discretion over
accounts holding which may include shares of our common stock.
In addition, some of the underwriters and their affiliates have
engaged in, and may in the future engage in, investment banking
and other transactions with us and perform services for us in
the ordinary course of their business. They have received
customary fees and commissions for those transactions. In the
course of their businesses, the underwriters and their
affiliates may actively trade our securities or loans for their
own account or for the accounts of customers, and, accordingly,
the underwriters and their affiliates may at any time hold long
or short positions in such securities or loans.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">There is no established trading market for the
share. The offering price for the shares has been determined by
us and the underwriters, based on the following factors:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the history and prospects for the industry in
    which we compete;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">our past and present operations;
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">90
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">our historical results of operations;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">our prospects for future business and earning
    potential;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">our management;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the general condition of the securities markets
    at the time of this offering;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the recent market prices of securities of
    generally comparable companies;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the market capitalization and stages of
    development of other companies which we and the underwriters
    believe to be comparable to us;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">other factors deemed to be relevant.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<A name='118'></A>

<!-- link1 "LEGAL MATTERS" -->

<P align="center">
<B><FONT size="2">LEGAL MATTERS</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The validity of the shares of common stock being
offered by this prospectus and certain other legal matters in
connection with this offering will be passed upon for us by
Patton Boggs LLP. Attorneys at Patton Boggs LLP beneficially own
25,000&nbsp;shares of our common stock, a class&nbsp;A warrant
to purchase&nbsp;6,250&nbsp;shares of our common stock and a
class&nbsp;B warrant to purchase&nbsp;6,250&nbsp;shares of our
common stock. Certain legal matters in connection with this
offering will be passed upon for the underwriters by Jones Day.
</FONT>

<P align="left">
<A name='119'></A>

<!-- link1 "EXPERTS" -->

<P align="center">
<B><FONT size="2">EXPERTS</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The consolidated financial statements as of
December&nbsp;31, 2003 and 2002 and for each of the years in the
three year period ending December&nbsp;31, 2003 are included in
this prospectus and in the registration statement have been so
included in reliance upon the report of Grant Thornton LLP,
independent registered public accounting firm, given on the
authority of said firm as experts in auditing and accounting.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Williamson Petroleum Consultants, Inc.,
independent petroleum consultants, estimated our reserves as of
December&nbsp;31, 2003, 2002 and 2001 and the present value of
the estimated future net revenues from those estimated reserves
included in this prospectus. These estimates are included in
reliance upon their reports given upon their authority as
experts on the matters covered by the summary reserve report.
</FONT>

<P align="left">
<A name='120'></A>

<!-- link1 "WHERE YOU CAN FIND MORE INFORMATION" -->

<P align="center">
<B><FONT size="2">WHERE YOU CAN FIND MORE INFORMATION</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have filed a registration statement on
Form&nbsp;S-1 with the SEC in connection with this offering. We
also file our annual report on Form&nbsp;10-K and quarterly
reports on Form&nbsp;10-Q, and file or furnish current reports
on Form&nbsp;8-K pursuant to Section&nbsp;13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended. You may also read
and copy the registration statement and any other documents we
have filed at the Securities and Exchange Commission&#146;s
Public Reference Room at 450&nbsp;Fifth Street, N.W.,
Washington,&nbsp;D.C. 20549. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information on
the Public Reference Room. Our Securities and Exchange
Commission filings are also available to the public at the
Securities and Exchange Commission&#146;s Internet site at
http://www.sec.gov. We also make available our periodic reports
and amendments as soon as reasonably practicable after such
documents are electronically filed with, or furnished to, the
SEC. Our Internet address is www.warrenresources.com.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">This prospectus is part of the registration
statement and does not contain all of the information included
in the registration statement. Whenever a reference is made in
this prospectus to any of our contracts or other documents, the
reference may not be complete and, for a copy of the contract or
document, you should refer to the exhibits that are part of the
registration statement.
</FONT>

<P align="center"><FONT size="2">91
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left">
<A name='121'></A>
</DIV>

<!-- link1 "INDEX TO FINANCIAL STATEMENTS" -->

<P align="center">
<B><FONT size="2">INDEX TO FINANCIAL STATEMENTS</FONT></B>

<CENTER>
<TABLE width="60%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="92%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Consolidated Financial Statements</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#201'>Report of Independent
    Registered Public Accounting Firm</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">F-2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#202'>Consolidated Balance Sheets
    as of December&nbsp;31, 2003 and 2002</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">F-3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#203'>Consolidated Statements of
    Operations for the years ended December&nbsp;31, 2003, 2002 and
    2001</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">F-4</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#204'>Consolidated Statement of
    Stockholders&#146; Equity (Deficit) for the years ended
    December&nbsp;31, 2003, 2002 and 2001</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">F-5</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#205'>Consolidated Statements of
    Cash Flows for the years ended December&nbsp;31, 2003, 2002 and
    2001</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">F-6</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#206'>Notes to Consolidated
    Financial Statements</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">F-8</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Unaudited Consolidated Financial
    Statements</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#208'>Consolidated Balance Sheets
    as of June&nbsp;30, 2004 and December&nbsp;31, 2003</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">F-37</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#209'>Consolidated Statements of
    Operations for the six months ended June&nbsp;30, 2004 and
    2003</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">F-38</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#210'>Consolidated Statements of
    Cash Flows for the six months ended June&nbsp;30, 2004 and
    2003</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">F-39</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#211'>Notes to the Unaudited
    Consolidated Financial Statements</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">F-40</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">F-1
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left">
<A name='201'></A>
</DIV>

<!-- link1 "REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM" -->

<P align="center">
<B><FONT size="2">REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM</FONT></B>

<P align="left">
<FONT size="2">Board of Directors
</FONT>

<DIV align="left">
<FONT size="2">Warren Resources, Inc.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have audited the accompanying consolidated
balance sheets of Warren Resources, Inc. and Subsidiaries as of
December&nbsp;31, 2003 and 2002, and the related consolidated
statements of operations, stockholders&#146; equity (deficit)
and cash flows for each of the three years in the period ended
December&nbsp;31, 2003. These financial statements are the
responsibility of the Company&#146;s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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&nbsp;31, 2003 and 2002, and the
results of their operations and their cash flows for each of the
three years in the period ended December&nbsp;31, 2003 in
conformity with accounting principles generally accepted in the
United States of America.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As discussed in Note A to the consolidated
financial statements, effective January&nbsp;1, 2001, the
Company adopted Statement of Financial Accounting Standards
No.&nbsp;133, <I>Accounting for Derivative Instruments and
Hedging Activities</I>; effective January&nbsp;1, 2002, the
Company adopted Statement of Financial Accounting Standards
No.&nbsp;142, <I>Goodwill and Other Intangible Assets</I>; and,
effective January&nbsp;1, 2003, the Company changed its method
of accounting for asset retirement obligations as required by
the provisions of Statement of Financial Accounting Standards
No.&nbsp;143, <I>Asset Retirement Obligations</I>.
</FONT>

<P align="left">
<FONT size="2">/s/&nbsp;GRANT THORNTON LLP
</FONT>

<P align="left">
<FONT size="2">Oklahoma City, Oklahoma
</FONT>

<DIV align="left">
<FONT size="2">February&nbsp;16, 2004 (except for the <BR>
 last three paragraphs of Note&nbsp;P, <BR>
 as to which the date is August&nbsp;23, 2004)
</FONT>
</DIV>

<P align="center"><FONT size="2">F-2
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<P align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>

<P align="left">
<A name='202'></A>

<!-- link1 "CONSOLIDATED BALANCE SHEETS" -->

<DIV align="center">
<B><FONT size="2">CONSOLIDATED BALANCE SHEETS</FONT></B>
</DIV>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="59%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="4"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">December 31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="4"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="4"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
</TR>

<TR>
    <TD colspan="4"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <BR>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><FONT size="2">ASSETS</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current Assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash and cash equivalents
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">24,528,999</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">23,184,936</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accounts receivable&nbsp;&#151; trade
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,386,180</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,895,483</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accounts receivable from affiliated partnerships
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">389,271</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">921,252</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Trading securities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">201,152</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">78,383</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Restricted investments in U.S. Treasury
    bonds&nbsp;&#151; available for sale, at fair value (amortized
    cost of $1,293,411 in 2003 and $683,513 in 2002)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,402,358</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">810,822</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other current assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,031,701</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,053,248</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total current assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">30,939,661</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">33,944,124</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other Assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and gas properties&nbsp;&#151; at cost, based
    on successful efforts method of accounting, net of accumulated
    depletion and amortization
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">94,949,545</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">48,684,362</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Property and equipment&nbsp;&#151; at cost, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">591,663</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">751,479</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Restricted investments in U.S. Treasury
    bonds&nbsp;&#151; available for sale, at fair value (amortized
    cost of $12,627,574 in 2003 and $7,571,860 in 2002)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">13,808,777</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,058,851</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred bond offering costs, net of accumulated
    amortization of $3,684,097 in 2003 and $3,051,046 in 2002
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,756,971</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,390,022</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Goodwill
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,430,246</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,430,246</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,576,800</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,365,435</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Restricted cash
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,637,775</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">120,114,002</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">74,318,170</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">151,053,663</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">108,262,294</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><FONT size="2">LIABILITIES
    AND STOCKHOLDERS&#146; EQUITY</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current Liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current maturities of debentures
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,809,470</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,466,970</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current maturities of other long-term liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">208,383</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">178,980</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accounts payable and accrued expenses
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,956,529</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,822,809</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred income&nbsp;&#151; turnkey drilling
    contracts with affiliated partnerships
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">22,438,272</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">32,265,725</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total current liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">36,412,654</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">41,734,484</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Long-Term Liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Debentures, less current portion
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">43,285,230</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">49,202,730</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other long-term liabilities, less current portion
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,613,081</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,353,129</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">44,898,311</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">50,555,859</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Minority Interest
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">13,348,654</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,970,078</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Stockholders&#146; Equity
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">8% convertible preferred stock&nbsp;&#151; $.0001
    par value; authorized, 10,000,000 shares; issued and
    outstanding, 6,507,729 shares in 2003 and 1,784,197 shares in
    2002 (aggregate liquidation preference $78,092,748 in 2003 and
    $21,410,364 in 2002)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">76,334,024</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">20,955,838</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Common stock&nbsp;&#151; $.0001 par value;
    authorized, 100,000,000 shares; issued, 17,349,070 shares in
    2003 and 17,581,996 shares in 2002
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,735</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,758</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Additional paid-in capital
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">47,739,159</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">52,424,147</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accumulated deficit
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(67,729,178</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(66,529,795</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accumulated other comprehensive income, net of
    applicable income taxes of $517,000 in 2003 and $646,000 in 2002
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">776,359</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">971,508</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">57,122,099</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,823,456</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Less common stock in Treasury&nbsp;&#151; at
    cost; 632,250 shares in 2003 and 707,691 shares in 2002
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">728,055</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">821,583</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">56,394,044</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,001,873</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">151,053,663</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">108,262,294</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center">
<FONT size="2">The accompanying notes are an integral part of
these statements.
</FONT>

<P align="center"><FONT size="2">F-3
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<P align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>

<P align="left">
<A name='203'></A>

<!-- link1 "CONSOLIDATED STATEMENTS OF OPERATIONS" -->

<DIV align="center">
<B><FONT size="2">CONSOLIDATED STATEMENTS OF
OPERATIONS</FONT></B>
</DIV>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="53%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Year Ended December 31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Revenues</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Turnkey contracts with affiliated partnerships
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,300,646</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,841,110</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">30,102,946</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and gas sales from marketing activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,620,522</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,272,398</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,866,954</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Well services, 81%, 79% and 12% with affiliated
    partnerships, respectively
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,167,564</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,895,453</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,574,335</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and gas sales
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,717,814</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">592,528</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">948,270</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net gain (loss)&nbsp;on investments
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">21,761</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">464,185</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(10,337</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Interest and other income
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,340,059</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,257,842</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,977,082</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Gain on sale of unproved oil and gas properties
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">494,497</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,286,774</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25,662,863</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">29,610,290</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">53,459,250</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Expenses</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Turnkey contracts
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,284,653</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,965,426</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25,953,340</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cost of marketed oil and gas purchased from
    affiliated partnerships
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,500,426</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,121,522</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15,298,842</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Well services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">662,128</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">838,878</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,519,085</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Production and exploration
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,811,595</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,325,764</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">567,756</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Depreciation, depletion, amortization and
    impairment
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,249,860</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,930,162</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,462,119</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">General and administrative
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,496,034</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,277,792</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,484,773</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Interest
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,528,069</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,312,631</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,776,234</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Contingent repurchase obligation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,064,661</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,318,993</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">26,532,765</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">37,707,514</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">74,381,142</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Loss before provision for income taxes
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(869,902</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(8,097,224</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(20,921,892</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred income tax expense (benefit)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">129,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(471,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">151,700</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss before minority interest and change in
    accounting principle
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(998,902</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,626,224</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(21,073,592</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Minority interest
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(112,263</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss before change in accounting principle
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,111,165</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,626,224</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(21,073,592</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cumulative effect of change in accounting
    principle
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(88,218</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,199,383</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,626,224</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(21,073,592</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Less dividends and accretion on preferred shares
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,561,543</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16,206</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss applicable to common stockholders
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,760,926</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,642,430</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(21,073,592</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Basic and diluted loss per common share
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.34</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.44</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.20</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Weighted average common shares outstanding
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16,827,857</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">17,339,869</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">17,532,882</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center">
<FONT size="2">The accompanying notes are an integral part of
these statements.
</FONT>

<P align="center"><FONT size="2">F-4
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<P align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>

<P align="left">
<A name='204'></A>

<!-- link1 "CONSOLIDATED STATEMENT OF STOCKHOLDERS&#146; EQUITY (DEFICIT)" -->

<DIV align="center">
<B><FONT size="2">CONSOLIDATED STATEMENT OF STOCKHOLDERS&#146;
EQUITY (DEFICIT)</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">Years ended December&nbsp;31, 2003, 2002 and
2001</FONT></B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="14%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Accumulated</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Total</FONT></B></TD>
</TR>

<TR>
    <TD colspan="4"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Preferred Stock</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Common Stock</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Additional</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Other</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Stockholders&#146;</FONT></B></TD>
</TR>

<TR>
    <TD colspan="4"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Paid-in</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Accumulated</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Comprehensive</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Treasury</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Equity</FONT></B></TD>
</TR>

<TR>
    <TD colspan="4"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Shares</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amount</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Shares</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amount</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Capital</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Deficit</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Income</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Stock</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Deficit)</FONT></B></TD>
</TR>

<TR>
    <TD colspan="4"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="1">Balance at January&nbsp;1, 2001</FONT></B></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">17,528,261</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">17,528</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">52,187,679</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(37,829,979</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">500,360</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">14,875,588</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Conversion to common stock from convertible
    debentures
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">9,318</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">10</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">9,990</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">10,000</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Purchase of treasury stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(10,010</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(10,010</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Comprehensive loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(21,073,592</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(21,073,592</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Other comprehensive loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Cumulative effect of change in accounting
    principle
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,449,930</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,449,930</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Reclassification adjustment for derivative losses
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,449,930</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,449,930</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Net change in unrealized gain on investment
    securities available for sale, net of applicable income taxes
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(236,100</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(236,100</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Total comprehensive loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(21,309,692</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="1">Balance at December&nbsp;31, 2001</FONT></B></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">17,537,579</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">17,538</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">52,197,669</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(58,903,571</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">264,260</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(10,010</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(6,434,114</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Change in par value of common stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(15,784</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">15,784</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Dividends declared on preferred stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(16,206</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(16,206</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Shares issued for services
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">23,695</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">2</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">86,902</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">86,904</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Conversion to common stock from convertible debt
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">20,722</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">2</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">139,998</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">140,000</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Issuance of preferred stock, net of offering
    costs of $454,740
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,784,197</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">20,955,838</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">20,955,838</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Purchase of treasury stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(811,573</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(811,573</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Comprehensive loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(7,626,224</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(7,626,224</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Other comprehensive loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Net change in unrealized gain on investment
    securities available for sale, net of applicable income taxes
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">707,248</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">707,248</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Total comprehensive loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(6,918,976</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="1">Balance at December&nbsp;31, 2002</FONT></B></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,784,197</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">20,955,838</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">17,581,996</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,758</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">52,424,147</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(66,529,795</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">971,508</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(821,583</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">7,001,873</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Retirement of common stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(232,926</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(23</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(123,445</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">93,528</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(29,940</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Dividends declared on preferred stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(4,272,297</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(4,272,297</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Issuance of preferred stock, net of offering
    costs of $1,593,990
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">4,723,532</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">55,088,940</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">55,088,940</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Accretion of preferred stock to redemption value
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">289,246</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(289,246</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Comprehensive loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,199,383</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,199,383</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Other comprehensive loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Net change in unrealized gain on investment
    securities available for sale, net of applicable income taxes
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(195,149</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(195,149</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Total comprehensive loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,394,532</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="1">Balance at December&nbsp;31, 2003</FONT></B></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">6,507,729</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">76,334,024</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">17,349,070</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,735</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">47,739,159</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(67,729,178</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">776,359</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(728,055</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">56,394,044</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center">
<FONT size="2">The accompanying notes are an integral part of
these statements.
</FONT>

<P align="center"><FONT size="2">F-5
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<P align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>

<P align="left">
<A name='205'></A>

<!-- link1 "CONSOLIDATED STATEMENTS OF CASH FLOWS" -->

<DIV align="center">
<B><FONT size="2">CONSOLIDATED STATEMENTS OF CASH
FLOWS</FONT></B>
</DIV>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="49%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="4"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Year Ended December&nbsp;31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="4"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="4"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD colspan="4"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash flows from operating activities:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,199,383</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,626,224</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(21,073,592</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accretion of discount on available for sale debt
    securities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(563,495</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(514,818</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(473,080</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Amortization and write-off of deferred bond
    offering costs
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">633,051</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">515,886</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">442,130</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Gain on sale of U.S. Treasury bonds-available for
    sale
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(132,827</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(28,104</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(21,019</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Depreciation, depletion, amortization and
    impairment
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,249,860</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,930,162</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,462,119</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accretion of asset retirement obligation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">62,452</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cumulative effect of accounting change
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">88,218</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Gain on sale of oil and gas properties
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(494,497</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,286,774</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Common stock issued for services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">86,904</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Non-cash compensation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">200,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred tax expense (benefit)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">129,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(471,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">151,700</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Change in assets and liabilities:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">(Increase) decrease in trading securities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(122,769</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">127,606</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">235,527</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">(Increase) decrease in accounts receivable-trade
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,509,303</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(902,157</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">275,723</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">(Increase) decrease in accounts receivable from
    affiliated partnerships
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">531,981</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(119,591</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(21,740</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Decrease in other assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">810,183</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,886,299</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">862,956</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Increase (decrease)&nbsp;in accounts payable and
    accrued expenses
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,633,658</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,704,532</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,251,636</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Decrease in deferred income from affiliated
    partnerships
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,223,496</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(677,861</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(12,619,695</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Increase (decrease)&nbsp;in contingent repurchase
    obligation to affiliated partnerships
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,064,661</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,318,993</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Increase (decrease)&nbsp;in other long-term
    liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(633,611</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">548,200</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net cash provided by (used in) operating
    activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,277,628</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6,100,665</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(15,711,614</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash flows from investing activities:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Purchases of U.S. Treasury bonds-available for
    sale
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,692,731</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(14,906</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,264,058</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Purchases of oil and gas properties
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(12,699,505</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,699,453</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(16,944,421</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Purchases of property and equipment
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(40,043</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(50,592</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(189,666</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Proceeds from the sale of oil and gas properties,
    net of selling fees
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">494,497</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,874,512</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Proceeds from the sale of property and equipment
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">52,353</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Proceeds from U.S. Treasury bonds-available for
    sale
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">723,442</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">845,081</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">763,353</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Decrease (increase) in restricted cash
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,637,775</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,637,775</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net cash provided by (used in) investing
    activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(13,524,212</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,316,867</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(17,634,792</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash flows from financing activities:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Payments on long-term debt
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,911,336</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,813,965</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,876,645</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred offering costs
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(812,886</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Issuance of preferred stock, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,304,156</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,861,718</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Dividends paid on preferred stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,772,233</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Purchase of treasury stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(29,940</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,624</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(10,010</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net cash provided by (used in) financing
    activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,590,647</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,045,129</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,699,541</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net increase (decrease)&nbsp;in cash and cash
    equivalents
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,344,063</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">261,331</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(36,045,947</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash and cash equivalents at beginning of year
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">23,184,936</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">22,923,605</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">58,969,552</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash and cash equivalents at end of year
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">24,528,999</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">23,184,936</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">22,923,605</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center">
<FONT size="2">The accompanying notes are an integral part of
these statements.
</FONT>

<P align="center"><FONT size="2">F-6
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<P align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>

<P align="center">
<B><FONT size="2">CONSOLIDATED STATEMENTS OF CASH
FLOWS&nbsp;&#151; (Continued)</FONT></B>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="51%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Year Ended December&nbsp;31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Supplemental disclosure of cash flow information
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash paid for interest, net of amount capitalized
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">895,018</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,770,006</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,275,100</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash paid for income taxes
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Noncash investing and financing activities:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Conversion to common stock from convertible debt
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">140,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Exchange of 2007 Sinking Fund Bond for preferred
    stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,858,392</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">978,600</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Exchange of 2017 Sinking Fund Bond for preferred
    stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">864,160</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accounts receivable consisting of service credits
    relating to the sale of Pinnacle
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">450,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other assets consisting of deferred payments
    relating to the conveyance of oil and gas property
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,818,183</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Purchase of treasury stock of $808,949 and
    incurrence of noncash compensation of $200,000 through the
    issuance of a noninterest-bearing note (Note&nbsp;D)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,008,949</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accrued preferred stock dividend
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,500,064</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16,206</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Preferred stock issued to minority interest (see
    Note&nbsp;J)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,782,664</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Preferred stock issued to acquire property, net
    of deferred income of $4,604,000 (see Note&nbsp;I)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,972,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">During 2003, the Company acquired affiliated
    L.L.C. interests in exchange for 1,956,850 shares of preferred
    stock (Note&nbsp;J). In conjunction with the acquisition, assets
    were acquired and liabilities were assumed as follows:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Estimated fair value of assets acquired
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">28,346,462</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Liabilities assumed
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,646,926</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Estimated fair value of preferred stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">19,699,536</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">During 2003, the Company recorded the cumulative
    effect of SFAS&nbsp;143 for asset retirement obligations, as
    follows:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Increase to oil and gas properties
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">557,465</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Increase of asset retirement obligation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">645,683</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cumulative effect of accounting change
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">88,218</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">During 2002, the Company acquired affiliated
    L.L.C. interests in exchange for 1,342,960 shares of preferred
    stock (Note J). In conjunction with the acquisition, assets were
    acquired and liabilities were assumed as follows:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Estimated fair value of assets acquired
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25,256,708</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Liabilities assumed
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,141,188</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Estimated fair value of preferred stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16,115,520</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center">
<FONT size="2">The accompanying notes are an integral part of
these statements.
</FONT>

<P align="center"><FONT size="2">F-7
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<P align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>

<P align="left">
<A name='206'></A>

<!-- link1 "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" -->

<DIV align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS</FONT></B>
</DIV>

<P align="left">
<B><FONT size="2">Note A&nbsp;&#151; Organization and Accounting
Policies</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Nature of
Operations:</FONT></I></B><FONT size="2"> Warren Resources, Inc.
(the &#147;Company&#148;) was formed as a New York corporation
on June&nbsp;12, 1990 for the purpose of acquiring and
developing oil and gas properties. On September&nbsp;5, 2002,
the Company changed its State of Incorporation to Delaware. As a
result, all shares of the Company&#146;s stock were converted
into shares of the Delaware corporation and the par value of
stock was changed from $0.001 to $0.0001 per share. Primarily,
the Company&#146;s oil and gas properties are located in
Wyoming, California, New Mexico, North Dakota and Texas. In
addition, the Company serves as the managing general partner
(the &#147;MGP&#148;) to affiliated partnerships and joint
ventures. Also, the Company, through its wholly owned
subsidiaries, provides turnkey contract drilling services to
affiliated partnerships and joint ventures, well services
including engineering, maintenance, operations and gas marketing
and transportation services.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Management
Plans:</FONT></I></B><FONT size="2"> The Company has incurred a
net loss of approximately $1.2&nbsp;million during 2003 and at
December&nbsp;31, 2003, current liabilities exceeded current
assets by approximately $5.5&nbsp;million. The Company had
equity of approximately $56.4&nbsp;million at December&nbsp;31,
2003.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In order to improve operations and liquidity and
meet its cash flow needs, the Company has or intends to do the
following:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Raise additional capital through the sale of
    either preferred or common stock (see Note&nbsp;P&nbsp;&#151;
    Subsequent Events).
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Obtain a credit facility based in part on the
    value of our proved reserves.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Generate gross profit from turnkey drilling
    contracts equal to approximately 25% of the total amount of
    total turnkey price and satisfy the drilling obligations
    relating to the contracts.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Use $2.0&nbsp;million of deferred drilling
    credits from Anadarko Petroleum Corporation to develop our
    acreage in the Washakie Basin, Wyoming.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As a result of these plans, management believes
that it will generate sufficient cash flows to meet its current
obligations in 2004.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Principles of
Consolidation:</FONT></I></B><FONT size="2"> The consolidated
financial statements include the accounts of the Company, its
wholly owned subsidiaries, Warren Development Corp., Warren
Drilling Corp., Warren Management Corp., Warren E&#38;P, Inc.
(formerly known as Petroleum Development Corp), CJS Pinnacle
Petroleum Services, LLC (&#147;Pinnacle&#148;) which was sold on
February&nbsp;14, 2002 and certain partnerships where the
Company has majority control (Note&nbsp;J). All significant
intercompany accounts and transactions have been eliminated in
consolidation.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company conducts the majority of its oil and
gas operations through joint ventures and partnerships. The
Company enters into joint venture agreements with limited
partnerships whereby the Company assigns 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 is an undivided interest in
the mineral rights and each owner is responsible for its
designated well expenditures. In exchange for the 75% working
interest, the limited partners pay intangible drilling costs
and, if a well is successful, the Company pays completion costs,
including lease and well equipment. The Company has a 25%
interest in the joint venture before payout and receives an
additional reversionary 15% interest once payout occurs. The
Company also has a 10% interest in the partnership revenue and
expenses which increases to 25% once payout occurs. Payout is
achieved when the limited partners in a particular partnership
receive distributions equal to 100% of their original
investment. Distributions received by the participants are
determined by the revenues generated from the wells in each of
the various partnerships less any applicable lease operating
expenses. Therefore, once payout is achieved, the Company has a
total interest of 55% in the net revenue generated from all
wells assigned to a particular
</FONT>

<P align="center"><FONT size="2">F-8
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<FONT size="2">partnership. The Company has subordinated
substantially all its general partner and joint venture rights
to production for 1998 and earlier partnerships until payout and
its general partner&#146;s interest in 1999 and later
partnerships until payout. The Company proportionately
consolidates its share of the costs incurred on undivided
working interest of affiliated partnerships and joint ventures
in which the Company does not have majority control. The Company
primarily incurs lease acquisition costs and completion costs,
including lease and well equipment, on wells developed in these
partnerships and joint ventures. All significant intercompany
accounts and transactions have been eliminated.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Oil and Gas
Properties:</FONT></I></B><FONT size="2"> The Company uses the
successful efforts method of accounting for oil and gas
properties. Under this methodology, costs incurred to acquire
mineral interests in oil and gas properties, to drill and equip
exploratory wells that find proved reserves and to drill and
equip development wells are capitalized.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Costs to drill exploratory wells that do not find
proved reserves, geological and geophysical costs and costs of
carrying and retaining unproved properties are expensed.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Unproved oil and gas properties that are
individually significant are periodically assessed for
impairment of value and a loss is recognized at the time of
impairment by providing an impairment allowance. Other unproved
properties are amortized based on the Company&#146;s experience
of successful drilling, terms of leases and historical lease
expirations.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Capitalized costs of producing oil and gas
properties are depleted by the units-of-production method on a
field-by-field basis. Lease costs are depleted using total
proved reserves while lease equipment and intangible development
costs are depleted using proved developed reserves. The
Company&#146;s proved properties are evaluated on a
field-by-field basis for impairment. An impairment loss is
indicated whenever net capitalized costs exceed expected future
net cash flow based on engineering estimates. In this
circumstance, the Company recognizes an impairment loss for the
amount by which the carrying value of the properties exceeds the
estimated fair value (based on discounted cash flow).
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On the sale or retirement of a complete unit of a
proved property, the cost and related accumulated depletion and
amortization are eliminated from the property accounts, and the
resultant gain or loss is recognized. On the retirement or sale
of a partial unit of proved property, the cost is charged to
accumulated depletion and amortization with a resulting gain or
loss recognized in earnings.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On the sale of an entire interest in an unproved
property, a gain or loss on the sale is recognized, taking into
consideration the amount of any recorded impairment if the
property had been assessed individually. If a partial interest
in an unproved property is sold, the amount received is treated
as a reduction of the cost of the interest retained.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Investment in CJS Pinnacle Petroleum
Services, LLC:</FONT></I></B><FONT size="2"> Pinnacle, a
drilling services company, was formed in 1997 and at that time
the Company obtained a 25% interest through its initial capital
contribution of $500 and a 9% loan to Pinnacle of $1,800,000.
The Company accounted for its 25% investment using the equity
method. On January&nbsp;1, 1999, the Company acquired an
additional 50% interest in Pinnacle by the assumption of
liabilities of approximately $2,267,000. Effective
September&nbsp;1, 2000, with the acquisition of Warren E&#38;P,
Inc., Pinnacle became a 100% owned subsidiary. On
February&nbsp;14, 2002, the Company completed the sale of
substantially all of the assets of Pinnacle (Note&nbsp;C).
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Revenue
Recognition:</FONT></I></B><FONT size="2"> Affiliated
partnerships enter into agreements with the Company to drill
wells to completion for a fixed price. The Company, in turn,
enters into drilling contracts primarily with unrelated parties
to drill wells on a day work basis. Therefore, if problems are
encountered on a well, the cost of that well will increase and
gross profit will decrease and could result in a loss on the
well. The Company recognizes revenue from the turnkey drilling
agreements on a proportional performance method as services are
performed. When estimates of revenues and expenses indicate a
loss, the total estimated loss is accrued.
</FONT>

<P align="center"><FONT size="2">F-9
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<FONT size="2">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. Oil and gas sales from marketing
activities result from sales by the Company of oil and gas
produced by affiliated joint ventures and partnerships and are
recognized when delivered to purchasers.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Cash and Cash
Equivalents:</FONT></I></B><FONT size="2"> 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 which
exceed federally insured limits. At December&nbsp;31, 2003 and
2002, the Company had approximately 99% and 97%, respectively,
of its cash and cash equivalents with one financial institution.
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. Restricted cash must be used to
purchase zero coupon U.S.&nbsp;Treasury bonds to secure
repayment of the outstanding debentures (Note&nbsp;G).
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Accounts
Receivable:</FONT></I></B><FONT size="2"> Accounts receivable
include amounts due from affiliated partnerships and joint
ventures for advances and expenditures made by the Company on
behalf of such entities, as well as trade receivables. Credit is
extended based on evaluation of a customer&#146;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&nbsp;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&#146;s previous loss history, the
customer&#146;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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company grants credit to purchasers of oil
and gas and owners of managed properties, substantially all of
whom are located in California and Wyoming.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Investments:</FONT></I></B><FONT size="2">
The Company classifies its debt and equity 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 measured at fair value and are classified as
current or noncurrent in proportion to the debt that is being
collateralized. Net unrealized gains and losses are excluded
from net earnings and reported as other comprehensive income
(loss). Realized gains and losses are determined on the basis of
specific identification of the securities.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Offering
Costs:</FONT></I></B><FONT size="2"> Costs incurred in
connection with the issuance of long-term debt are capitalized
and amortized over the term of the related debt using the
effective interest rate method. Costs associated with the
issuance of preferred stock are reflected as a reduction of
proceeds and the discount is accreted to the liquidation value
over seven years from the date of issuance.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Contingent Repurchase
Obligation:</FONT></I></B><FONT size="2"> A contingent
repurchase obligation is recognized when the present value of
the Company&#146;s potential future obligation to affiliated
partnerships under repurchase agreements (Note&nbsp;G) is
greater than their estimated future net revenues from oil and
gas properties, as determined by independent petroleum engineers.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Income Taxes:</FONT></I></B><FONT size="2">
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&#146;s
opinion, it is more likely than not that a portion or all of the
deferred tax assets will not be realized.
</FONT>

<P align="center"><FONT size="2">F-10
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Use of
Estimates:</FONT></I></B><FONT size="2"> 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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Gas
Imbalances:</FONT></I></B><FONT size="2"> The Company follows
the sales method of accounting for gas imbalances. A liability
is recorded when the Company&#146;s excess takes of natural gas
volumes exceed its estimated remaining recoverable reserves.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Capitalized
Interest:</FONT></I></B><FONT size="2"> Interest of
approximately $5,700,000, $1,400,000 and $2,300,000 was
capitalized during the years ended December&nbsp;31, 2003, 2002
and 2001, respectively, relating to California and Wyoming
properties on which exploration activities were in progress
during 2003, 2002 and 2001. Approximately $1,933,000 of interest
previously capitalized was charged against the proceeds of the
conveyance of certain of these unproved properties in 2002
(Note&nbsp;C).
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Hedging
Activities:</FONT></I></B><FONT size="2"> The Company accounted
for its hedging instruments using the fair value method of
SFAS&nbsp;133 as amended. For instruments qualifying and
designated as hedges, the increase and decrease in fair value
net of related deferred income taxes is reported in equity.
Gains and losses from the Company&#146;s price risk management
activities are recognized in gas revenues when the associated
sale occurs and the resulting cash flows are reported as cash
flows from operating activities. Gains and losses on hedging
contracts that are closed before the hedged production occurs
are deferred until the production month originally hedged. In
the event of a loss of correlation between changes in oil and
gas reference prices under a hedging instrument and actual oil
and gas prices, a gain or loss is recognized currently to the
extent the hedging instrument has not offset changes in actual
oil and gas prices. For the year ended December&nbsp;31, 2001,
the Company hedged approximately 3,000 dekatherms of natural gas
per day for the months April 2000 through March 2001 based on
the Inside FERC Index price and fixed floor and ceiling prices
of $2.50 and $3.55, respectively. For the year ended
December&nbsp;31, 2001, the Company incurred losses on its
hedging contracts of approximately $509,000, which are reflected
as a reduction of gas sales from marketing activities.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company adopted the provisions under
Statement of Financial Accounting Standards
(&#147;SFAS&#148;)&nbsp;No.&nbsp;133, <I>Accounting for
Derivative Instruments and Hedging Activities</I>, as amended,
in the first quarter of its year ended December&nbsp;31, 2001.
In accordance with the transition provisions of
SFAS&nbsp;No.&nbsp;133, the Company recorded a
net-of-tax-cumulative-effect-type adjustment of approximately
$1,450,000 in accumulated other comprehensive income to
recognize at fair value all derivatives that are designated as
cash flow hedging financial instruments. The Company&#146;s
hedging agreements expired in March 2001.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Accounting for Long-Lived
Assets:</FONT></I></B><FONT size="2"> 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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Stock Based
Compensation:</FONT></I></B><FONT size="2"> The Company has a
stock-based employee plan, which is described more fully in
Note&nbsp;E to the financial statements. The Company accounts
for stock based employee awards using the intrinsic value method
for its employee option plans in which compensation is
recognized only when the fair value of the underlying stock
exceeds the exercise price of the option at the date of grant.
The exercise price of all options equaled or exceeded market
price of the stock at the date of grant. Accordingly, no
compensation cost has been recognized for the options issued.
Had compensation cost been determined based on the fair value of
the options at the grant dates, the Company&#146;s net loss
would have been adjusted to the
</FONT>

<P align="center"><FONT size="2">F-11
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<FONT size="2">pro forma amounts for the years ended as
indicated below. Stock based awards to nonemployees are
accounted for under the fair value method of accounting.
</FONT>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="56%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss&nbsp;&#151; As reported
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,760,926</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,642,430</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(21,073,592</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss&nbsp;&#151; Pro forma
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,908,384</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(8,052,112</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(21,360,468</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Pro forma&nbsp;&#151; Basic and diluted loss per
    common share
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.47</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.46</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.22</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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
2003, 2002 and 2001, respectively: no expected dividends,
expected volatility of 31%, 33% and 28%, risk-free interest rate
of 3.25%, 3.22% and 3.64% and expected lives of five years for
incentive options issued in 2003, 2002 and 2001, respectively.
The volatility assumptions were developed using a peer group of
similar energy companies. The weighted average fair value of the
options issued in 2003, 2002 and 2001 was $1.57, $0.06 and
$0.73, respectively.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Black-Scholes options valuation model was
developed for use in estimating the fair value of traded options
that have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price
volatility. The existing models do not necessarily provide a
reliable single measure of the fair value of its employee
options because the Company&#146;s employee options have
characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in
management&#146;s opinion.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Property and
Equipment:</FONT></I></B><FONT size="2"> 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 10&nbsp;years. Major classes of property and
equipment consisted of the following at December&nbsp;31:
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="71%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Equipment
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,004,891</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,047,989</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Automobiles and trucks
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">30,433</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">33,086</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Furniture and fixtures
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">145,260</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">148,730</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Land and buildings
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">119,736</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">137,625</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Office equipment
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">99,090</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">94,868</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,399,410</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,462,298</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Less accumulated depreciation, depletion,
    amortization and impairment
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">807,747</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">710,819</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">591,663</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">751,479</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Earnings (Loss) Per Common
Share:</FONT></I></B><FONT size="2"> Basic earnings
(loss)&nbsp;per common share is computed by dividing the net
earnings (loss)&nbsp;applicable to common stockholders by the
weighted average number of common shares outstanding for the
period. Diluted earnings (loss)&nbsp;per share is based on the
assumption that stock options and warrants are converted into
common shares using the treasury stock method and convertible
bonds and debentures are converted using the if-converted
method. Conversion or exercise is not assumed if the results are
antidilutive.
</FONT>

<P align="center"><FONT size="2">F-12
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Potential common shares relating to options,
preferred stock and convertible bonds and debentures excluded
from the computations of diluted earnings (loss)&nbsp;per share
because they are antidilutive are as follows:
</FONT>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="62%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Year Ended December 31</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Employee stock options
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,241,012</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,514,459</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,770,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Convertible bonds and debentures
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,387,820</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,768,903</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,216,022</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Preferred stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,507,729</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,784,197</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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 .5 (Note&nbsp;E).
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Convertible Bonds and Debentures may be
converted from the date of issuance until maturity at 100% of
principal amount into common stock of the Company at prices
ranging from approximately $5.00 to $50.00 (Note&nbsp;D).
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Goodwill:</FONT></I></B><FONT size="2">
During 2001, goodwill was amortized using the straight-line
method over a 15-year life. The Company adopted SFAS
No.&nbsp;142, <I>Goodwill and Other Intangible Assets</I>,
effective January&nbsp;1, 2002 and as such, has not subsequently
recorded any amortization of goodwill. Under the new rules, the
Company only adjusts the carrying amount of goodwill or
indefinite life intangible assets upon an impairment.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company retained CBIZ Valuation Group, Inc.
to assist management in their development of the fair value
analysis in conducting the testing for impairment of its
goodwill, all of which arose in its acquisition of Warren
E&#38;P, which provides turnkey operations and well services.
The results of the analysis indicated that no impairment of
goodwill had occurred. The Company has set the beginning of the
second quarter (April) as the annual period for goodwill
impairment testing. The results will be reported no later than
June&nbsp;30 of each year.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following reconciles reported net loss and
related per share amounts to amounts that would have been
presented exclusive of amortization expense recognized for
goodwill that is no longer being amortized:
</FONT>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="50%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Year Ended December&nbsp;31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Report net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,760,926</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,642,430</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(21,073,592</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Goodwill amortization
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">269,572</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Adjusted net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,760,926</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,642,430</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(20,804,020</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss per share&nbsp;&#151; basic and diluted
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Reported net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.34</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.44</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.20</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Goodwill amortization
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.01</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Adjusted net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.34</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.44</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.19</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<B><I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Recent
Accounting Pronouncements</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In January 2003, the FASB issued FASB
Interpretation&nbsp;46 (FIN&nbsp;46), <I>Consolidation of
Variable Interest Entities</I>. FIN 46 clarifies the application
of Accounting Research Bulletin&nbsp;51, <I>Consolidated
Financial Statements</I>, for certain entities that do not have
sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties or in which equity investors do not have the
characteristics of a controlling financial interest
(&#147;variable interest entities&#148;). Variable interest
entities within the scope of FIN 46 are required to be
consolidated by their primary beneficiary. The primary
</FONT>

<P align="center"><FONT size="2">F-13
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<FONT size="2">beneficiary of a variable interest entity is
determined to be the party that absorbs a majority of the
entity&#146;s expected losses, receives a majority of its
expected returns, or both. FIN&nbsp;46 applies immediately to
variable interest entities created after January&nbsp;31, 2003,
and to variable interest entities in which an enterprise obtains
an interest after that date. The Company has determined that the
partnerships created after 1998 do not qualify as variable
interest entities.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As a result of the recapitalizations (see
Note&nbsp;J) the Company has consolidated certain drilling
partnerships in which it has majority control and contained
certain repurchase agreements (see Note&nbsp;G).
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In June 2001, the Financial Accounting Standard
Board issued SFAS&nbsp;No.&nbsp;143, <I>Accounting for Asset
Retirement Obligations</I>, which requires entities to record
the fair value of a liability for an asset retirement obligation
in the period in which it is incurred and a corresponding
increase in the carrying amount of the related long-lived asset.
This statement is effective for fiscal years beginning after
June&nbsp;15, 2002. The Company adopted SFAS&nbsp;No.&nbsp;143
on January&nbsp;1, 2003 and recorded a net asset of $557,000, a
related liability of $645,000 (using a 10% discount rate) and a
cumulative effect on change in accounting principle on prior
years of $88,000. As of December&nbsp;31, 2002, the Company had
an allowance for asset retirement obligations of $434,000,
relating to certain nonproducing wells. The new standard had no
material impact on income before the cumulative effect of
adoption in the first quarter of 2003, nor would it have had a
material impact on the quarterly results for 2002 assuming an
adoption of this accounting standard on a proforma basis. During
2003, the asset retirement liability was increased by
approximately $62,000, as a result of accretion and recorded as
interest expense. During 2003, the Company also sold certain
non-strategic oil and gas properties deemed not commercially
productive which resulted in a decrease to the asset retirement
liability of approximately $245,000. The Company has treasury
bills held in escrow with a fair market value of $2,721,000 that
are legally restricted for potential plugging and abandonment
liability in the Wilmington field.
</FONT>

<P align="left">
<B><FONT size="2">Note B&nbsp;&#151; Investments</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The amortized cost, unrealized gains and
estimated fair values of the Company&#146;s available-for-sale
securities held are summarized as follows:
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="64%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">December 31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">U.S. Treasury Bonds, stripped of interest,
    maturing 2007 through 2023, aggregate par value of $23,414,000
    and $17,780,000, respectively
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Amortized cost
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">13,920,985</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,255,373</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Gross unrealized gains
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,290,150</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,614,300</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Estimated fair value
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15,211,135</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,869,673</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During 2003, 2002 and 2001, the Company
recognized approximately $(87,000), $461,000 and $(3,100),
respectively, of unrealized gains (losses)&nbsp;on its trading
securities and $109,000, $28,000 and $21,000, respectively, of
realized gains from its investments in trading and
available-for-sale securities. During 2003, 2002 and 2001, the
Company recognized realized gains of approximately $109,000,
$28,000 and $21,000, respectively, resulting 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&#146;s obligation related to
collateralizing its commitment under certain repurchase
agreements (Note&nbsp;G).
</FONT>

<P align="center"><FONT size="2">F-14
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The amortized cost and estimated fair values of
available-for-sale securities, by contractual maturity, at
December&nbsp;31, 2003 are shown below.
</FONT>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="63%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amortized</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Estimated Fair</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Cost</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Value</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Due after one year through five years
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,092,367</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,098,169</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Due after five years through ten years
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,079,662</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,698,081</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Due after ten years
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,748,956</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,414,885</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">13,920,985</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15,211,135</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<B><FONT size="2">Note C&nbsp;&#151; Sale of Assets</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Pinnacle Assets</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During 2001, the Company initiated a plan to
dispose of substantially all assets of Pinnacle which was
completed on February&nbsp;14, 2002, for a purchase price of
$4.2&nbsp;million to Basic Energy Services, Inc. (&#147;Basic
Energy&#148;). Pinnacle&#146;s operations comprised a portion of
the Company&#146;s well service business. Under the purchase
agreement dated December&nbsp;31, 2001, Basic Energy paid the
Company $3.7&nbsp;million in cash at the closing and $500,000 in
contract drilling services credits issued by Basic Energy, which
may be utilized by the Company over a three-year period with a
maximum of $25,000 in any month. Additionally, the Company
entered into a non-compete agreement with Basic Energy.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In connection with the plan of disposal, the
Company determined that the carrying value of Pinnacle&#146;s
assets exceeded their fair values. Accordingly, an impairment
expense of approximately $825,000, which is included as part of
depreciation, depletion and amortization, and represents the
excess of the carrying value of $4,568,198 over the fair value
of $3,742,941, has been charged to operations in 2001. The fair
value is based on the net selling price of the completed
transaction. The components of the carrying value and fair value
are as follows:
</FONT>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="66%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Carrying Value</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Fair Value</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Goodwill
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">223,042</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Property and equipment
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,345,156</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,742,941</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,568,198</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,742,941</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<B><I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Kirby Decker
Acreage</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During June 2002, the Company initiated a plan to
dispose of its unproved Kirby Decker acreage, which was
completed in August 2002. The Company sold all of its
24,133&nbsp;gross (22,075&nbsp;net) acres, which was located in
Bighorn County, Montana for proceeds of approximately $895,000.
In connection with the disposal, the Company determined that the
carrying value of this property exceeded its fair value.
Accordingly, an impairment expense of approximately $1,100,000,
was included as part of depreciation, depletion, amortization
and impairment expense for the year ended December&nbsp;31,
2002. The fair value was based on the estimated selling price of
the property.
</FONT>

<P align="left">
<B><I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Atlantic Rim
Project</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company signed a property exchange and
development agreement with Anadarko E&#38;P Company LP
(&#147;Anadarko&#148;), a wholly owned subsidiary of Anadarko
Petroleum Corporation, on December&nbsp;13, 2002. As a result of
these transactions, the Company effectively sold a partial
interest in unproved properties and recognized a gain of
approximately $4,300,000 after recovery of its unproved property
costs.
</FONT>

<P align="center"><FONT size="2">F-15
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Pursuant to the exchange agreement, the Company
conveyed to Anadarko its interest in certain coalbed methane
properties of approximately 86,000 net acres within a defined
area of mutual interest (&#147;AMI&#148;) located in the
Washakie Basin, Carbon County, Wyoming. Anadarko conveyed to the
Company its interest in certain acreage in the AMI with each
party owning a 50% interest in approximately 141,000 net acres
in the AMI.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company received $12,000,000 in cash and a
deferred payment commitment of $6,000,000 for the three
(3)&nbsp;year period commencing August&nbsp;1, 2002 and a
reimbursement of prior drilling expenses of approximately
$2,200,000. Anadarko will pay for the Company&#146;s
proportionate share of the AMI costs, as defined, associated
with exploration and development of oil and gas properties for
up to $2,000,000 for each of the three years until Anadarko has
paid $2,000,000 for each such twelve-month period. Subject to
mutually agreed upon force majeure events, on each
August&nbsp;1, Anadarko will pay the Company the difference, if
any, between $2,000,000 and the amount of costs and expenses
actually paid by Anadarko during the preceding year. At
December&nbsp;31, 2003, the Company had $2,000,000 in deferred
credits remaining, which are expected to be utilized in 2004.
</FONT>

<P align="left">
<B><FONT size="2">Note D&nbsp;&#151; Long-Term Debt</FONT></B>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="69%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">At December&nbsp;31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Sinking Fund Debentures, due December&nbsp;31,
    2007, bearing interest at 12%, due in monthly payments. Annual
    Sinking Fund payments, based on 20% of total outstanding
    principal, commencing on December&nbsp;31, 2002. As of
    December&nbsp;31, 2003 and 2002, principal collateralized by
    $3,206,000 and $0, respectively, principal amount of zero coupon
    U.S.&nbsp;Treasury Bonds due November&nbsp;15, 2007
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,616,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,376,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Secured Convertible Debentures, due
    December&nbsp;31, 2009, bearing interest at 12%, due in monthly
    payments. As of December&nbsp;31, 2003 and 2002, principal
    collateralized by $790,000 and $790,000, respectively, principal
    amount of zero coupon U.S.&nbsp;Treasury Bonds due
    November&nbsp;15, 2009
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">790,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">790,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Secured Convertible Bonds, due December&nbsp;31,
    2010, bearing interest at 12%, due in monthly payments. As of
    December&nbsp;31, 2003 and 2002, principal collateralized by
    $1,705,000 and $1,715,000, respectively, principal amount of
    zero coupon U.S.&nbsp;Treasury Bonds due November&nbsp;15, 2010
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,705,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,715,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Sinking Fund Convertible Debentures, due
    December&nbsp;31, 2010, bearing interest at 13.02%, due in
    monthly payments. Annual Sinking Fund payments, based on 8.33%
    of total outstanding principal, commenced on December&nbsp;31,
    1999. As of December&nbsp;31, 2003 and 2002, principal
    collateralized by $6,107,000 and $3,774,000, respectively,
    principal amount of zero coupon U.S. Treasury Bonds due
    November&nbsp;15, 2010
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,655,200</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,780,200</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Sinking Fund Convertible Debentures, due
    December&nbsp;31, 2015, bearing interest at 13.02%, due in
    monthly payments. Annual Sinking Fund payments, based on 5.88%
    of total outstanding principal, commenced on December&nbsp;31,
    1999. As of December&nbsp;31, 2003 and 2002, principal
    collateralized by $3,469,000 and $2,248,000, respectively,
    principal amount of zero coupon U.S.&nbsp;Treasury Bonds due
    November&nbsp;15, 2015
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,792,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,137,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Secured Convertible Bonds, due December&nbsp;31,
    2016, bearing interest at 12%, due in monthly payments. As of
    December&nbsp;31, 2003 and 2002, principal collateralized by
    $1,365,000 and $1,460,000, respectively, principal amount of
    zero coupon U.S.&nbsp;Treasury Bonds due November&nbsp;15, 2016
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,365,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,460,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">F-16
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="60%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="4"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">At December&nbsp;31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="4"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="4"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
</TR>

<TR>
    <TD colspan="4"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Sinking Fund Convertible Debentures, due
    December&nbsp;31, 2017, bearing interest at 12%, due in monthly
    payments. Annual Sinking Fund payments, based on 5.56% of total
    outstanding principal, commenced on December&nbsp;31, 1999. As
    of December&nbsp;31, 2003 and 2002, principal collateralized by
    $1,223,000 and $802,000, respectively, principal amount of zero
    coupon U.S. Treasury Bonds due November&nbsp;15, 2017
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,500,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,590,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Secured Convertible Bonds, due December&nbsp;31,
    2020, bearing interest at 12%, due in monthly payments. As of
    December&nbsp;31, 2003 and 2002, principal collateralized by
    $1,485,000 and $1,635,000, respectively, principal amount of
    zero coupon U.S.&nbsp;Treasury Bonds due November&nbsp;15, 2020
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,485,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,635,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Secured Convertible Bonds, due December&nbsp;31,
    2022, bearing interest at 12%, due in monthly payments. As of
    December&nbsp;31, 2003 and 2002, principal collateralized by
    $1,186,000 and $1,186,000 respectively, principal amount of zero
    coupon U.S.&nbsp;Treasury Bonds due November&nbsp;15, 2022
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,186,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,186,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">48,094,700</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">54,669,700</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Less current maturities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,809,470</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,466,970</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Long-term portion
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">43,285,230</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">49,202,730</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other long-term liabilities consists of the
    following at December&nbsp;31:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other miscellaneous long-term debt, consisting of
    debt collateralized by treasury stock and asset retirement
    obligations
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,821,464</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,532,109</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Less current maturities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">208,383</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">178,980</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Long-term portion
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,613,081</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,353,129</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During 2002, the Company entered into an
agreement to purchase 702,500 shares of common stock from a
stockholder through the issuance of a non-interest bearing note.
The Company discounted the non-interest bearing note at 10% and
the outstanding balance at December&nbsp;31, 2002 and 2003 was
approximately $984,000 and $925,000, respectively, net of
discount of approximately $549,000 and $462,000, respectively,
which is included in other long-term liabilities. The note
requires monthly payments of $13,333 until August of 2012 and is
collateralized by treasury stock. In the event of default as
defined by the agreement, the only remedy available to the
stockholder is the issuance of the common stock.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During 2003 and 2002, the Company exchanged
preferred stock for 2007 debentures with an outstanding
principal of $3,858,000 and $979,000, respectively. Also, during
2003, the Company exchanged preferred stock for 2017 debentures
with an outstanding principal of $864,000. The estimated fair
value of the preferred stock, which was based on sales to
third-party accredited investors, equaled the carrying value of
the debenture. As such, no gain or loss was recognized for the
exchange.
</FONT>

<P align="center"><FONT size="2">F-17
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The convertible bonds and 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 of the bonds and
debentures and range from approximately $5.00 to $50.00.
Conversion of debt would increase the number of shares
outstanding at December&nbsp;31 as follows:
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="37%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Outstanding</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Per Share</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Common</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Principal</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Conversion</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Shares</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Maturity Date</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amount</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Price</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">If Converted</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Sinking Fund 12% Bond
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">December 31, 2007</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,616,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Secured Convertible 12% Bond
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">December 31, 2009</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">790,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">98,750</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Secured Convertible 12% Bond
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">December 31, 2010</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,705,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">213,125</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Sinking Fund 13.02% Bond
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">December 31, 2010</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,655,200</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,931,040</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Sinking Fund 13.02% Bond
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">December 31, 2015</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,792,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,474,063</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Secured Convertible 12% Bond
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">December 31, 2016</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,365,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">170,625</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Sinking Fund 12% Bond
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">December 31, 2017</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,500,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">366,667</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Secured Convertible 12% Bond
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">December 31, 2020</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,485,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">20.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">74,250</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Secured Convertible 12% Bond
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">December 31, 2022</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,186,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">20.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">59,300</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">48,094,700</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,387,820</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="37%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="17%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Outstanding</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Per Share</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Common</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Principal</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Conversion</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Shares</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Maturity Date</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amount</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Price</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">If Converted</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Sinking Fund 12% Bond
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">December 31, 2007
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,376,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Secured Convertible 12% Bond
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">December 31, 2009
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">790,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">98,750</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Secured Convertible 12% Bond
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">December 31, 2010
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,715,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">214,375</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Sinking Fund 13.02% Bond
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">December 31, 2010
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,780,200</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,956,040</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Sinking Fund 13.02% Bond
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">December 31, 2015
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,137,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,517,188</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Secured Convertible 12% Bond
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">December 31, 2016
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,460,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">182,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Sinking Fund 12% Bond
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">December 31, 2017
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,590,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">659,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Secured Convertible 12% Bond
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">December 31, 2020
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,635,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">20.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">81,750</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Secured Convertible 12% Bond
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">December 31, 2022
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,186,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">20.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">59,300</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">54,669,700</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,768,903</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">F-18
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="37%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="17%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Outstanding</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Per Share</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Common</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Principal</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Conversion</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Shares</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Maturity Date</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amount</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Price</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">If Converted</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Sinking Fund 12% Bond
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">December 31, 2007
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15,390,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Secured Convertible 12% Bond
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">August 31, 2002
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">470,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.50</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">104,444</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Sinking Fund 12% Bond
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">August 31, 2002
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">55,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.50</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,222</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Secured Convertible 12% Bond
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">December 31, 2009
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">840,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">120,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Secured Convertible 12% Bond
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">December 31, 2010
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,740,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">248,571</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Sinking Fund 13.02% Bond
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">December 31, 2010
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15,095,200</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,019,040</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Sinking Fund 13.02% Bond
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">December 31, 2015
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,737,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,592,188</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Secured Convertible 12% Bond
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">December 31, 2016
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,580,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">225,714</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Sinking Fund 12% Bond
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">December 31, 2017
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,215,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">721,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Secured Convertible 12% Bond
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">December 31, 2020
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,780,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">17.50</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">101,714</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Secured Convertible 12% Bond
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">December 31, 2022
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,236,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">17.50</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">70,629</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">58,138,700</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,216,022</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Each year, holders of the secured convertible
debentures and sinking fund convertible debentures may tender to
the Company up to 10% of the aggregate debentures issued.
Assuming annual tender of the maximum amount possible, the
estimated principal that can be tendered by the secured
convertible and sinking fund debenture holders, including
contractual maturities, is as follows:
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="80%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Fiscal Year</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Ending</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December&nbsp;31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2004
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,809,470</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2005
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,328,523</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2006
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,895,671</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2007
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,815,160</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2008
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,524,588</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Thereafter
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">22,721,288</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">48,094,700</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Annual sinking fund requirements are as follows:
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="80%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Fiscal Year</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Ending</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December&nbsp;31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2004
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,928,915</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2005
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,132,303</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2006
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,221,234</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2007
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,368,266</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2008
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,845,447</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Thereafter
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,065,409</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">23,561,574</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">F-19
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<B><FONT size="2">Note&nbsp;E&nbsp;&#151; Stockholders&#146;
Equity</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During 2003 and 2002, the Company issued
1,320,164 and 359,687 shares, respectively, of convertible
preferred stock (&#147;preferred stock&#148;) through a private
placement with accredited investors at a price of $12 per share
for gross proceeds of $15,841,968 and $4,316,244, respectively.
Also, during 2003 and 2002, the Company issued 3,005,186 and
1,342,960 shares, respectively, of preferred stock to its
affiliated limited partnerships under a partnership
recapitalization offering at a price of $12 per share (see
Note&nbsp;J). The Company also exchanged 393,522 and 81,550
shares of preferred stock for 2007 debentures in 2003 and 2002,
respectively (see Note&nbsp;D). The preferred stock has an 8%
cumulative dividend, payable quarterly. Preferred dividends of
approximately $1.5&nbsp;million and $16,000 were accrued at
December&nbsp;31, 2003 and 2002 and paid in the following month.
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 at the
election of the holder, commencing one year after the date of
issuance. Each outstanding redeemable convertible preferred
share is convertible into common stock of the Company based on
the table below. The conversion rate is subject to adjustment as
defined by the agreement.
</FONT>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="74%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="11%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="11%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Preferred to</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Period</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Common</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Until June&nbsp;30, 2005
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">1 to 1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">July&nbsp;1, 2005 through June&nbsp;30, 2006
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1 to .75</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">July&nbsp;1, 2006 through redemption
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1 to .50</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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
(&#147;Redemption Price&#148;). Upon the receipt of a redemption
election, the Company, at its option, shall either: (1)&nbsp;pay
the holder cash in the amount equal to the Redemption Price or
(2)&nbsp;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
capital. The accretion of preferred stock results in a reduction
of earnings per share applicable to common stockholders.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During 2003, the Board of Directors approved and
the Company issued 1,374,553 stock options to officers and
employees of the Company exercisable at prices ranging from $4
to $10 per share. The options are exercisable at a price not
less than the fair market of the stock at the date of grant,
have an exercisable period of five years and generally are fully
vested at the date of grant. During 2003, certain employees
forfeited 648,000 stock options as a result of terminations.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On September&nbsp;6, 2001, the Board of Directors
approved the issuance of 2,520,613 stock options to officers and
employees under certain plans subject to stockholder approval.
These plans were approved at the annual stockholder meeting in
2002. As a result, the Company issued and granted a total of
2,505,242 options exercisable at $10 per share. The options are
exercisable at a price not less than the fair market of the
stock at the date of grant, have an exercisable period of five
years and generally are fully vested at the date of grant. On
October&nbsp;1, 2002, in order to improve the Company&#146;s
capital structure, senior management and other employees
voluntarily surrendered to the company and terminated 2,760,783
stock options issued in 2001 that were exercisable at prices
ranging from $4 to $10 per share through September&nbsp;4, 2006.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In September 2000, the Company adopted an
employee stock option plan for certain employees with a maximum
of 1,975,000 shares which may be issued and granted a total of
1,642,000 options exercisable at $4.00 per share. During 2001,
the Company issued and granted a total of 153,000 options under
the plan. During 2002, options under this plan were not granted
by the Company. The options are exercisable at a price not less
than the fair market of the stock at the date of grant, have an
exercisable period of five years and generally vest 25% after
one year, 50% after two years and the final 25% three years
after the date of
</FONT>

<P align="center"><FONT size="2">F-20
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<FONT size="2">grant. A total of 1,050,000 options granted in
2000 to certain of the employees vest 50% upon grant and 25%
each on the second and third anniversaries of the date of grant.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">A summary of the status of the Company&#146;s
options issued to employees as of December&nbsp;31, 2003, 2002
and 2001 and changes during the years ended on those dates is
presented below:
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="65%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="9%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Incentive</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Weighted Average</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Options</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exercise Price</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options outstanding&nbsp;&#151; January&nbsp;1,
    2001
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,642,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Issued
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">153,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Exercised
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Expired
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Forfeited
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(25,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options outstanding&nbsp;&#151; December&nbsp;31,
    2001
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,770,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Issued
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,505,242</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Exercised
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Expired
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Forfeited
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,760,783</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8.74</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options outstanding&nbsp;&#151; December&nbsp;31,
    2002
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,514,459</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5.29</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Issued
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,374,553</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.05</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Exercised
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Expired
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Forfeited
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(648,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options outstanding&nbsp;&#151; December&nbsp;31,
    2003
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,241,012</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5.10</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table summarizes information about
the Company&#146;s stock options outstanding at
December&nbsp;31, 2003.
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="36%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="10%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="10%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Options Outstanding</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Weighted Average</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Options Exercisable</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Exercise Price</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">at Year End</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Remaining Life (in years)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">at Year End</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">$4.00
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,817,813</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.68</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,762,563</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">$7.00
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.94</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">$10.00
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">398,199</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2.95</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">398,199</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,241,012</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.56</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,185,762</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">F-21
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<B><FONT size="2">Note&nbsp;F&nbsp;&#151; Income Taxes</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company and its subsidiaries file a
consolidated income tax return.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company&#146;s effective income tax rate
differed from the federal statutory rate as follows:
</FONT>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="58%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Income taxes at federal statutory rate
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(295,767</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,753,056</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,113,443</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Change in valuation allowance
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">364,836</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,812,915</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,560,422</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Nondeductible expenses
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">46,517</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">55,126</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">264,101</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">State income taxes at statutory rate
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(52,194</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(485,833</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,255,314</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Adjustment of estimated income tax provision of
    prior year
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">65,608</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">899,550</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,312,841</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">298</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,775</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">129,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(471,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">151,700</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The components of the net deferred tax asset are
as follows as of December&nbsp;31:
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="60%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
</TR>

<TR>
    <TD colspan="4"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred tax assets related to:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net operating loss carryforward
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25,977,793</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">22,868,443</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and gas properties and tangible equipment
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,240,782</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">314,400</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">134,422</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">26,292,193</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25,243,647</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Less valuation allowance
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">24,320,523</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">23,955,687</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total deferred tax assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,971,670</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,287,960</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred tax liabilities related to:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Capitalized intangible assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">887,172</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">636,162</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and gas properties and tangible equipment
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">570,706</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net unrealized gain on investments
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">513,792</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">651,798</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total deferred tax liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,971,670</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,287,960</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net deferred tax asset
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The valuation allowance increased $364,836,
$1,812,915 and $11,560,422 for the years ended December&nbsp;31,
2003, 2002 and 2001, respectively.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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&#146;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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">At December&nbsp;31, 2003, the Company had net
operating loss carryforwards for federal income tax purposes of
approximately $65,000,000, which begin to expire in 2012.
</FONT>

<P align="center"><FONT size="2">F-22
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<B><FONT size="2">Note&nbsp;G&nbsp;&#151; Commitments And
Contingencies</FONT></B>

<P align="left">
<B><I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;General
Commitments</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company has entered into various commitments
and operating agreements related to development and production
of certain oil and gas properties. It is management&#146;s
belief that such commitments, as stated below, will be met
without significant adverse impact to the Company&#146;s
financial position or results of operations.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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.
The maximum termination compensation for all executives is
$2,889,000, at December&nbsp;31, 2003.
</FONT>

<P align="left">
<B><I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Oil and Gas
Partnerships</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company is the managing general partner in
various oil and gas partnerships. Accordingly, the Company is
unconditionally liable for liabilities that may be incurred by
such partnerships. Additionally, the Company has indemnified
various working interest (general) partners of affiliated
partnerships against any liability that may be incurred in
connection with the partnerships, in excess of such
partner&#146;s interest, in the undistributed net assets of the
partnership and insurance proceeds thereof which continues
through the date of termination of the partnership from 2025 to
2030, unless the partnership is dissolved at an earlier date.
The partnerships have no liabilities except accounts payable to
the Company for lease operating and administrative expenses.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company has a contract with Western Gas
related to its Piper Federal lease. The contract is for the sale
of a minimum of 2,500&nbsp;Mcf of gas per day at the wellhead
and expires on February&nbsp;1, 2005. If the Company fails to
deliver 2,500 Mcf of gas per day, Western Gas may charge the
Company a deficiency fee. The deficiency fee is defined as the
amount of deficient Mcf times 90% (amount below 2,500 Mcf times
90%) times the deficiency rate of $0.47 per Mcf representing
gathering, compression and transportation charges. The maximum
deficiency charge for 2004 and 2005 totals approximately
$375,000. At December&nbsp;31, 2003, no deficiency fees were due
under the contract.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company has a contract with Western Gas
related to its Haight Less lease through December&nbsp;31, 2004.
The contract is for the sale of a minimum of 550&nbsp;Mcf of gas
per day at the wellhead. Since approximately 1998, the contract
has been extended on a year-by-year basis. If the Company fails
to deliver 550&nbsp;Mcf of gas per day, Western Gas reduces the
sales price by a nominal amount. During 2003, 2002 and 2001, the
Company was in compliance with the purchase contract.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company has a transportation contract with
Williston Basin Interstate (&#147;WBI&#148;) through
October&nbsp;8, 2006 related to its LX Bar lease. If the Company
fails to deliver 6,000 Mcf of gas per day, WBI may charge the
Company a transportation fee. The transportation fee is defined
as the amount of deficient Mcf times the transportation rate of
approximately $0.30 per Mcf. During 2003, 2002 and 2001, the
Company paid a transportation fees of approximately $169,000,
$276,000 and $172,000, respectively. The maximum deficiency
charge through the period of contract expiration is
approximately $1,800,000.
</FONT>

<P align="left">
<B><I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Repurchase
Agreements</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Under certain repurchase agreements, the investor
partners in certain affiliated drilling programs have a right to
have their interests repurchased by the Company. Such purchase
price is calculated at a formula price and is payable in seven
to 25&nbsp;years from the date of admission to the program. For
certain affiliated programs formed prior to 1998, the maximum
purchase price for all such interests was fully secured at
maturity by zero coupon U.S. Treasury Bonds held by an
independent trust company. The face amounts of such securities
</FONT>

<P align="center"><FONT size="2">F-23
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<FONT size="2">are released to the Company when equal amounts of
cash distributions are made to investors. Under certain other
repurchase agreements formed from 1998 to 2001, the investors
have a right to have their interests repurchased by the Company
under the same formula price seven years from the date of the
original investment. In determining the amount of the contingent
repurchase obligation for the 1998 to 2001 programs, the present
value of the obligation is computed based on the lesser of the
formula purchase price or the estimated discounted present value
(&#147;PV-10&#148;) of future net revenues of proved developed
and undeveloped reserves of each program, net of future capital
costs and the Company&#146;s working interest. During 2002, the
Company contributed leases to certain drilling programs and
recognized an expense of approximately $254,000. As a result of
the recapitalizations (see Note&nbsp;J), any payment made under
pre-1998 guarantees would be recorded as a reduction to minority
interest as shown on the Company&#146;s balance sheet. At
December&nbsp;31, 2003, the maximum cash outlay relating to the
pre-1998 contingent repurchase obligation was $8,082,511, which
is net of U.S. Treasury Bonds with a face value of $1,374,000.
Also as of December&nbsp;31, 2003, based on the
December&nbsp;31, 2003 reserve reports of the respective
drilling programs, the aggregate PV-10 value of the assets in
the 1998 to 2001 programs was $15.8&nbsp;million. The formula
purchase price as of December&nbsp;31, 2003 was
$96.5&nbsp;million. Because the PV-10 value is less than the
formula purchase price, the Company&#146;s maximum repurchase
obligation as of December&nbsp;31, 2003 was equal to the PV-10
of $15.8&nbsp;million. In the event of repurchase, Warren
receives the investors interest in the program, which includes
their pro rata share of the program&#146;s reserves and related
future cash flows.
</FONT>

<P align="left">
<B><I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Trust
Indenture Agreements</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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
outstanding when due at maturity. At December&nbsp;31, 2003 and
2002, the face amounts of U.S. Treasury Bonds securing the
Company&#146;s obligation under the Trust Indenture Agreements
were $20,536,000 and $13,610,000, respectively, and the market
values of these U.S. Treasury Bonds were approximately
$14,023,000 and $8,108,000, respectively.
</FONT>

<P align="left">
<B><I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Leases</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company leases office space in New York City,
which expires in March 2008. The Company&#146;s oil and gas
administrative office in Casper, Wyoming occupies 3,750 square
feet under a lease currently being negotiated. In June 2003, the
Company entered into an office lease in Roswell, New Mexico,
which expires in May 2005.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Future minimum annual rental payments, which are
subject to escalation and include utility charges as of
December&nbsp;31, 2003, are as follows:
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="80%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Year ending</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December&nbsp;31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2004
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">166,486</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2005
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">160,186</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2006
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">155,686</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2007
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">155,686</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2008
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">38,921</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">676,965</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Rent expense under these leases was approximately
$162,000, $254,000 and $281,000 for the years ended
December&nbsp;31, 2003, 2002 and 2001, respectively.
</FONT>

<P align="center"><FONT size="2">F-24
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<B><I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Litigation</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In 1998, Warren E&#38;P, Inc. was sued in the
81st Judicial District Court of Frio County, Texas by Stricker
Drilling Company, Inc. and Manning Safety Systems to recover the
value of lost equipment based on a well blow out. Warren was
later joined in the suit as a defendant. As a result of the
lawsuit, Gotham Insurance Company, Warren E&#38;P&#146;s well
blow-out insurer, intervened. The suit was settled in 1999 with
all parties except Gotham. Gotham paid over $1.7&nbsp;million
under the insurance policy and now seeks a refund of
approximately $1.5&nbsp;million of monies paid, denying
coverage, and alleging fraud and misrepresentation and a failure
of Warren E&#38;P to act with due diligence and pursuant to
safety regulations. Warren E&#38;P countersued for the remaining
proceeds under the policy coverage. In the summer and fall of
2000, summary judgments were entered for Warren E&#38;P on
essentially all claims except its bad faith claims against
Gotham. Gotham&#146;s claims against Warren E&#38;P and Warren
were rejected. Final judgment was rendered by the District Court
on May&nbsp;14, 2001, in Warren E&#38;P&#146;s favor for the
remaining policy proceeds, interest and attorney fees. Gotham
appealed the final judgment to the San Antonio Court of Appeals
seeking a refund of approximately $1.5&nbsp;million. On
July&nbsp;23, 2003, a three judge panel of the San Antonio Court
of Appeals rendered its decision in favor of Gotham on all
points, except for the amount of restitution owed by Warren
E&#38;P and related parties, reversing the earlier summary
judgment entered by the trial court for Warren E&#38;P. Although
the three judge panel of the San Antonio Court of Appeals
acknowledged that Gotham asked for the Court to render its
judgment in Gotham&#146;s favor on its restitution claims,
Gotham gave no particulars, and therefore the Court of Appeals
remanded Gotham&#146;s restitution claims to the trial court for
further proceedings consistent with its opinion. Although the
ultimate resolution is uncertain, counsel has advised Warren
E&#38;P that it believes the three judge panel of the San
Antonio Court of Appeals committed numerous errors of fact and
law, primarily relying on their erroneous conclusion that Warren
E&#38;P as operator of the oil well incurred no loss.
Accordingly, in November 2003 Warren E&#38;P appealed the San
Antonio Court of Appeals panel decision to the Texas Supreme
Court. On February&nbsp;17, 2004, we were advised that the Texas
Supreme Court had accepted our appeal and requested the parties
to submit full briefs regarding our petition.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company is a party to various matters of
litigation arising in the normal course of business (see Note
I). Management believes that the ultimate outcome of the matters
will not have a material effect on the Company&#146;s financial
condition or results of operations.
</FONT>

<P align="left">
<B><FONT size="2">Note&nbsp;H&nbsp;&#151; Employee Benefit
Plans</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company has a retirement plan covering
substantially all qualified corporate employees under
section&nbsp;401(k) of the Internal Revenue Code. The Company
contributed for each participant a matching contribution equal
to 50% of the participant&#146;s contribution to a maximum of 6%
of each employee&#146;s annual compensation. The Company may
also make discretionary contributions. The Company&#146;s
expenses under the plan were approximately $66,000, $78,000 and
$92,000 for the years ended December&nbsp;31, 2003, 2002 and
2001, respectively.
</FONT>

<P align="left">
<B><FONT size="2">Note&nbsp;I&nbsp;&#151; Related Party
Transactions</FONT></B>

<P align="left">
<B><I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Affiliated
Partnerships</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company contributed mineral rights with an
agreed-upon fair value of $142,247 and $184,916 during 2003 and
2002, respectively, to affiliated partnerships in exchange for a
10% interest in these partnerships. The mineral rights remain at
cost in the Company&#146;s property accounts. Affiliated
partnerships paid $6,077,150, $5,163,250 and $14,443,250 to the
Company during 2003, 2002 and 2001, respectively, under fixed
price turnkey drilling contracts. At December&nbsp;31, 2003 and
2002, accounts receivable from affiliated partnerships were
approximately $389,000 and $921,000, respectively, relating
primarily to administrative costs paid by the Company on behalf
of the partnerships.
</FONT>

<P align="center"><FONT size="2">F-25
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During the third quarter of 2003, certain joint
venture general partnerships formed between accredited investors
and Warren Resources, Inc. commenced a vote to (a)&nbsp;amend
their joint venture agreement to allow for two classes of
partners: preferred partners and common partners and
(b)&nbsp;allow partners to select whether they wanted to be
preferred partners having certain preferred rights in the joint
venture by consenting to the additional capital contributed by
the Company in the form of its unregistered preferred shares.
For its additional capital contribution, Warren received
additional common partner interests in the joint venture. During
the fourth quarter of 2003, the joint ventures received the
necessary 50% of affirmative votes required to effect the
transaction. As a result, the Company issued approximately
1,048,000 preferred shares with an estimated value of
$12,576,000 to the joint ventures as consideration for the joint
ventures working interest in certain unproved acreage in
Wyoming. Additionally, approximately $4,604,000 of deferred
income was eliminated as a result of the transaction and was
recorded as a reduction in the property basis.
</FONT>

<P align="left">
<B><I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other Joint
Venture Agreements</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Warren E&#38;P, Inc. is party to separate joint
venture agreements with the affiliated partnerships. The
agreements form a joint venture between Warren E&#38;P and each
partnership for the purpose of participating in the drilling and
re-completing of oil wells. Under the terms of the agreements,
property acquisition and capital equipment costs are borne by
Warren E&#38;P. Generally, intangible drilling and development
costs are borne by the partnerships.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Under the terms of the joint venture agreement,
the affiliated partnerships have an initial 75% interest in the
aggregate net profits of the properties. Once the partnerships
have received distributions equal to the payments under the
turnkey contract, Warren E&#38;P will receive an additional
reversionary interest of 15% and the partnerships&#146; interest
will be reduced to 60%.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The partnerships are parties to a standard form
of operating agreement with Warren E&#38;P (the
&#147;Operator&#148;) pursuant to which the Operator will be
responsible for the operation of the wells. Also, the Operator
is engaged to supervise all drilling and recompletion of wells,
on behalf of all working interests, and has full control of all
operations of the wells as covered under the operating
agreement. Each partnership pays the Operator its pro rata share
of monthly operating expenses.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In May 1999, the Company entered into an
agreement with Magness Petroleum Company (&#147;Magness&#148;)
to form a joint venture for the purpose of participating in the
horizontal drilling and re-completing of existing oil wells and
the drilling of new oil wells within the Wilmington Oil Field in
Los Angeles County, California.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On September&nbsp;28, 1999, Magness filed a
complaint against Warren, Warren E&#38;P, and certain Warren
subsidiaries in the Superior Court of Los Angeles County,
alleging that we had breached our joint venture agreement with
Magness and an alleged oral agreement regarding advance payment
of expenses for drilling and completion operations. The
Wilmington Field comprises approximately 81% of the estimated
present value of our proven reserves and has a carrying value of
approximately $54&nbsp;million. Magness sought dissolution of
the joint venture, an accounting and a declaratory judgment as
to the rights of the parties under the joint venture agreement.
The Company was successful in enforcing the arbitration
provision in the joint venture agreement and entered into an
agreement with Magness to submit the matter for arbitration by
the Judicial Arbitration Mediation Services, or
&#147;JAMS&#148;. The arbitrator ruled that the joint venture
agreement is a valid enforceable agreement, declined to dissolve
the joint venture, denied Magness&#146; claims for breach of
contract, and held that he and JAMS would retain jurisdiction to
enforce the Final Award. On August&nbsp;8, 2001, Magness filed a
demand with the American Arbitration Association, or
&#147;AAA,&#148; reasserting its claims for dissolution of the
joint venture and breach of contract. Subsequently, Warren
sought to enforce the original Final Award rendered in the JAMS
arbitration. A procedural determination of proper arbitration
forum was eventually determined by the California Court of
Appeals in December 2002 and a Motion for Clarification filed in
January 2003 before the California Superior Court, on
September&nbsp;24, 2003. The
</FONT>

<P align="center"><FONT size="2">F-26
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<FONT size="2">California Superior Court ordered that
Warren&#146;s motion to enforce the Final Award covering
unauthorized direct labor charges and tangible costs be heard by
JAMS and that Magness&#146;s theory of dissolution of the Joint
Venture and Warren&#146;s drilling rights if the Joint Venture
is not dissolved and Warren&#146;s claims for damages for
Magness preventing resumption of drilling activities be heard by
AAA. On January&nbsp;14, 2004, Warren filed an Amended Answer
and Counterclaim in the AAA arbitration denying Magness&#146;s
request to dissolve the joint venture and to drill outside of
the joint venture. Warren seeks damages against Magness in the
amount of $15&nbsp;million on a number of grounds including
breach of contract. Warren also requests that Magness be removed
as operator for the Wilmington Field because of a breach of its
duties and that an independent operator be appointed in its
place. Accordingly, pending final resolution, further
development of the Wilmington Field will be curtailed (see
Note&nbsp;P).
</FONT>

<P align="left">
<B><I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other
Income</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In December of 2002, the Company&#146;s Executive
Vice President died in an accident. The Company carried life
insurance in the amount of approximately $3,750,000 on this
officer. At December&nbsp;31, 2002, a receivable for these
insurance proceeds, which was collected in February of 2003, was
recorded and income of approximately $3,750,000 was recognized
in Interest and Other Income on the Statement of Operations.
</FONT>

<P align="left">
<B><FONT size="2">Note&nbsp;J&nbsp;&#151; Recapitalization
Offers</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During the fourth quarter of 2002,
13&nbsp;limited partnerships, of which the Company was the
managing general partner, commenced a vote solicitation of their
limited partners (the &#147;Partnership Recapitalization
Offers&#148;) to: (1)&nbsp;obtain the requisite two-thirds
affirmative vote of their respective partners to convert the
drilling program from a Delaware limited partnership into a
Delaware limited liability company (the &#147;LLC&#148;) wherein
all LLC members would have limited liability, including the
Company, and (ii)&nbsp;partners could convert their interests to
preferred interests (&#147;Preferred Members&#148;). Upon
conversion to an LLC, the Company agreed to contribute as
additional capital to the LLC its unregistered 8% convertible
preferred stock with a value equal to between 110% to 120% of
the potential repurchase price of consenting Preferred
Members&#146; interests calculated as of December&nbsp;31, 2002.
The Company would receive additional standard membership
interests in the LLC and be specially allocated, pro rata as a
standard member, additional beneficial interests in the oil and
gas properties owned by their respective programs (the
&#147;Recapitalization&#148;). Preferred Members no longer have
repurchase rights under the original buy/sell agreements.
Standard members continue to have repurchase rights. At
December&nbsp;31, 2002, six of the thirteen programs obtained
the requisite votes to convert to LLCs and because of the
majority control by the Company were consolidated in the
financial statements for the year ended December&nbsp;31, 2002.
As a result of the conversions, the Company issued 1,342,960
preferred shares to these six LLC&#146;s in 2002 with an
estimated fair value of $16,115,520. At March&nbsp;31, 2003, the
remaining seven programs obtained the requisite votes to convert
to LLCs and on average 72.9% of the program members elected to
become Preferred Members in their LLC. During the first quarter
the Company issued 1,641,628 preferred shares to the remaining
seven LLCs as a capital contribution, with an estimated fair
value of $19,699,536 and received its pro&nbsp;rata share of
additional standard membership interests in the LLCs. The fair
value of the preferred shares was based on actual cash sales to
independent parties in this time period. Due to the majority
control of these thirteen affiliated partnerships, the Company
has consolidated these entities for financial reporting purposes
at December&nbsp;31, 2003. The Company
</FONT>

<P align="center"><FONT size="2">F-27
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<FONT size="2">accounted for these acquisitions as purchase
transactions with the estimated fair value of assets acquired
and liabilities assumed in the acquisition as follows:
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="63%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Estimated fair value of assets acquired
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,512</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,350</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and gas properties
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">28,342,950</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25,252,358</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total fair value of assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">28,346,462</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25,256,708</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Liabilities assumed
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accounts payable
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">144,122</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">171,110</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Minority interest
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,502,804</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,970,078</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total liabilities assumed
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,646,926</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,141,188</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cost of acquisition
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">19,699,536</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16,115,520</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Subsequent to the recapitalization offers that
closed on March&nbsp;31, 2003, and December&nbsp;31, 2002,
certain minority interest limited partners elected to convert to
preferred members, which resulted in the Company issuing 315,222
preferred shares to these individuals with an estimated fair
value of $3,782,664.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following summarizes pro forma unaudited
results of operations for the years ended December&nbsp;31,
2003, 2002 and 2001, as if these acquisitions had been
consummated immediately prior to January&nbsp;1, 2001. These pro
forma results are not necessarily indicative of future results.
</FONT>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="53%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Pro Forma (Unaudited)</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Year Ended December&nbsp;31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Revenues
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">26,531,361</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">33,960,704</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">61,007,202</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(658,131</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(10,333,144</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(20,903,952</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Loss per share, basic and diluted
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.31</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.60</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.19</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The operations of the affiliated partnerships are
included in the accompanying consolidated operating statements,
subsequent to December&nbsp;31, 2002, for the 2002 acquisition
and subsequent to March&nbsp;31, 2003, for the 2003 acquisition.
</FONT>

<P align="left">
<B><FONT size="2">Note&nbsp;K&nbsp;&#151; Fair Value of
Financial Instruments</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following methods and assumptions were used
to estimate the fair value of each class of financial
instruments and does not purport to represent the aggregate net
fair value of the Company.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Cash and Cash
Equivalents.</FONT></I></B><FONT size="2"> The balance sheet
carrying amounts of cash and cash equivalents approximate fair
values of such assets.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">U.S. Treasury Bonds&nbsp;&#151; Trading
Securities and Available For Sale.
</FONT></I></B><FONT size="2">The fair values are based upon
quoted market prices for those or similar investments.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Restricted
Cash.</FONT></I></B><FONT size="2"> The balance sheet carrying
value amounts of restricted cash approximates fair value of such
assets.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Convertible
Debentures.</FONT></I></B><FONT size="2"> 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.
</FONT>

<P align="center"><FONT size="2">F-28
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Other Long-Term
Liabilities.</FONT></I></B><FONT size="2"> The carrying amount
approximates fair value due the current rates offered to the
Company for long-term liabilities of the same remaining
maturities.
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="36%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Carrying</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Carrying</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Fair Value</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amount</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Fair Value</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amount</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Financial assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash and cash equivalents
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">24,528,999</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">24,528,999</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">23,184,936</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">23,184,936</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">U.S. Treasury bonds and other
    investments&nbsp;&#151; trading securities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">201,152</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">201,152</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">78,383</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">78,383</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">U.S. Treasury bonds&nbsp;&#151; available for sale
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15,211,135</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15,211,135</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,869,673</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,869,673</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Restricted cash
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,637,775</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,637,775</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Financial liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Fixed rate debentures
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(53,169,798</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(48,094,700</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(61,691,195</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(54,669,700</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other long-term liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,821,464</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,821,464</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,532,109</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,532,109</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<B><FONT size="2">Note&nbsp;L&nbsp;&#151; Oil and Gas
Information</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Costs related to the oil and gas activities of
the Company were incurred as follows for the years ended
December&nbsp;31:
</FONT>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="55%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Property acquisition&nbsp;&#151; unproved
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,967,002</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">176,030</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,912,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Property acquisition&nbsp;&#151; proved
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">28,389,424</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25,419,962</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Exploration costs
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">525,098</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">471,948</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,763,417</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Development costs
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,425,296</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,888,221</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,269,004</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">49,306,820</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">29,956,161</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16,944,421</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Asset retirement costs of approximately $307,000
are included in proved property acquisition costs for 2003.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Of the above development costs incurred for the
years ended December&nbsp;31, 2003, 2002 and 2001, the amounts
of approximately $0, $343,000 and $390,000, respectively, were
incurred to develop proved undeveloped properties from the prior
year.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During the years ended December&nbsp;31, 2003,
2002 and 2001, exploration costs of approximately $92,000,
$472,000 and $282,000, respectively, were expensed.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company had the following aggregate
capitalized costs relating to the Company&#146;s oil and gas
activities at December&nbsp;31:
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="69%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Unproved oil and gas properties
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">50,738,040</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">31,296,142</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Proved oil and gas properties
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">103,423,818</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">73,558,896</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">154,161,858</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">104,855,038</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Less accumulated depreciation, depletion,
    amortization<BR>
    and impairment
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">59,212,313</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">56,170,676</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">94,949,545</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">48,684,362</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">F-29
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table sets forth the Company&#146;s
results of operations from oil and natural gas producing
activities for the years ended December&nbsp;31:
</FONT>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="56%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Revenues
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,717,814</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">592,528</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">948,270</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Production costs
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,719,780</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(294,520</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(285,980</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Exploration costs
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(91,815</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(471,948</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(281,776</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accretion of asset retirement obligation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(62,452</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Depreciation, depletion, amortization and
    impairment
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,102,354</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(9,606,606</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(12,899,648</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Loss from oil and gas producing activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,258,587</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(9,780,546</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(12,519,134</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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&#146;s tax loss carryforwards.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Depreciation, depletion, amortization and
impairment expense was $3,102,354, $9,606,606 and $12,899,648 or
$2.37, $120 and $258 per equivalent Mcf of production for the
years ended December&nbsp;31, 2003, 2002 and 2001, respectively.
These amounts include impairment expenses, primarily for
unproved properties of $1,899,705, $9,299,981 and $11,112,516
for the years ended December&nbsp;31, 2003, 2002 and 2001,
respectively, which was based on prices at December&nbsp;31 for
2003 and 2002 and March&nbsp;15, 2002 for 2001, for fair value
determination.
</FONT>

<P align="left">
<B><FONT size="2">Note M&nbsp;&#151; Oil and Gas Reserve Data
(Unaudited)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following estimates of proved reserve
quantities and related standardized measure of discounted net
cash flows are estimates only, and do not purport to reflect
realizable values or fair market values of the Company&#146;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&#146;s
reserves are located in the United States.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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%
per year to reflect the estimated timing of the future cash
flows.
</FONT>

<P align="center"><FONT size="2">F-30
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following summaries of changes in reserves
(in thousands of barrels (MBbls) and in millions of cubic feet
(MMcf)) and standardized measure of discounted future net cash
flows were prepared from estimates of proved reserves developed
by independent petroleum engineers.
</FONT>

<P align="center">
<B><FONT size="2">Summary of Changes in Proved
Reserves</FONT></B>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="40%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="23"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="23" align="center" nowrap><B><FONT size="1">Year ended December&nbsp;31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="23" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">MBbls</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">MMcf</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">MBbls</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">MMcf</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">MBbls</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">MMcf</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Proved reserves
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Beginning of year
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,324</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,502</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,478</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,495</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,770</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,516</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Purchase of reserves in place
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,688</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,218</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,538</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,770</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Discoveries and extensions
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,291</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,294</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">947</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Revisions of previous estimates
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">199</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,778</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">312</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,002</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,293</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(9,936</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Production
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(87</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(785</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(55</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(32</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">End of year
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15,124</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15,448</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,324</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(2)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,502</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(2)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,478</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,495</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Proved developed reserves
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Beginning of year
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">404</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,544</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,648</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">243</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,034</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">End of year
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">476</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,006</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">404</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,544</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,648</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Included in 2003 reserves, 2,469&nbsp;MBbls and
    1,028&nbsp;MMcf is attributable to consolidated subsidiaries in
    which there is an average 25% minority interest.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(2)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Included in 2002 reserves, 1,195&nbsp;MBbls and
    577&nbsp;MMcf is attributable to consolidated subsidiaries in
    which there is an average 34% minority interest.
    </FONT></TD>
</TR>

</TABLE>

<P align="center">
<B><FONT size="2">Standardized Measure of Discounted Future Net
Cash Flows</FONT></B>

<DIV align="center">
<B><FONT size="2">Relating to Proved Oil and Gas
Reserves</FONT></B>
</DIV>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="60%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">At December 31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">(Amounts in thousands)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Future cash inflows
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">499,693</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">362,982</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">122,032</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Future production costs and taxes
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(69,180</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(47,661</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(25,676</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Future development costs
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(60,272</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(43,003</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(31,556</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Future income tax expenses
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(87,042</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(110,939</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,749</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net future cash flows
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">283,199</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">161,379</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">60,051</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Discounted at 10% for estimated timing of cash
    flows
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(137,073</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(89,961</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(40,539</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Standardized measure of discounted future net
    cash flows
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">146,126</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">71,418</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(2)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">19,512</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Included in 2003 reserves, $23,017 is
    attributable to consolidated subsidiaries in which there is an
    average 25% minority interest.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(2)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Included in 2002 reserves, $10,462 is
    attributable to consolidated subsidiaries in which there is an
    average 34% minority interest.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">F-31
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="center">
<B><FONT size="2">Changes in Standardized Measure of Discounted
Future Net Cash Flows</FONT></B>

<DIV align="center">
<B><FONT size="2">Related to Proved Oil and Gas
Reserves</FONT></B>
</DIV>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="62%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Year Ended December 31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">(Amounts in thousands)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Sales, net of production costs and taxes
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,934</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(298</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(662</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Discoveries and extensions
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,339</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,550</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">272</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Purchases of reserves in place
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">30,875</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">30,944</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Changes in prices and production costs
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,624</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">46,531</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(42,613</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Revisions of quantity estimates
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,882</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,884</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(15,976</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net changes in development costs
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(13,341</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,048</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,823</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Interest factor&nbsp;&#151; accretion of discount
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,396</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,047</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,783</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net change in income taxes
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,677</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(41,566</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">27,762</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Changes in production rates (timing)&nbsp;and
    other
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">27,954</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,862</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(52,973</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net increase (decrease)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">74,708</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">51,906</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(69,584</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Balance at beginning of year
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">71,418</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">19,512</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">89,096</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Balance at end of year
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">146,126</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">71,418</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">19,512</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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&nbsp;31, 2003,
2002 and 2001 were $28.45, $27.15 and $13.87 per barrel and
$4.50, $3.36 and $1.76 per thousand cubic feet, respectively. No
deduction has been made for depreciation, depletion or any
indirect costs such as general corporate overhead or interest
expense.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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&#146;s portion of proved
undeveloped properties in the years ended December&nbsp;31,
2004, 2005 and 2006 are $10,587,489, $22,960,986 and
$17,815,400, respectively.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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.
</FONT>

<P align="center"><FONT size="2">F-32
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<B><FONT size="2">Note&nbsp;N&nbsp;&#151; Quarterly Information
(Unaudited)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Summarized quarterly financial data for the years
ended December&nbsp;31, 2003 and 2002 are as follows:
</FONT>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="32%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="15"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="15" align="center" nowrap><B><FONT size="1">Quarter</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="15" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">First</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Second</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Third</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Fourth</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Year</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Revenues
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,437,681</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,441,003</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,173,532</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,610,647</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25,662,863</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Gross profit
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">634,381</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,117,818</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,383,088</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,412,457</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,547,744</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,034,484</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(949,688</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(371,269</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,405,485</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,760,926</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Loss per share
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Basic and diluted
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.12</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.06</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.02</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.14</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.34</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

</TABLE>
</CENTER>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="31%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="15"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="15" align="center" nowrap><B><FONT size="1">Quarter</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="15" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">First</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Second</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Third</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Fourth</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Year</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Revenues
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,092,392</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,553,080</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,794,244</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,170,574</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">29,610,290</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Gross profit (loss)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(89,514</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">864,947</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,867,136</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,292,670</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,349,899</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net income (loss)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">574,420</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,587,965</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,088,942</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,539,943</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,642,430</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Income (loss)&nbsp;per share
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Basic and diluted
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.03</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.15</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.06</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.27</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.44</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During the fourth quarter of 2003, the Company
had the following significant adjustment:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Recognized impairment on oil and gas properties
    of approximately $1,900,000 as a result of the expiration of
    certain unproved Washakie leases and net capitalized costs
    exceeding the expected future net cash flow based on engineering
    estimates on certain properties (see Note&nbsp;L).
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The effect of this adjustment was to increase the
net loss by approximately $1,900,000 or $(0.11) per basic and
diluted share for the quarter and year ended December&nbsp;31,
2003.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During the fourth quarter of 2002, the Company
had the following significant adjustments:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Recognized impairment on oil and gas properties
    of approximately $9,300,000 as a result of the net capitalized
    costs exceeding the expected future net cash flow based on
    engineering estimates (see Note&nbsp;M).
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Recorded life insurance proceeds of $3,750,000
    relating to the death of Executive Vice President, James&nbsp;C.
    Johnson,&nbsp;Jr. (see Note&nbsp;I).
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Recognized a gain of $4,300,000 as a result of
    the sale of oil and gas properties to Anadarko.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Reversed previously recognized turnkey revenue of
    $4,300,000 relating to wells that were previously in drilling
    programs but were part of the asset sale of Anadarko.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The effect of these adjustments was to increase
the net loss by approximately $5,550,000 or $(0.32) per basic
and diluted share for the quarter and year ended
December&nbsp;31, 2002.
</FONT>

<P align="center"><FONT size="2">F-33
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<B><FONT size="2">Note&nbsp;O&nbsp;&#151; Segment
Information</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company&#146;s operating activities can be
divided into four major segments: turnkey contracts, oil and gas
marketing, oil and gas exploration and production operations and
well services. The Company drills oil and natural gas wells for
Company-sponsored drilling partnerships and retains an interest
in each well. The Company also markets natural gas for
affiliated partnerships. The Company charges Company-sponsored
partnerships and other third parties competitive industry rates
for well operations and gas gathering. Segment information for
the years ended December&nbsp;31 is as follows:
</FONT>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="49%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Revenues from external customers
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Turnkey contracts
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,300,646</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,841,110</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">30,102,946</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and gas marketing
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,620,522</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,272,398</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,866,954</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and gas operations
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,212,311</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,879,302</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">948,270</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Well services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,167,564</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,895,453</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,574,335</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,361,820</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,722,027</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,966,745</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25,662,863</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">29,610,290</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">53,459,250</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Intersegment revenue
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Well services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">983,910</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25,660</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">228,857</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25,660</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,212,767</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Interest and other income
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Turnkey contracts
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,246</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,368</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">23,003</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and gas marketing
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and gas operations
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,586</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">31,439</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">81,001</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Well services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,540</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">17,183</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,329,227</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,246,155</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,084,752</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Intersegment elimination
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(25,660</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(228,857</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,340,059</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,257,842</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,977,082</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Consolidated revenues
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total segment revenue
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">24,301,043</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">23,888,263</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">52,476,415</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,361,820</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,747,687</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,195,602</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Intersegment elimination
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(25,660</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,212,767</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25,662,863</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">29,610,290</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">53,459,250</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">F-34
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="48%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Interest expense
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Turnkey contracts
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,200</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,577</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">116,933</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and gas marketing
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and gas operations
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Well services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">28,957</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">292,515</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,518,869</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,303,757</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,595,643</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Elimination of intersegment
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(25,660</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(228,857</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,528,069</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,312,631</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,776,234</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Depreciation, depletion, amortization and
    impairment
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Turnkey contracts
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">102,534</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">102,942</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">100,450</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and gas marketing
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and gas operations
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,102,354</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,606,606</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,899,648</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Well services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">47,643</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">961,253</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">44,972</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">172,971</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">500,768</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,249,860</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,930,162</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,462,119</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Operating income (loss)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Turnkey contracts
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,908,505</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,835,194</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,458,217</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and gas marketing
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">120,096</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">150,876</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(431,888</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and gas operations
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(695,052</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6,021,629</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(12,438,133</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Well services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">505,436</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">982,515</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,367,993</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,708,887</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,044,180</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(12,878,081</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(869,902</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(8,097,224</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(20,921,892</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Turnkey contracts
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">23,625,826</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">34,982,047</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">31,688,540</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and gas marketing
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">192,642</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">192,642</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">192,642</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and gas operations
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">106,113,628</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">54,582,576</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">56,931,996</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Well services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">94,338</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,471,379</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">21,121,567</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">18,410,691</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,615,657</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">151,053,663</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">108,262,294</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">94,900,214</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Capital expenditures
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Turnkey contracts
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">42,616</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and gas marketing
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and gas operations
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,735,327</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,744,732</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16,955,738</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Well services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">92,315</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,221</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,313</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">43,418</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,739,548</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,750,045</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">17,134,087</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">F-35
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<B><FONT size="2">Note&nbsp;P&nbsp;&#151; Subsequent
Events</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In February 2004, the Company completed an equity
private placement financing. The Company, for a negotiated total
purchase price of $14&nbsp;million, sold 2&nbsp;million shares
of common stock, five-year Class&nbsp;A warrants to purchase
500,000 shares of common stock at $10 per share, and five-year
Class&nbsp;B warrants to purchase 500,000 shares at $12.50 per
share. These warrants are subject to a cash-only exercise
provision. The securities were sold only to &#147;accredited
investors&#148; as defined in Rule&nbsp;501(a) under
Regulation&nbsp;D of the Securities Act of 1933, as amended (the
&#147;Securities Act&#148;). Additionally, pursuant to the
Subscription and Registration Rights Agreement dated
February&nbsp;3, 2004, commencing the earlier of
February&nbsp;3, 2005 or 170&nbsp;days after the completion of
an Initial Public Offering by the Company, certain holders have
a right to demand that 2,000,000 shares of outstanding common
stock and 1,000,000 shares of common stock issuable upon
exercise of our Class&nbsp;A and Class&nbsp;B warrants, be
registered under the Securities Act. The four Purchasers of the
equity private placement were institutional investors managed by
a Boston-based institutional investment adviser. These
securities have not been registered under the Securities Act, or
under state securities laws, and may not be offered or sold in
the United States absent registration with the Securities and
Exchange Commission or an applicable exemption from the
registration requirements.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In July 2004, the Company completed an equity
private placement financing. The Company, for a negotiated total
purchase price of $5,950,000, sold 850,000 shares of common
stock, five-year Class&nbsp;A warrants to purchase 212,500
shares of common stock at $10 per share, and five-year
Class&nbsp;B warrants to purchase 212,500 shares at $12.50 per
share. These warrants are subject to a cash-only exercise
provision. The securities were sold only to &#147;accredited
investors&#148; as defined in Rule&nbsp;501(a) under
Regulation&nbsp;D of the Securities Act of 1933, as amended (the
&#147;Securities Act&#148;). Additionally, pursuant to the
Subscription and Registration Rights Agreement dated
July&nbsp;31, 2004, commencing the earlier of February&nbsp;3,
2005 or 170&nbsp;days after the completion of an initial public
offering by the Company, certain holders have a right to demand
that 1,000,000 shares of outstanding common stock and 500,000
shares of common stock issuable upon exercise of our
Class&nbsp;A and Class&nbsp;B warrants, be registered under the
Securities Act. The five Purchasers of the equity private
placement were institutional investors managed by a Boston-based
institutional investment adviser. These securities have not been
registered under the Securities Act, or under state securities
laws, and may not be offered or sold in the United States absent
registration with the Securities and Exchange Commission or an
applicable exemption from the registration requirements.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In regard to the Magness matter discussed in
Note&nbsp;I, the AAA arbitration was held from May&nbsp;3, 2004
through May&nbsp;14, 2004 and further expert oral testimony is
scheduled in Los Angeles on September&nbsp;29, 2004. A ruling is
expected in the AAA arbitration by the end of 2004. The JAMS
arbitration hearing on the motion to enforce the final award was
held from May&nbsp;19, 2004. On August&nbsp;16, 2004, Judge
Wisot issued an order granting our motion to enforce the final
award covering unauthorized direct labor charges, ruling that
these charges are recoverable by us as improperly billed to the
joint venture.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Management believes Warren has meritorious
defenses to Magness&#146;s claims, as well as valid claims and
counterclaims against Magness. Management believes Warren will
prevail in upholding the validity and enforceability of the
joint venture agreement. However, this is not certain, and
although the consequences of Magness prevailing in a dissolution
of the joint venture are not entirely predictable, if Magness
does prevail in dissolving the joint venture, management
believes that Warren would retain a 47% working interest in the
undeveloped properties. Additionally, if the joint venture were
dissolved, Warren&#146;s estimated proved natural gas and oil
reserves, as of December&nbsp;31, 2003, would decrease from
106.2&nbsp;Bcfe to approximately 73&nbsp;Bcfe and the estimated
discounted future net revenues from our estimated proved
reserves would decrease from $183.0&nbsp;million to
approximately $129&nbsp;million.
</FONT>

<P align="center"><FONT size="2">F-36
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<P align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>

<P align="left">
<A name='207'></A>

<!-- link1 "UNAUDITED FINANCIAL STATEMENTS" -->

<DIV align="center">
<B><FONT size="2">UNAUDITED FINANCIAL STATEMENTS</FONT></B>
</DIV>

<P align="left">
<A name='208'></A>

<!-- link1 "CONSOLIDATED BALANCE SHEETS" -->

<DIV align="center">
<B><FONT size="2">CONSOLIDATED BALANCE SHEETS</FONT></B>
</DIV>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="56%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="9%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">June 30, 2004</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December 31, 2003</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Unaudited)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">ASSETS</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current Assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash and cash equivalents
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">20,033,002</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">24,528,999</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accounts receivable&nbsp;&#151; trade
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,382,432</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,386,180</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accounts receivable from affiliated partnerships
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">138,058</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">389,271</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Trading securities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">273,873</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">201,152</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Restricted investments in U.S. Treasury
    Bonds&nbsp;&#151; available for sale, at fair value (amortized
    cost of $1,320,197 in 2004 and $1,293,411 in 2003)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,396,695</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,402,358</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other current assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,225,722</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,031,701</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total current assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">27,449,782</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">30,939,661</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other Assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and gas properties&nbsp;&#151; at cost, based
    on successful efforts method of accounting, net of accumulated
    depreciation, depletion and amortization
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">102,423,044</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">94,949,545</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Property and equipment&nbsp;&#151; at cost, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">460,591</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">591,663</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Restricted investments in U.S. Treasury
    Bonds&nbsp;&#151; available for sale, at fair value (amortized
    cost of $12,869,723 in 2004 and $12,627,574 in 2003)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">13,719,477</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">13,808,777</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred bond offering costs (net of accumulated
    amortization of $3,905,720 in 2004 and $3,684,097 in 2003)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,535,348</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,756,971</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Goodwill
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,430,246</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,430,246</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,276,265</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,576,800</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total other assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">125,844,971</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">120,114,002</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">153,294,753</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">151,053,663</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">LIABILITIES AND STOCKHOLDERS&#146;
    EQUITY</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current Liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current maturities of debentures
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,691,970</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,809,470</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current maturities of other long-term liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">326,939</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">208,383</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accounts payable and accrued expenses
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,406,396</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,956,529</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred income&nbsp;&#151; turnkey drilling
    contracts with affiliated partnerships
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">19,187,876</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">22,438,272</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total current liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">32,613,181</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">36,412,654</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Long-Term Liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Debentures, less current portion
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">42,227,730</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">43,285,230</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other long-term liabilities, less current portion
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,420,395</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,613,081</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">43,648,125</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">44,898,311</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Minority Interest
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,604,063</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">13,348,654</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Stockholders&#146; Equity
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">8% convertible preferred stock, par value $.0001;
    authorized 10,000,000 shares, issued and outstanding, 6,552,674
    shares in 2004 and 6,507,729 shares in 2003 (aggregate
    liquidation preference $78,632,076 in 2004 and $78,092,748 in
    2003)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">77,020,766</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">76,334,024</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Common Stock&nbsp;&#151; $.0001 par value;
    authorized, 100,000,000 shares; issued 19,374,070 in 2004 and
    17,349,070 shares in 2003)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,937</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,735</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Additional paid-in-capital
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">58,623,635</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">47,739,159</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accumulated deficit
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(70,047,359</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(67,729,178</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accumulated other comprehensive income, net of
    applicable income taxes of $371,000 in 2004 and $517,000 in 2003
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">558,460</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">776,359</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">66,157,439</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">57,122,099</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Less common stock in Treasury&nbsp;&#151; at
    cost; 632,250 shares in 2004 and 2003
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">728,055</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">728,055</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total stockholders&#146; equity
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">65,429,384</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">56,394,044</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">153,294,753</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">151,053,663</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center">
<FONT size="2">The accompanying notes are an integral part of
these financial statements.
</FONT>

<P align="center"><FONT size="2">F-37
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<P align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>

<P align="left">
<A name='209'></A>

<!-- link1 "CONSOLIDATED STATEMENTS OF OPERATIONS" -->

<DIV align="center">
<B><FONT size="2">CONSOLIDATED STATEMENTS OF
OPERATIONS</FONT></B>
</DIV>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="62%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Six Months Ended June&nbsp;30,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">(Unaudited)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Revenues</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Turnkey contracts with affiliated partnerships
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,250,396</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,876,672</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and gas sales from marketing activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,795,567</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,789,524</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Well services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">511,932</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">501,420</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and gas sales
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,680,839</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,832,493</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net gain (loss)&nbsp;on investments
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(87,971</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">126,330</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Interest and other income
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,091,592</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">752,245</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Gain on sale of oil and gas properties
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">120,193</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,362,548</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,878,684</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Expenses</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Turnkey contracts
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,343,404</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,234,640</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cost of marketed oil and gas purchased from
    affiliated partnerships
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,724,401</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,731,079</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Well services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">261,355</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">329,775</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Production&nbsp;&#38; exploration
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,046,301</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,952,416</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Depreciation, depletion, amortization and
    impairment
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,533,614</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">519,295</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">General and administrative
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,337,236</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,164,886</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Interest
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">256,205</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,238,434</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,502,516</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,170,525</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Loss before provision for income taxes
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,139,968</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,291,841</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred income tax expense (benefit)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">146,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(194,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss before minority interest and change in
    accounting principle
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,285,968</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,097,841</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Minority interest
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(32,213</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(62,045</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss before change in accounting principle
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,318,181</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,159,886</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cumulative effect of change in accounting
    principle
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(88,218</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,318,181</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,248,104</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Less dividends and accretion on preferred shares
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,290,321</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,736,068</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss applicable to common stockholders
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,608,502</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,984,172</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Basic and diluted loss per common share
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Loss before accounting change
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.31</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.17</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cumulative effect of change in accounting
    principle
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.31</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.17</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Weighted average common shares outstanding
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">18,357,891</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16,871,121</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center">
<FONT size="2">The accompanying notes are an integral part of
these financial statements.
</FONT>

<P align="center"><FONT size="2">F-38
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<P align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>

<P align="left">
<A name='210'></A>

<!-- link1 "CONSOLIDATED STATEMENTS OF CASH FLOWS" -->

<DIV align="center">
<B><FONT size="2">CONSOLIDATED STATEMENTS OF CASH
FLOWS</FONT></B>
</DIV>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="62%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">For the Six Months Ended</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">June&nbsp;30,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">(Unaudited)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash flows from operating activities:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,318,181</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,248,104</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accretion of discount on available-for-sale debt
    securities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(333,551</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(271,431</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Amortization and write-off of deferred bond
    offering costs
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">221,623</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">408,438</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Gain on sale of U.S. treasury bonds&nbsp;&#151;
    available for sale
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(122,965</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Depreciation, depletion, amortization and
    impairment
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,533,614</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">519,295</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accretion of asset retirement obligation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">33,281</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Gain on sale of oil and gas properties
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(120,193</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred tax expense (benefit)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">146,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(194,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Change in assets and liabilities:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Increase in trading securities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(72,720</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(560,079</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">(Increase) decrease in accounts
    receivable&nbsp;&#151; trade
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(996,252</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,540,791</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Decrease in accounts receivable from affiliated
    partnerships
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">251,213</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">558,642</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">(Increase) decrease in other assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,106,514</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(247,163</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Decrease in accounts payable and accrued expenses
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(618,563</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(557,204</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Decrease in deferred income from affiliated
    partnerships
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,250,396</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,791,172</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Decrease in other long term liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(72,950</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(366,586</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net cash provided by (used in) operating
    activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,490,561</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">668,462</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash flows from investing activities:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Purchases of oil and gas properties
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(10,235,162</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,937,623</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Purchase of property and equipment
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6,108</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,539</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Proceeds from the sale of oil and gas properties
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">120,193</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Proceeds from the sale of property and equipment,
    net of selling fees
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">24,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">45,850</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Proceeds from U.S. Treasury Bonds&nbsp;&#151;
    available for sale
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">64,616</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,172,390</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net cash used in investing activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(10,032,461</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,722,922</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash flows from financing activities:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Payments on other long-term debt
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,209,460</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,329,906</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Issuance of common stock, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,175,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Repurchase of common stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(29,940</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Issuance of preferred stock, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">126,730</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,058,252</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Dividends paid on preferred stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,065,245</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(800,092</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net cash provided by (used in) financing
    activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,027,025</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(101,686</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net decrease in cash and cash equivalents
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,495,997</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,156,146</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash and cash equivalents at beginning of period
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">24,528,999</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">23,184,936</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash and cash equivalents at end of period
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">20,033,002</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">21,028,790</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Supplemental disclosure of cash flow information
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash paid for interest, net of amount capitalized
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">829,996</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash paid for income taxes
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center">
<FONT size="2">The accompanying notes are an integral part of
these financial statements.
</FONT>

<P align="center"><FONT size="2">F-39
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<P align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>

<P align="left">
<A name='211'></A>

<!-- link1 "NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS" -->

<DIV align="center">
<B><FONT size="2">NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS</FONT></B>
</DIV>

<P align="left">
<B><FONT size="2">Note 1&nbsp;&#151; Organization</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Warren Resources, Inc. (the &#147;Company&#148;
or &#147;Warren&#148;) was formed on June&nbsp;12, 1990 under
the laws of the state of New York for the purpose of acquiring
and developing oil and gas properties. On September&nbsp;5,
2002, the Company changed its state of incorporation to
Delaware. On July&nbsp;7, 2004, the Company changed its state of
incorporation to Maryland. As a result, all shares of the
Company&#146;s stock were converted into shares of the Maryland
corporation. The Company&#146;s properties are primarily located
in New Mexico, North Dakota, Texas, Wyoming and California. In
addition, the Company serves as the managing general partner
(the &#147;MGP&#148;) to affiliated partnerships and joint
ventures.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The accompanying unaudited financial statements
and related notes present the Company&#146;s consolidated
financial position as of June&nbsp;30, 2004 and December 31,
2003, and the consolidated results of operations and
consolidated cash flows for the six months ended June&nbsp;30,
2004 and 2003. The unaudited financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial
information and Article&nbsp;10 of Regulation&nbsp;S-X.
Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted
in the United States of America for complete financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results
for the six months ended June&nbsp;30, 2004, are not necessarily
indicative of the results that may be expected for the fiscal
year ending December&nbsp;31, 2004. The accounting policies
followed by the Company are set forth in Note A to the
Company&#146;s financial statements on Form&nbsp;10-K for the
year ended December&nbsp;31, 2003. These interim financial
statements and notes thereto should be read in conjunction with
the consolidated financial statements presented in the
Company&#146;s 2003 Annual Report on Form&nbsp;10-K.
</FONT>

<P align="left">
<B><FONT size="2">Note 2&nbsp;&#151; Management&#146;s
Plans</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company had a net loss of $2.3&nbsp;million
for the six months ended June&nbsp;30, 2004, as compared to a
loss of $1.2&nbsp;million for the corresponding six months ended
June&nbsp;30, 2003. At June&nbsp;30, 2004, current liabilities
exceeded current assets by approximately $5.2&nbsp;million.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In order to improve operations and liquidity and
meet its cash flow needs, the company has or intends to do the
following:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Raise additional capital through the sale of
    common and preferred stock.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Obtain a credit facility based in part on the
    value of our proved reserves.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Generate turnkey profit from turnkey drilling
    contracts equal to approximately 25% of the total amount of
    total turnkey price.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Increase oil and gas production and revenues by
    drilling our Wyoming and California properties.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Use $2.0&nbsp;million of deferred drilling
    credits from Anadarko Petroleum Corporation to develop our
    acreage in the Washakie Basin, Wyoming.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As a result of these plans, management believes
that it will generate sufficient cash flows to meet its current
obligations in 2004.
</FONT>

<P align="left">
<B><FONT size="2">Note 3&nbsp;&#151; Stock Options</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">At June&nbsp;30, 2004, the Company had
stock-based compensation plans. The Company accounts for those
plans under the recognition and measurement principles of
Accounting Principles Board (APB)&nbsp;Opinion No.&nbsp;25,
<I>Accounting for Stock Issued to Employees</I>, and related
interpretations. The following table illustrates the effect on
net loss and loss per share if the Company had applied the
fair-value recognition provisions of
</FONT>

<P align="center"><FONT size="2">F-40
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<FONT size="2">Financial Accounting Standards Board
(FASB)&nbsp;Statement No.&nbsp;123, <I>Accounting for
Stock-Based Compensation</I>, to stock-based employee
compensation:
</FONT>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="68%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Six Months Ended June&nbsp;30,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss, as reported
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,318,181</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,248,104</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deduct: Total stock-based employee compensation
    expense determined under fair-value-based method for all awards,
    net of related tax effects
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(711,373</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(547,278</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Pro forma net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,029,554</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,795,382</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Basic and diluted loss per share:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">As reported&nbsp;&#151;
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.31</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.17</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Pro forma&nbsp;&#151;
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.34</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.21</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<B><FONT size="2">Note 4&nbsp;&#151; Plugging and Abandonment
Liability</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In June 2001, the Financial Accounting Standard
Board issued SFAS No.&nbsp;143, <I>Accounting for Asset
Retirement Obligations</I>, which requires entities to record
the fair value of a liability for an asset retirement obligation
in the period in which it is incurred and a corresponding
increase in the carrying amount of the related long-lived asset.
The Company adopted SFAS No.&nbsp;143 on January&nbsp;1, 2003
and recorded a net asset of $557,000, a related liability of
$645,000 (using a 10% discount rate) and a cumulative effect of
change in accounting principle of $88,000. During the six months
ending June&nbsp;30, 2004 and 2003 the asset retirement
liability was increased by approximately $33,000 and $42,000
respectively, as a result of accretion and recorded as interest
expense. During the six months ended June&nbsp;30, 2004, there
has been no significant changes in cash flow assumptions for the
liability or liabilities incurred or settled during the period.
The Company has treasury bills held in escrow with a fair market
value of $2,709,000 which are legally restricted for potential
plugging and abandonment liability in the Wilmington field.
</FONT>

<P align="left">
<B><FONT size="2">Note 5&nbsp;&#151; Changes in
Stockholders&#146; Equity</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During the six months ended June&nbsp;30, 2004,
the Company raised $14&nbsp;million through the private
placement of 2,000,000 shares of common stock and issued
1,000,000 warrants to four institutional investors managed by a
large Boston-based investment advisor. The Company also sold
25,000 shares of its common stock for $175,000 and issued 12,500
warrants to a single investor. All warrants have expected lives
of five years and have a cumulative weighted average exercise
price of $11.07.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of June&nbsp;30, 2004, 6,552,674 shares of
convertible preferred stock were issued and outstanding.
Preferred dividends of approximately $1.6&nbsp;million and
$1.5&nbsp;million were accrued at June&nbsp;30, 2004 and
December&nbsp;31, 2003, respectively. The Company has incurred
cumulative issuance costs of approximately $2.1 million in
relation to these shares. For the six months ended June&nbsp;30,
2004, the Company issued 44,944 preferred shares, 33,614
relating to the recapitalization of drilling programs and 11,330
for cash consideration of approximately $135,960. The preferred
stock pays an 8% cumulative dividend, which is payable
quarterly, and is treated as a deduction in additional paid in
capital. 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
at the election of the holder, commencing one year after the
date of issuance. Each outstanding redeemable convertible
preferred share is convertible into common stock of the Company
based
</FONT>

<P align="center"><FONT size="2">F-41
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<FONT size="2">on the table below. The conversion rate is
subject to adjustment from time to time as defined by the
agreement.
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="80%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Preferred to</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Period</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Common</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Until June&nbsp;30, 2005
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">1 to 1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">July&nbsp;1, 2005 through June&nbsp;30, 2006
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">1 to .75</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">July&nbsp;1, 2006 through redemption
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">1 to .50</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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 $12.00 per
share, plus accrued but unpaid dividends, if any
(&#147;Redemption Price&#148;). Upon the receipt of a redemption
election, the Company, at its option, shall either: (1)&nbsp;pay
the holder cash in the amount equal to the Redemption Price or
(2)&nbsp;issue to holder shares of common stock up to a maximum
of 1.5&nbsp;shares of common stock for each one share of
preferred stock redeemed. The Company is accreting the carrying
value of its preferred stock to its redemption price using the
effective interest method with changes recorded to additional
paid in capital. The accretion of preferred stock results in a
reduction of earnings per share applicable to common
stockholders.
</FONT>

<P align="left">
<B><FONT size="2">Note 6&nbsp;&#151; Loss Per Share</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Basic loss per share is computed by dividing net
loss by the weighted average number of shares of common stock
outstanding during the period. Diluted loss per share is based
on the assumption that stock options are converted into common
shares using the treasury stock method and convertible bonds,
debentures and preferred stock are converted using the
if-converted method. Conversion is not assumed if the results
are anti-dilutive. Potential common shares at June&nbsp;30, 2004
and June&nbsp;30, 2003 of 11,869,784 and 9,633,171 respectively,
relating to convertible bonds, debentures and preferred stock,
2,751,262 and 2,257,012, respectively, relating to incentive
stock options and 1,193,125 potential shares relating to
warrants at June&nbsp;30, 2004, were excluded from the
computation of diluted loss per share because they are
anti-dilutive. Incentive stock options have a weighted average
exercise price of $5.45 and $5.06 at June&nbsp;30, 2004 and
June&nbsp;30, 2003, respectively. Warrants have a weighted
average exercise price of $11.07 at June&nbsp;30, 2004. The
convertible bonds and debentures may be converted from the date
of issuance until maturity at 100% of principal amount into
common stock of the Company at prices ranging from $5 to $50.
The preferred stock may be converted at the discretion of the
holder (see Note&nbsp;5).
</FONT>

<P align="center"><FONT size="2">F-42
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<B><FONT size="2">Note 7&nbsp;&#151; Long-Term Debt</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The convertible bonds and debentures may be
converted from the date of issuance until maturity at 100% of
principal amount into common stock of the Company at prices
ranging from $5 to $50. Each year the holders of the convertible
debentures may tender to the Company up to 10% of the aggregate
debentures issued and outstanding. Bonds and debentures
outstanding are as follows:
</FONT>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="68%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">June 30,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December 31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">12% Sinking Fund Debentures, due
    December&nbsp;31, 2007
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,141,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,616,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">12% Secured Convertible Debentures, due
    December&nbsp;31, 2009
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">770,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">790,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">12% Secured Convertible Bonds, due
    December&nbsp;31, 2010
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,700,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,705,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">13.02% Sinking Fund Convertible Debentures, due
    December&nbsp;31, 2010
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,545,200</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,655,200</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">13.02% Sinking Fund Convertible Debentures, due
    December&nbsp;31, 2015
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,642,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,792,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">12% Secured Convertible Bonds, due
    December&nbsp;31, 2016
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,365,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,365,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">12% Sinking Fund Convertible Debentures, due
    December&nbsp;31, 2017
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,135,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,500,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">12% Secured Convertible Bonds, due
    December&nbsp;31, 2020
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,485,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,485,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">12% Secured Convertible Bonds, due
    December&nbsp;31, 2022
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,136,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,186,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">46,919,700</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">48,094,700</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Less current portion
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,691,970</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,809,470</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Long-term portion
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">42,227,730</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">43,285,230</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<B><FONT size="2">Note 8&nbsp;&#151; Capitalized
Interest</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Interest of approximately $2,978,000 and
$2,532,000 was capitalized during the six months ended
June&nbsp;30, 2004 and 2003, respectively, relating to
California and Wyoming properties.
</FONT>

<P align="left">
<B><FONT size="2">Note 9&nbsp;&#151; Contingencies</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Arbitrations vs. Magness Petroleum Company.
</FONT></I><FONT size="2">On September&nbsp;28, 1999, Magness
Petroleum Company, our joint venture partner in the Wilmington
field, filed a complaint against us, Warren E&#38;P, Inc., our
principal operating subsidiary, and certain of our other
subsidiaries in the Superior Court of Los Angeles County,
California, alleging that we had breached our joint venture
agreement with Magness, as well as an alleged oral agreement
regarding advance payment of expenses for drilling and
completion operations. Magness sought dissolution of the joint
venture, an accounting and a declaratory judgment as to the
rights of the parties under the joint venture agreement. We
successfully enforced the arbitration provision contained in the
joint venture agreement and entered into a written stipulation
with Magness to submit the matter for arbitration by the
Judicial Arbitration and Mediation Services, or JAMS, before the
Honorable Keith&nbsp;J. Wisot, a retired Los Angeles Superior
Court Judge. Judge&nbsp;Wisot, as the arbitrator, ruled that the
joint venture agreement is a valid enforceable agreement,
declined to dissolve the joint venture, denied Magness&#146;s
claims for breach of contract, determined that Magness was not
entitled to reimbursement of direct labor charges to the field
and tangible well costs, and held that he and JAMS would retain
jurisdiction to enforce the final award. In addition, the
parties stipulated on the record that Judge Wisot retain
jurisdiction to adjudicate any future disputes among the
parties. The Superior Court case was dismissed in January 2000.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On August&nbsp;8, 2001, Magness filed a demand
with the American Arbitration Association, or AAA, reasserting
its claims for dissolution of the joint venture under a new
dissolution theory and breach of
</FONT>

<P align="center"><FONT size="2">F-43
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<FONT size="2">contract. The dissolution theory was based on
Magness&#146;s claim that voting rights within the joint venture
should be based on ownership of working interests in the
Wilmington Townlot Unit, which includes property never
contributed to the joint venture, instead of ownership of joint
venture working interests. We then brought suit in the
California Superior Court seeking to enforce the original final
award issued by Judge Wisot in the JAMS arbitration and to
enforce the oral stipulation among the parties to have JAMS
retain jurisdiction to adjudicate any future disputes. On
September&nbsp;24, 2003, after a number of court proceedings,
the California Superior Court ordered JAMS to hear our motion to
enforce the final award covering unauthorized direct labor
charges and tangible costs and for the AAA to hear
Magness&#146;s new theory of dissolution of the joint venture,
to make a determination as to whether Magness can independently
drill new wells in the Wilmington Townlot Unit without our
consent if the joint venture is not dissolved, and whether we
were entitled to damages as a result of Magness preventing the
resumption of drilling activities by us as ordered by
Judge&nbsp;Wisot in the JAMS arbitration.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On January&nbsp;14, 2004, we filed an amended
answer in the AAA arbitration denying Magness&#146;s request to
dissolve the joint venture, together with counterclaims seeking
damages against Magness initially in the amount of
$15&nbsp;million, which was subsequently increased to in excess
of $40&nbsp;million, on a number of grounds, including breach of
contract. We also requested that Magness be removed as operator
for the joint venture wells in the Wilmington Field due to a
breach of its duties and that an independent operator be
appointed in its place. We asserted a further claim against
Magness that in the event the joint venture is dissolved prior
to completion of the venture, we would be entitled to damages in
the amount of $26&nbsp;million. The AAA arbitration was held
from May&nbsp;3, 2004 through May&nbsp;14, 2004 and further
expert oral testimony is scheduled in Los Angeles on
September&nbsp;29, 2004. A ruling is expected in the AAA
arbitration by the end of 2004. The JAMS arbitration hearing on
the motion to enforce the final award was held from May&nbsp;19,
2004 through May&nbsp;21, 2004. On August&nbsp;16, 2004, Judge
Wisot issued an order granting our motion to enforce the final
award covering unauthorized direct labor charges, ruling that
these charges are recoverable by us as improperly billed to the
joint venture.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We believe that we have meritorious defenses to
Magness&#146;s claims, as well as valid claims and counterclaims
against Magness. We believe that we will prevail in upholding
the validity and enforceability of the joint venture agreement.
However, this is not certain, and although the consequences of
Magness prevailing in a dissolution of the joint venture are not
entirely predictable, if Magness does prevail in dissolving the
joint venture, we believe that we would retain a 47% working
interest in the undeveloped properties to be liquidated by the
joint venture. If that were to occur, our estimated proved
natural gas and oil reserves, as of December&nbsp;31, 2003,
would decrease from 106.2&nbsp;Bcfe to approximately
73&nbsp;Bcfe and the estimated discounted future net revenues
from our estimated proved reserves would decrease from
$183.0&nbsp;million to approximately $129&nbsp;million.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Gotham Insurance Company v.
Warren.</FONT></I><FONT size="2"> In 1998, we and our
subsidiary, Warren E&#38;P, Inc., were sued in the 81st Judicial
District Court of Frio County, Texas by Stricker Drilling
Company, Inc. and Manning Safety Systems to recover the value of
lost equipment based on a well blow-out. As a result of the
lawsuit, Gotham Insurance Company, Warren E&#38;P&#146;s well
blow-out insurer, intervened. The suit was settled in 1999 with
all parties except Gotham. Gotham paid over $1.7&nbsp;million
under the insurance policy and now seeks a refund of
approximately $1.5&nbsp;million of monies paid, denying
coverage, and alleging fraud and misrepresentation and a failure
of Warren E&#38;P to act with due diligence and pursuant to
safety regulations. Warren E&#38;P countersued for the remaining
proceeds under the policy coverage. In the summer and fall of
2000, summary judgments were entered for Warren E&#38;P on
essentially all claims except its bad faith claims against
Gotham. Gotham&#146;s claims against Warren E&#38;P and us were
rejected. Final judgment was rendered by the District Court on
May&nbsp;14, 2001 in Warren E&#38;P&#146;s favor for the
remaining policy proceeds, interest and attorneys&#146; fees.
Gotham appealed the final judgment to the San Antonio Court of
Appeals seeking a refund of approximately $1.5&nbsp;million. On
July&nbsp;23, 2003, the San Antonio Court of Appeals reversed
the trial court&#146;s earlier summary
</FONT>

<P align="center"><FONT size="2">F-44
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<FONT size="2">judgment for Warren E&#38;P and remanded the case
to the trial court. In November 2003, Warren E&#38;P appealed
the San Antonio Court of Appeals&#146; panel decision to the
Texas Supreme Court, and in July 2004, the Court denied
appellate review. If we elect not to appeal, the matter will be
remanded to the trial court in the 81st Judicial District Court
of Frio County, Texas, for further proceedings consistent with
the San Antonio Court of Appeals&#146; decision.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are also a party to legal actions arising in
the ordinary course of our business. In the opinion of our
management, based in part on consultation with legal counsel,
the liability, if any, under these claims is either adequately
covered by insurance or would not have a material adverse effect
on us.
</FONT>

<P align="left">
<B><I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Repurchase
Agreements</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Under certain repurchase agreements, the investor
partners in certain affiliated partnerships have a right to have
their interests repurchased by the Company. Such purchase price
is calculated at a formula price and is payable in seven to
25&nbsp;years from the date of admission to the partnership. For
certain affiliated partnerships formed prior to 1998, the
maximum purchase price for all such interests was fully secured
at maturity by zero coupon U.S. Treasury Bonds held by an
independent trust company. The face amounts of such securities
are released to the Company when equal amounts of cash
distributions are made to investors. As a result of the
recapitalizations, any payment made under this guarantee would
be recorded as a reduction to minority interest as shown on the
Company&#146;s balance sheet. At June&nbsp;30, 2004, the maximum
cash outlay relating to these repurchase obligations is
approximately $5,900,000. This amount is collateralized by U.S.
Treasury Bonds with a face value of approximately $1,100,000.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">For certain other repurchase agreements relating
to partnerships formed from 1998 to 2001, to the extent that the
drilling programs and other program investors elect not to
purchase a withdrawing partner&#146;s interest, investor
partners have a right to have their interests repurchased by the
Company at a formula price. This right is effective seven to
25&nbsp;years from the date of the original partnership
investment. In determining the amount of the repurchase
obligation, the obligation is computed based on the lesser of
the formula purchase price or the estimated cash flows
discounted at 10% (&#147;PV-10&#148;) from proved developed and
undeveloped reserves of each partnership. At June&nbsp;30, 2004,
the formula purchase price with respect to these partnerships
was approximately $96,500,000. However, this amount is limited
to approximately $15,800,000 based on the PV-10 of the assets in
these partnerships. This limitation may increase when we drill
the remaining 22&nbsp;wells on behalf of these seven drilling
programs and will fluctuate due to the variables in determining
discounted cash flows, such as price changes and reserve
revisions. In the event of repurchase, Warren receives the
investors interest in the program and their pro rata share of
the programs reserves and related future cash flows.
</FONT>

<P align="center"><FONT size="2">F-45
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<B><FONT size="2">Note 10&nbsp;&#151; Business Segment
Information</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company&#146;s operating activities can be
divided into four major segments: turnkey contracts, oil and gas
marketing, oil and gas exploration and production operations and
well services. The Company drills oil and natural gas wells for
Company-sponsored drilling programs and retains an interest in
each well. Also, the Company markets natural gas for affiliated
drilling programs. The Company charges Company-sponsored
drilling programs and other third parties competitive industry
rates for well operations and gas gathering. Segment information
is as follows:
</FONT>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="70%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Six Months Ended</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">June 30,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">June 30,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Revenues</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Turnkey Contracts
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,250,396</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,876,672</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and Gas Marketing
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,795,567</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,789,524</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and Gas Operations
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,680,839</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,832,493</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Well Services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">511,932</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">501,420</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,123,814</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">878,575</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,362,548</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,878,684</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="69%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">June 30,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">June 30,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Operating Income (Loss)</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Turnkey Contracts
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(144,616</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">590,975</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and Gas Marketing
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">71,166</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">58,445</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and Gas Operations
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(784,898</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">432,987</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Well Services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">250,577</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">171,645</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,532,197</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,545,893</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,139,968</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,291,841</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<B><FONT size="2">Note 11&nbsp;&#151; Comprehensive
Loss</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Other comprehensive loss consists primarily of
net unrealized investment gains and losses, net of income tax
effect. Total comprehensive losses for the periods are as follow:
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="70%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Six months ending June&nbsp;30
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,536,080</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(957,048</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<B><FONT size="2">Note 12&nbsp;&#151; Consent
Solicitation</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During the fourth quarter of 2002,
13&nbsp;limited partnerships, of which the Company was the
managing general partner, commenced a vote solicitation of their
limited partners (the &#147;Partnership Recapitalization
Offers&#148;) to: (1)&nbsp;obtain the requisite two-thirds
affirmative vote of their respective partners to convert the
drilling program from a Delaware limited partnership into a
Delaware limited liability company (the &#147;LLC&#148;) wherein
all LLC members would have limited liability, including the
Company, and (ii)&nbsp;upon conversion to an LLC, the Company
would contribute as additional capital to the LLC its
unregistered 8% convertible preferred stock with a value equal
to between 110% to 120% of the potential repurchase price of
consenting members&#146; interests (&#147;Preferred
Members&#148;) calculated as of December&nbsp;31, 2002. For its
additional capital contribution, the Company received standard
membership interests in the LLC and as a standard member was
</FONT>

<P align="center"><FONT size="2">F-46
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<FONT size="2">specially allocated, pro rata, the Preferred
Members&#146; interests in the oil and gas properties owned by
their respective programs (the &#147;Recapitalization&#148;).
Members converting to Preferred Member interests received
preferential rights in the LLC. Election by members to become
Preferred Members terminated their repurchase rights as standard
members under the LLC buy/sell agreements. At December&nbsp;31,
2002, six of the thirteen programs voted to convert to LLCs and
because of the majority control by the Company were consolidated
in the financial statements for the year ended December&nbsp;31,
2002. As a result, the Company issued 1,342,960 preferred shares
to these six LLC&#146;s in 2002 with an estimated fair value of
$16,115,520. At March&nbsp;31, 2003, the remaining seven
programs voted to convert to LLCs and on average 72.9% of the
program members converted to become Preferred Members in their
LLC. During the first quarter ended March&nbsp;31, 2003, the
Company issued 1,641,628 preferred shares to the remaining seven
LLCs as a capital contribution, with an estimated fair value of
$19,699,536 and received its pro rata share of additional
standard membership interests in the LLCs. The fair value of the
preferred shares was based on actual cash sales to independent
parties in this time period. Due to the majority control of
these thirteen affiliated partnerships, the Company has
consolidated these entities for financial reporting purposes at
June&nbsp;30, 2003. The Company accounted for the remaining
seven LLCs as a purchase transaction as of June&nbsp;30, 2003
with the estimated fair value of the assets and liabilities
assumed in the acquisition as follows:
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="77%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Estimated fair value of assets acquired
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,512</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil and gas properties
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">28,342,950</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total fair value of assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">28,346,462</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Liabilities assumed
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accounts payable
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">144,122</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Minority Interest
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,502,804</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total liabilities assumed
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,646,926</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cost of acquisition
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">19,699,536</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Subsequent to the recapitalization offers that
closed on June&nbsp;30, 2003, and December&nbsp;31, 2002,
certain minority interest limited partners elected to convert to
preferred members during the six months ended June&nbsp;30,
2004, which resulted in the Company issuing 44,944 preferred
shares to these individuals with an estimated fair value of
$539,328.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following summarizes pro forma unaudited
results of operations for the six months ended June&nbsp;30,
2003 as if these acquisitions had been consummated immediately
prior to January&nbsp;1, 2003. These pro forma results are not
necessarily indicative of future results.
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="76%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="10%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="10%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Pro Forma</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Six Months Ended</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">June&nbsp;30, 2003</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Revenues
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,201,767</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(596,601</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Loss per common share&nbsp;&#151; basic and
    diluted
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.14</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<B><FONT size="2">Note&nbsp;13&nbsp;&#151; Goodwill</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company adopted SFAS&nbsp;No.&nbsp;142,
<I>Goodwill and Other Intangible Assets</I>, effective
January&nbsp;1, 2002 and as such, has not subsequently recorded
any amortization of goodwill. Under SFAS&nbsp;No.&nbsp;142 the
Company only adjusts the carrying amount of goodwill or
indefinite life intangible assets upon an impairment. During
</FONT>

<P align="center"><FONT size="2">F-47
</FONT>

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<DIV align="center">
<B><FONT size="2">WARREN RESOURCES, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<FONT size="2">the three months ended June&nbsp;30, 2004 and
June&nbsp;30, 2003, no events occurred which would indicate that
an impairment of goodwill existed.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During the second quarter of 2004, the Company
retained an independent outside valuation expert to assist in
developing the fair value analysis necessary to conduct the
testing for impairment of its goodwill, all of which arose in
its acquisition of Warren E&#38;P. The results of this analysis
indicated that no impairment of goodwill had occurred in 2004.
The 2005 annual impairment testing will be performed during the
second quarter of 2005.
</FONT>

<P align="left">
<B><FONT size="2">Note&nbsp;14&nbsp;&#151; Subsequent
Events</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In July 2004, the Company completed an equity
private placement financing. The Company, for a negotiated total
purchase price of $5,950,000, sold 850,000 shares of common
stock, five-year Class&nbsp;A warrants to purchase 212,500
shares of common stock at $10 per share, and five-year
Class&nbsp;B warrants to purchase 212,500 shares at $12.50 per
share. These warrants are subject to a cash-only exercise
provision. The securities were sold only to &#147;accredited
investors&#148; as defined in Rule&nbsp;501(a) under
Regulation&nbsp;D of the Securities Act of 1933, as amended (the
&#147;Securities Act&#148;). Additionally, pursuant to the
Subscription and Registration Rights Agreement dated
July&nbsp;31, 2004, commencing the earlier of February&nbsp;3,
2005 or 170&nbsp;days after the completion of an initial public
offering by the Company, certain holders have a right to demand
that 1,000,000 shares of outstanding common stock and 500,000
shares of common stock issuable upon exercise of our
Class&nbsp;A and Class&nbsp;B warrants, be registered under the
Securities Act. The five purchasers of the equity private
placement were institutional investors managed by a Boston-based
institutional investment adviser. These securities have not been
registered under the Securities Act, or under state securities
laws, and may not be offered or sold in the United States absent
registration with the Securities and Exchange Commission or an
applicable exemption from the registration requirements.
</FONT>

<P align="center"><FONT size="2">F-48
</FONT>

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<DIV align="left">
<A name='122'></A>
</DIV>

<!-- link1 "APPENDIX A TO PROSPECTUS GLOSSARY OF CERTAIN OIL AND NATURAL GAS TERMS" -->

<P align="center">
<B><FONT size="2">APPENDIX A TO PROSPECTUS</FONT></B>

<P align="center">
<B><FONT size="2">GLOSSARY OF CERTAIN OIL AND NATURAL GAS
TERMS</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following are abbreviations and definitions
of certain terms commonly used in the oil and gas industry and
in this report.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Adsorption.</FONT></B><FONT size="2"> 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 is strongly
affected by changes in temperature and pressure.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">AMI.</FONT></B><FONT size="2"> Area of mutual
interest.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Bbl.</FONT></B><FONT size="2"> One stock tank
barrel, or 42 U.S.&nbsp;gallons liquid volume, used in reference
to oil or other liquid hydrocarbons.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Bbl/d.</FONT></B><FONT size="2"> One Bbl per
day.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Bcf.</FONT></B><FONT size="2"> One billion
cubic feet of natural gas at standard atmospheric conditions.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Bcfe.</FONT></B><FONT size="2"> One billion
cubic feet equivalent of natural gas, calculated by converting
oil to equivalent Mcf at a ratio of 6&nbsp;Mcf to 1&nbsp;Bbl of
oil.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Boe.</FONT></B><FONT size="2"> Barrels of oil
equivalent, with six thousand cubic feet of natural gas being
equivalent to one barrel of oil.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Btu or British thermal
unit.</FONT></B><FONT size="2"> The quantity of heat required to
raise the temperature of one pound of water by one degree
Fahrenheit.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Coalbed methane
(CBM).</FONT></B><FONT size="2"> Natural gas formed as a
byproduct of the coal formation process, which is trapped in
coal seams and produced by non-traditional means.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Completion.</FONT></B><FONT size="2"> The
installation of permanent equipment for the production of oil or
natural gas.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Condensate.</FONT></B><FONT size="2"> Liquid
hydrocarbons associated with the production of a primarily
natural gas reserve.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Desorption.</FONT></B><FONT size="2"> The
detachment of adsorbed gas molecules from the coal surface. See
&#147;Adsorption&#148;.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Developed acreage.</FONT></B><FONT size="2">
The number of acres that are allocated or assignable to
producing wells or wells capable of production.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Development well.</FONT></B><FONT size="2"> A
well drilled into a proved natural gas or oil reservoir to the
depth of a stratigraphic horizon known to be productive.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Dewatering.</FONT></B><FONT size="2"> 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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Dry hole.</FONT></B><FONT size="2"> 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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Environmental assessment
(EA).</FONT></B><FONT size="2"> 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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Environmental impact statement
(EIS).</FONT></B><FONT size="2"> A detailed statement of the
environmental effects of a proposed action and of alternative
actions that is required for all major federal actions.
</FONT>

<P align="center"><FONT size="2">A-1
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Exploitation.</FONT></B><FONT size="2"> 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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Exploration.</FONT></B><FONT size="2"> The
search for natural accumulations of oil and natural gas by any
geological, geophysical or other suitable means.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Exploratory well.</FONT></B><FONT size="2"> 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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Farm-out or Farm-in.</FONT></B><FONT size="2">
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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Field.</FONT></B><FONT size="2"> 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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Fracturing.</FONT></B><FONT size="2"> The
technique of improving a well&#146;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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Gross acres.</FONT></B><FONT size="2"> The
total acres in which we own any amount of working interest.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Gross wells.</FONT></B><FONT size="2"> The
total number of producing wells in which we own any amount of
working interest.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Horizontal drilling.</FONT></B><FONT size="2">
A drilling operation in which a portion of the well is drilled
horizontally within a productive or potentially productive
formation. This operation usually yields a well which has the
ability to produce higher volumes than a vertical well drilled
in the same formation.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Identified drilling
locations.</FONT></B><FONT size="2"> 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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Injection well or
injector.</FONT></B><FONT size="2"> A well which is used to
place liquids or gases into the producing zone during
secondary/tertiary recovery operations to assist in maintaining
reservoir pressure and enhancing recoveries from the field.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Intangible drilling
costs.</FONT></B><FONT size="2"> 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:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">ground clearing, drainage construction, location
    work, road making, temporary roads and ponds, surveying and
    geological works;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">drilling, completion, logging, cementing,
    acidizing, perforating and fracturing of wells;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">hauling mud and water, perforating, swabbing,
    supervision and overhead;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">renting horizontal tools, milling tools and
    bits;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">construction of derricks, pipelines and other
    physical structures necessary for the drilling or preparation of
    the wells.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Lease.</FONT></B><FONT size="2"> An instrument
which grants to another (the lessee) the exclusive right to
enter to explore for, drill for, produce, store and remove oil
and natural gas on the mineral interest, in consideration for
which the
</FONT>

<P align="center"><FONT size="2">A-2
</FONT>

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<DIV align="left">
<FONT size="2">lessor is entitled to certain rents and royalties
payable under the terms of the lease. Typically, the duration of
the lessee&#146;s authorization is for a stated term of years
and &#147;for so long thereafter&#148; as minerals are producing.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">MBbl.</FONT></B><FONT size="2"> One thousand
barrels of oil or other liquid hydrocarbons.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Mcf.</FONT></B><FONT size="2"> One thousand
cubic feet of natural gas at standard atmospheric conditions.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Mcf/d.</FONT></B><FONT size="2"> One Mcf per
day.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Mcfe.</FONT></B><FONT size="2"> One thousand
cubic feet equivalent of natural gas, calculated by converting
oil to equivalent Mcf at a ratio of 6&nbsp;Mcf to 1&nbsp;Bbl of
oil.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">MMbbl.</FONT></B><FONT size="2"> One million
barrels of oil or other liquid hydrocarbons.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">MMBoe.</FONT></B><FONT size="2"> One million
barrels of oil equivalent.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">MMBtu.</FONT></B><FONT size="2"> Million
British thermal units.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">MMcf.</FONT></B><FONT size="2"> One million
cubic feet of natural gas at standard atmospheric conditions.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">MMcf/d.</FONT></B><FONT size="2"> One MMcf per
day.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">MMcfe.</FONT></B><FONT size="2"> One million
cubic feet equivalent of natural gas, calculated by converting
oil to equivalent Mcf at a ratio of 6&nbsp;Mcf to 1&nbsp;Bbl of
oil.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">MMcfe/d.</FONT></B><FONT size="2"> One MMcfe
per day.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Net acres.</FONT></B><FONT size="2"> Gross
acres multiplied by the percentage working interest owned by
Warren.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Net production.</FONT></B><FONT size="2">
Production that is owned by Warren less royalties and production
due others.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Net wells.</FONT></B><FONT size="2"> The sum
of all the complete and partial well ownership interests (i.e.,
if we own 25% percent of the working interest in eight producing
wells, the subtotal of this interest to the total net producing
well count would be two net producing wells).
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Operator.</FONT></B><FONT size="2"> The
individual or company responsible for the exploration,
exploitation and production of an oil or natural gas well or
lease.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Overpressured.</FONT></B><FONT size="2"> A
subsurface formation that exerts an abnormally high formation
pressure on a wellfore drilled into it.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Permeability.</FONT></B><FONT size="2"> The
capacity of a geologic formation to allow water, natural gas or
oil to pass through it.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Pod.</FONT></B><FONT size="2"> A grouping of
10 to 24&nbsp;wells complete with associated infrastructure,
including water disposal wells, gathering and compression.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Porosity.</FONT></B><FONT size="2"> The ratio
of the volume of all the pore spaces in a geologic formation to
the volume of the whole formation.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Plugging and
abandonment.</FONT></B><FONT size="2"> 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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">PV-10 value.</FONT></B><FONT size="2"> 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%.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Productive well.</FONT></B><FONT size="2"> A
well that is found to be capable of producing hydrocarbons in
sufficient quantities such that proceeds from the sale of the
production exceed production expenses and taxes.
</FONT>

<P align="center"><FONT size="2">A-3
</FONT>

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<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Prospect.</FONT></B><FONT size="2"> 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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Proved developed
reserves.</FONT></B><FONT size="2"> Reserves that can be
expected to be recovered through existing wells with existing
equipment and operating methods.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Proved reserves.</FONT></B><FONT size="2"> 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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Proved undeveloped reserves
(PUD).</FONT></B><FONT size="2"> 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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Re-entry.</FONT></B><FONT size="2"> Entering
an existing well bore to redrill or repair.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Reservoir.</FONT></B><FONT size="2"> 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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Royalty.</FONT></B><FONT size="2"> 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&#146;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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Secondary recovery.</FONT></B><FONT size="2">
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 waterflooding
are examples of this technique.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Standardized measure of discounted future net
cash flows.</FONT></B><FONT size="2"> 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%&nbsp;per year to reflect the estimated timing of the future
cash flows.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Tangible drilling
costs.</FONT></B><FONT size="2"> 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:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">well casings;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">wellhead equipment;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">water disposal facilities;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">metering equipment;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">tubing and pumps;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">gathering lines;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">storage tanks.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">A-4
</FONT>

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<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">3-D seismic.</FONT></B><FONT size="2"> The
method by which a three dimensional image of the earth&#146;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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Undeveloped acreage.</FONT></B><FONT size="2">
Lease acreage on which wells have been 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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Waterflood.</FONT></B><FONT size="2"> 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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Working interest.</FONT></B><FONT size="2"> 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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Ultimate recovery.</FONT></B><FONT size="2">
The total expected recovery of oil and gas from a producing
well, leasehold, pool or field.
</FONT>

<P align="center"><FONT size="2">A-5
</FONT>

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<DIV align="left">
<A name='123'></A>
</DIV>

<!-- link1 "APPENDIX B TO PROSPECTUS SUMMARY RESERVE REPORT OF WILLIAMSON PETROLEUM CONSULTANTS, INC. As of December 31, 2003" -->

<P align="center">
<B><FONT size="2">APPENDIX B TO PROSPECTUS</FONT></B>

<DIV align="center">
<B><FONT size="2">SUMMARY RESERVE REPORT OF</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">WILLIAMSON PETROLEUM CONSULTANTS,
INC.</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">As of December&nbsp;31, 2003</FONT></B>
</DIV>

<DIV>&nbsp;</DIV>

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<P align="center">
<B><FONT size="2">WILLIAMSON PETROLEUM CONSULTANTS,
INC.</FONT></B>

<DIV align="center">
<B><FONT size="2">550 West Texas Avenue, Suite 300</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">Midland, Texas 79701-4246</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">Phone: 432-685-6100</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">Fax: 432-685-3909</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">E-Mail: wpc@wpc-inc.com</FONT></B>
</DIV>

<P align="left">
<FONT size="2">February&nbsp;10, 2004
</FONT>

<P align="left">
<FONT size="2">Warren Resources, Inc.
</FONT>

<DIV align="left">
<FONT size="2">489 Fifth Avenue, 32nd&nbsp;Floor
</FONT>
</DIV>

<DIV align="left">
<FONT size="2">New York, New York 10017
</FONT>
</DIV>

<P align="left">
<FONT size="2">Attention Mr.&nbsp;Norman F. Swanton
</FONT>

<P align="left">
<FONT size="2">Gentlemen:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Subject:&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Evaluation of Oil and Gas Reserves to the
    Combined Interests of Warren Resources, Inc. in 1)&nbsp;the
    Direct Interests in Certain Properties, 2)&nbsp;the Interest as
    the General Partner in Certain Partnerships, and 3)&nbsp;the
    Total Controlled Interests in 13 LLC&#146;s Effective
    December&nbsp;31, 2003 for Disclosure to the Securities and
    Exchange Commission <BR>
     <BR>
     Williamson Project 3.8962
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<FONT size="2">Williamson Petroleum Consultants, Inc. has
performed an engineering evaluation to estimate proved reserves
and future net revenue from oil and gas properties to the
subject interests. This evaluation was authorized by
Mr.&nbsp;Norman F. Swanton of Warren Resources, Inc. (Warren).
Projections of the reserves and future net revenue to the
evaluated interests were based on economic parameters and
operating conditions considered applicable as of
December&nbsp;31, 2003 and are pursuant to the requirements of
the Securities and Exchange Commission (SEC). This evaluation,
in conjunction with other documents and data, is being used by
Warren as an annual update of the subject properties and for SEC
filings. Following is a summary of the results of the proved
evaluation effective December&nbsp;31, 2003:
</FONT>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="42%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Proved</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Proved</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Developed</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Developed</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Proved</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Producing</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Nonproducing</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Undeveloped</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Total Proved</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net Reserves to the Evaluated Interests:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oil/ Condensate, MBBL
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">475.948</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,647.731</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15,123.680</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other Liquids, MBBL
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Gas, MMCF
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,005.532</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,442.038</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15,447.570</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Future Net Revenue, M$:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Undiscounted
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">28,730.881</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">341,510.781</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">370,241.656</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Discounted Per Annum at 10.00 Percent
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">20,460.939</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">162,524.359</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">182,985.328</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>

<P align="left">
<FONT size="2">Note: Due to the method of rounding within Aries
Software, Total Proved may not equal PDP + PDNP + PU.
</FONT>

<P align="left">
<FONT size="2">The attached Definitions describe all categories
of proved reserves, and the Discussion describes the bases of
this evaluation.
</FONT>

<P align="center"><FONT size="2">B-1
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left">
<FONT size="2">Warren Resources, Inc.
</FONT>
</DIV>

<DIV align="left">
<FONT size="2">Mr.&nbsp;Norman F. Swanton
</FONT>
</DIV>

<DIV align="left">
<FONT size="2">February&nbsp;10, 2004
</FONT>
</DIV>

<DIV align="left">
<FONT size="2">Page 2
</FONT>
</DIV>

<P align="left">
<FONT size="2">It has been a pleasure to serve you by preparing
this engineering evaluation. All related data will be retained
in our files and are available for your review.
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="36%"></TD>
    <TD width="64%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <FONT size="2">Yours very truly,
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <B><FONT size="2">WILLIAMSON PETROLEUM
    CONSULTANTS,&nbsp;INC.</FONT></B></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="36%"></TD>
    <TD width="1%"></TD>
    <TD width="63%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD></TD>
    <TD align="left">
    <FONT size="2">/s/ JOHN D. SAVAGE, P.E.
    </FONT></TD>
</TR>

</TABLE>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="36%"></TD>
    <TD width="64%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <HR size="1" align="left" noshade></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <FONT size="2">John D. Savage, P.E.
    </FONT></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <FONT size="2">Executive Vice President
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<FONT size="2">JDS/ BES/thb
</FONT>

<P align="left">
<FONT size="2">Attachments
</FONT>

<P align="center"><FONT size="2">B-2
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<P align="center">
<B><FONT size="2">DISCUSSION</FONT></B>

<P align="left">
<B><FONT size="2">Introduction</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Williamson Petroleum Consultants, Inc.
(Williamson) has performed an engineering evaluation to estimate
proved reserves and future net revenue from oil and gas
properties to the combined direct interests of Warren Resources,
Inc. (Warren) in certain properties, the interests of Warren as
the general partner in certain partnerships, and the total
controlled interests of Warren in 13 LLC&#146;s. This evaluation
was authorized by Mr.&nbsp;Norman F. Swanton of Warren. The
results of the evaluation are summarized in the cover letter and
are presented by year in the summary tables.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Following the discussion is a list of all of the
partnerships with proved reserves managed by Warren. When
applicable, this listing shows the payout date for each
partnership and the general partner/limited partner interest
split before and after payout.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The individual projections of lease reserves and
economics include data that describe the production forecasts
and associated evaluation parameters such as interests, taxes,
product prices, operating costs, investments, salvage values,
abandonment costs, and net profit interests.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The properties evaluated in this report are
located in the states of California, New Mexico, North Dakota,
Texas, and Wyoming with the majority of the value in California.
Major-value properties are discussed in the Major Property
Review section of this Discussion.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Projections of the reserves and future net
revenue to the evaluated interests were based on economic
parameters and operating conditions considered to be applicable
as of December&nbsp;31, 2003 and are pursuant to the financial
reporting requirements of the Securities and Exchange Commission
(SEC). This evaluation, in conjunction with other documents and
data, is being used by Warren as an annual update and for SEC
filings.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Net income to the evaluated interests is the
future net revenue after consideration of royalty revenue
payable to others, taxes, operating expenses, investments,
salvage values, abandonment costs, and net profit interests, as
applicable. The future net revenue is before federal income tax
and excludes consideration of any encumbrances against the
properties if such exist.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The future net revenue values presented in the
Lease Reserves and Economics section of this report and
summarized in the cover letter were based on projections of oil
and gas production. It was assumed there would be no significant
delay between the date of oil and gas production and the receipt
of the associated revenue for this production.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Unless specifically identified and documented by
Warren as having curtailment problems, gas production trends
have been assumed to be a function of well productivity and not
of market conditions. The effect of &#147;take or pay&#148;
clauses in gas contracts was not considered.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Oil and gas reserves were evaluated for the
proved developed producing, proved developed nonproducing, and
proved undeveloped categories. The summary classification of
proved developed reserves combines the proved developed
producing and proved developed nonproducing categories.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In preparing this evaluation, no attempt has been
made to quantify the element of uncertainty associated with any
category. Reserves were assigned to each category as warranted.
The attached Definitions describe all categories of proved
reserves.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Oil reserves are expressed in thousands of United
States (U.S.) barrels (MBBL)&nbsp;of 42 U.S.&nbsp;gallons. Gas
volumes are expressed in millions of cubic feet (MMCF)&nbsp;at
60 degrees Fahrenheit and at the legal pressure base that
prevails in the state in which the reserves are located. No
adjustment of the individual gas volumes to a common pressure
base has been made.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The future net revenue was discounted at an
annual rate of 10.00&nbsp;percent as requested by Warren. Future
net revenue was also discounted at various secondary rates and
is displayed as totals only. The 10.00&nbsp;percent rate was
included in accordance with the reporting requirements of the
SEC. The future net revenue was discounted monthly at the
midpoint of the month. Capital costs were discounted at the time
they occurred and
</FONT>

<P align="center"><FONT size="2">B-3
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left">
<FONT size="2">were compounded annually. No opinion is expressed
by Williamson in this report as to a fair market value of the
evaluated properties.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">This report includes only those costs and
revenues which are considered by Warren to be directly
attributable to individual leases and areas. There could exist
other revenues, overhead costs, or other costs associated with
Warren which are not included in this report. Such additional
costs and revenues are outside the scope of this report. This
report is not a financial statement for Warren and should not be
used as the sole basis for any transaction concerning Warren or
the evaluated properties.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The reserves projections in this evaluation are
based on the use of the available data and accepted industry
engineering methods. Future changes in any operational or
economic parameters or production characteristics of the
evaluated properties could increase or decrease their reserves.
Unforeseen changes in market demand or allowables set by various
regulatory agencies could also cause actual production rates to
vary from those projected. The dates of first production for
nonproducing properties were based on estimates by Warren or
Williamson and the actual dates may vary from those estimated.
Williamson reserves the right to alter any of the reserves
projections and the associated economics included in this
evaluation in any future evaluations based on additional data
that may be acquired.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Williamson is an independent consulting firm and
does not own any interests in the oil and gas properties covered
by this report. No employee, officer, or director of Williamson
is an employee, officer, or director of Warren. Neither the
employment of nor the compensation received by Williamson is
contingent upon the values assigned to the properties covered by
this report.
</FONT>

<P align="left">
<B><FONT size="2">Data Sources</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">All data utilized in the preparation of this
report with respect to interests, reversionary status, oil and
gas prices, gas categories, gas contract terms, operating
expenses, investments, salvage values, abandonment costs, net
profit interests, well information, and current operating
conditions, as applicable, were provided by Warren and the
operators. The production data were updated by client data
through October 2003 in California. Production was updated by
public record through September 2003 in New Mexico and Texas,
and October 2003 in Wyoming. In North Dakota, production was
updated by public record through August 2003. All data have been
reviewed for reasonableness and, unless obvious errors were
detected, have been accepted as correct. It should be emphasized
that revisions to the projections of reserves and economics
included in this report may be required if the provided data are
revised for any reason. No inspection of the properties was made
as this was not considered within the scope of this evaluation.
No investigation was made of any environmental liabilities that
might apply to the evaluated properties, and no costs are
included for any possible related expenses.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Warren represented to Williamson that it has, or
can generate, the financial and operational capabilities to
accomplish those projects evaluated by Williamson which require
capital expenditures.
</FONT>

<P align="left">
<B><FONT size="2">Method of Reserves Determination</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The estimates of reserves contained in this
report were determined by accepted industry methods and in
accordance with the attached Definitions of Oil and Gas
Reserves. Methods utilized in this report include extrapolation
of historical production trends, analogy to similar properties,
and volumetric calculations. Where sufficient production history
and other data were available, reserves for producing properties
were determined by extrapolation of historical production
trends. Analogy to similar properties or volumetric calculations
were used for nonproducing properties and those producing
properties which lacked sufficient production history and other
data to yield a definitive estimate of reserves. Reserves
projections based on analogy are subject to change due to
subsequent changes in the analogous properties or subsequent
production from the evaluated properties. Volumetric
calculations are often based upon limited log and/or core
analysis data and incomplete reservoir fluid and formation rock
data. Since these limited data must frequently be extrapolated
over an assumed drainage area, subsequent production performance
trends or material balance calculations may cause the need for
significant revisions to the estimates of reserves.
</FONT>

<P align="center"><FONT size="2">B-4
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<P align="left">
<B><FONT size="2">Oil Pricing</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">West Texas Intermediate (WTI)&nbsp;NYMEX spot
prices were subtracted from lease wellhead prices provided by
Warren for the most recent 12-month period to determine lease
price differentials. These lease differentials were used with a
December&nbsp;31, 2003 WTI NYMEX spot price of $32.55 to
estimate wellhead prices at the effective date. Prices were held
constant for the life of the properties.
</FONT>

<P align="left">
<B><FONT size="2">Gas Pricing</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Henry Hub (HH)&nbsp;NYMEX spot prices were
subtracted form the lease wellhead prices provided by Warren for
the most recent 12-month period to determine lease price
differentials. These lease differentials were used with a
December&nbsp;31, 2003 HH NYMEX spot price of $5.825 to estimate
wellhead prices at the effective date. In addition, the L-X Bar
wells include price deductions to cover the cost attributed to
transportation, commodity, and gathering. The Atlantic Rim wells
include a price adjustment to cover gathering costs. All prices
are held constant for the life of the properties.
</FONT>

<P align="left">
<B><FONT size="2">Pricing Statement</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">It should be emphasized that with the current
economic uncertainties, fluctuation in market conditions could
significantly change the economics of the properties included in
this report.
</FONT>

<P align="left">
<B><FONT size="2">Operating Expenses</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Operating expenses were provided by Warren for
the period between November&nbsp;2002 and October&nbsp;2003 and
are represented to be an average of all recurring expenses which
are billable to the working interest owners. Expenses for
workovers, well stimulations, and other maintenance were not
included in the operating expenses unless such work was expected
on a recurring basis. Judgments for the exclusion of the
nonrecurring expenses were made by Warren and/or Williamson. For
new and developing properties where data were unavailable,
operating expenses were estimated by Warren based on analogy
with similar properties. Operating costs were held constant for
the life of the properties.
</FONT>

<P align="left">
<B><FONT size="2">Production and Ad Valorem Taxes</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">State production taxes have been deducted at the
published rates as appropriate. Average county ad valorem taxes
were deducted for those properties located in states for which
the data were available. Any ad valorem taxes for properties in
other states were assumed to be included in the operating
expenses.
</FONT>

<P align="left">
<B><FONT size="2">Investments</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">All capital costs for drilling and completion of
wells and nonrecurring workover or operating costs have been
deducted as applicable. These costs were provided by Warren or,
where not supplied, were estimated by Williamson. No adjustments
were made to account for the potential effect of inflation on
these costs.
</FONT>

<P align="left">
<B><FONT size="2">Salvage and Property Abandonment</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Neither salvage values nor abandonment costs were
provided by Warren to be included in this evaluation.
</FONT>

<P align="left">
<B><FONT size="2">Major Property Review</FONT></B>

<P align="left">
<B><I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Wilmington
Townlot Unit, Los&nbsp;Angeles County, California</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The top valued property in this evaluation is the
Wilmington Townlot Unit (WTU). The producing wells and the
25&nbsp;proposed waterflood patterns make up over
78.4&nbsp;percent of the total proved future net revenue
discounted at 10.00&nbsp;percent per annum (DFNR).
</FONT>

<P align="center"><FONT size="2">B-5
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The WTU is located in the Wilmington field, Los
Angeles County, western side of the Wilmington field. The WTU
first produced in 1937. Production has been primarily from the
following zones: Tar, Ranger, Upper Terminal, Ford, and 237/
Schist.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The WTU Ranger and Upper Terminal zones were
unitized by Exxon Company, USA effective February&nbsp;1, 1972.
The following year, waterflooding began in the Ranger and Upper
Terminal zones. Exxon operated the property until May of 1997
when it was purchased by the current operator, Magness Petroleum
Company.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Recoveries from the WTU have been lower than
expected based on waterflood recoveries from offsetting
properties in the Wilmington field. This is most likely due to
poor completion design which led to poor vertical conformance
and poor sweep efficiency of some Ranger&nbsp;&#151; Upper
Terminal sub-zones. The complex faulting patterns present in the
WTU may also have hindered an efficient sweep of the reservoir.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">It is believed that there is a significant amount
of recoverable oil remaining in these unswept sub-zones;
however, proper completion design and proper waterflood pattern
design and placement will be required to capture this oil.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">To estimate the remaining waterflood reserves in
the WTU, secondary-to-primary recovery ratios were calculated
for the three waterflood areas closest to the WTU. An average
secondary-to-primary ratio of 0.6:1.0 was calculated for the
offsets. Assuming that the WTU could experience a similar
recovery, an estimated gross 22,500,000&nbsp;barrels of oil
remain to be recovered through enhanced waterflood operations.
Approximately 25&nbsp;five-spot waterflood patterns will need to
be established to recover the above reserves. During 1999, work
was started on the first three waterflood patterns. These three
patterns are scheduled to be completed by December&nbsp;2004. It
is anticipated that full-scale waterflooding will begin upon
complete development of the first three patterns.
</FONT>

<P align="center"><FONT size="2">B-6
</FONT>

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<DIV align="left">
<HR size="1" width="100%" align="left" noshade>
</DIV>

<DIV align="left">
<HR size="1" width="100%" align="left" noshade>
</DIV>

<P align="center">
<IMG src="y99523y9952301.gif" alt="(WARREN RESOURCES INC. LOGO)">

<P align="center">
<B><FONT size="6">K</FONT><FONT size="5">EY</FONT><FONT size="6">B</FONT><FONT size="5">ANC</FONT><FONT size="6">
C</FONT><FONT size="5">APITAL</FONT><FONT size="6">
M</FONT><FONT size="5">ARKETS</FONT></B>

<P align="center">
<B><FONT size="6">J</FONT><FONT size="5">EFFERIES</FONT><FONT size="6">
&#38; C</FONT><FONT size="5">OMPANY,</FONT><FONT size="6">
I</FONT><FONT size="5">NC.</FONT></B>

<P align="center">
<B><FONT size="6">S</FONT><FONT size="5">ANDERS</FONT><FONT size="6">
M</FONT><FONT size="5">ORRIS</FONT><FONT size="6">
H</FONT><FONT size="5">ARRIS</FONT></B>

<P align="center">
<HR size="1" width="22%" align="center" noshade>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">You should rely only on the information
contained or incorporated by reference in this prospectus. No
dealer, salesperson or other person is authorized to give
information that is not contained in this prospectus. This
prospectus is not an offer to sell nor is it seeking an offer to
buy these securities in any jurisdiction where the offer or sale
is not permitted.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Through and
including &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2004 (the 25th day after the date of this prospectus), all
dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers&#146; obligation
to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
</FONT>

<P align="left">
<HR size="1" width="100%" align="left" noshade>

<DIV align="left">
<HR size="1" width="100%" align="left" noshade>
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<P align="center">
<B><FONT size="2">PART&nbsp;II</FONT></B>

<P align="center">
<B><FONT size="2">INFORMATION NOT REQUIRED IN
PROSPECTUS</FONT></B>

<P align="left">
<B><FONT size="2">Item&nbsp;13.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other
Expenses of Issuance and Distribution.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table indicates the expenses to be
incurred in connection with the offering described in this
Registration Statement, other than underwriting discounts and
commissions, all of which will be paid by the Company. All
amounts are estimates, other than the registration fee and the
NASD fee.
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="82%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">SEC registration fee
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,869.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">NASD filing fee
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Nasdaq National Market listing fee
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Printing and engraving expenses
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Legal fees and expenses
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accounting fees and expenses
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Blue Sky fees and expenses
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Transfer agent and registrar fees and expenses
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Miscellaneous
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="2%"></TD>
    <TD width="98%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">*&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">To be completed by amendment.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We will pay all of the expenses to be incurred in
connection with the issuance and distribution of the securities
registered hereby.
</FONT>

<P align="left">
<B><FONT size="2">Item&nbsp;14.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Indemnification
of Directors and Officers.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Maryland General Corporation Law allows
corporations to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or
completed action or suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he
or she is or was a director, officer, employee or agent of the
corporation or is or was serving at the request of the
corporation as a director, officer, employee, partner, trustee,
or agent of another corporation, partnership, joint venture,
trust, other enterprise or employee benefit plan, unless it is
established that:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the act or omission was material to the matter
    giving rise to the proceeding and either was committed in bad
    faith or was the result of active and deliberate dishonesty;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the person actually received an improper personal
    benefit in money, property or services;&nbsp;or
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">in the case of any criminal proceeding, the
    person had reasonable cause to believe that the act or omission
    was unlawful.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Under Maryland law, indemnification may be
provided against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by the person in
connection with the proceeding. The indemnification may be
provided, however, only if authorized for a specific proceeding
after a determination has been made that indemnification is
permissible under the circumstances because the person met the
applicable standard of conduct. This determination is required
to be made:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">by the board of directors by a majority vote of a
    quorum consisting of directors not, at the time, parties to the
    proceeding or, if a quorum cannot be obtained, then by a
    majority vote of a committee of the board consisting solely of
    two or more directors not, at the time, parties to the
    proceeding and who a majority of the board of directors
    designated to act in the matter;
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">II-1
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">by special legal counsel selected by the board or
    board committee by the vote set forth above, or, if such vote
    cannot be obtained, by a majority of the entire board;&nbsp;or
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">by the stockholders.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If the proceeding is one by or in the right of
the corporation, indemnification may not be provided as to any
proceeding in which the person is found liable to the
corporation.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">A Maryland corporation may pay, before final
disposition, the expenses, including attorneys&#146; fees,
incurred by a director, officer, employee or agent in defending
a proceeding. Under Maryland law, expenses may be advanced to a
director or officer when the director or officer gives a written
affirmation of his or her good faith belief that he or she has
met the standard of conduct necessary for indemnification and a
written undertaking to the corporation to repay the amounts
advanced if it is ultimately determined that he or she is not
entitled to indemnification. Maryland law does not require that
the undertaking be secured, and the undertaking may be accepted
without reference to the financial ability of the director or
officer to repay the advance. Unless limited by its articles of
incorporation, a Maryland corporation is required to indemnify
any director who has been successful, on the merits or
otherwise, in defense of a proceeding for reasonable expenses.
The determination as to reasonableness of expenses is required
to be made in the same manner as required for indemnification.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Under Maryland law, the indemnification and
advancement of expenses provided by statute are not exclusive of
any other rights to which a person who is not a director seeking
indemnification or advancement of expenses may be entitled under
any charter, bylaw, agreement, vote of stockholders, vote of
directors or otherwise.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our articles of incorporation provide that we
shall indemnify each director or officer:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">to the fullest extent permitted by the Maryland
    General Corporation Law, or any similar provision or provisions
    of applicable law at the time in effect, in connection with any
    threatened, pending or completed action, suit or proceeding,
    whether civil, criminal, administrative or investigative, by
    reason of the fact that he or she is or was at any time a
    director or officer, or is or was at any time serving at our
    request as a director, officer, employee, agent or trustee of
    another corporation, partnership, limited liability company,
    joint venture, trust, other enterprise or employee benefit
    plan;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">to the fullest extent permitted by the common law
    and by any statutory provision other than the Maryland General
    Corporation Law in connection with any threatened, pending or
    completed action, suit or proceeding, whether civil, criminal,
    administrative or investigative, by reason of the fact that he
    or she is or was at any time a director or officer, or is or was
    at any time serving at our request as a director, officer,
    employee, agent or trustee of another corporation, partnership,
    limited liability company, joint venture, trust, other
    enterprise or employee benefit plan.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Additionally, our articles of incorporation
provide that we may indemnify any of our employees or agents to
the fullest extent permitted by the Maryland General Corporation
Law, or any similar provision or provisions of applicable law at
the time in effect, in connection with any threatened, pending
or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact
that he or she is or was at any time our employee or agent, or
is or was at any time serving at our request as a director,
officer, employee, agent or trustee of another corporation,
partnership, limited liability company, joint venture, trust,
other enterprise or employee benefit plan.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Reasonable expenses incurred in defending any
action, suit or proceeding described above shall be paid by the
corporation in advance of the final disposition of such action,
suit or proceeding upon receipt of an undertaking by or on
behalf of such director, officer or employee to repay such
amount to the corporation if it shall ultimately be determined
that he is not entitled to be indemnified by us.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In addition to the general indemnification
described above, Maryland law permits corporations to include
any provision expanding or limiting the liability of its
directors and officers to the corporation or its
</FONT>

<P align="center"><FONT size="2">II-2
</FONT>

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<DIV align="left">
<FONT size="2">stockholders for money damages, but may not
include any provision that restricts or limits the liability of
its directors or officers to the corporation or its stockholders:
</FONT>
</DIV>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">to the extent that it is proved that the person
    actually received an improper benefit or profit in money,
    property, or services for the amount of the benefit or profit in
    money, property or services actually received;&nbsp;or
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">to the extent that a judgment or other final
    adjudication adverse to the person is entered in a proceeding
    based on a finding in the proceeding that the person&#146;s
    action, or failure to act, was the result of active and
    deliberate dishonesty and was material to the cause of action
    adjudicated in the proceeding.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have adopted, in our charter, a provision that
eliminates and limits the personal liability of each of our
directors and officers to the full extent permitted by the laws
of the State of Maryland.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have entered into an indemnification agreement
with each of our directors and officers against liabilities that
may arise by reason of their status or service as directors or
officers and to advance their expenses incurred as a result of a
proceeding as to which they may be indemnified. These
indemnification agreements are intended to be in addition to any
other rights that the indemnitee may have under our certificate
of incorporation, bylaws and applicable law.
</FONT>

<P align="left">
<B><FONT size="2">Item&nbsp;15.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Recent
Sales of Unregistered Securities.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Since its inception, we have issued securities in
the following transactions, each of which was exempt from the
registration requirements of the Securities Act of 1933, as
amended, under Sections&nbsp;3(a)(9) and 4(2) of the Securities
Act, as transactions by an issuer not involving any public
offering or under Rules&nbsp;701 and 506 thereunder. All of the
below-referenced securities are deemed restricted securities for
the purposes of the Securities Act.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In August 2004, we granted options to purchase
60,000&nbsp;shares of common stock exercisable at $7.00 per
share to six directors, and one of our officers exercised an
option to purchase 98,750&nbsp;shares of our common stock for an
aggregate purchase price of $395,000.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Between February and July 2004, we issued
41,749&nbsp;shares of our Series&nbsp;A 8% cumulative
convertible preferred stock to six accredited investor drilling
programs formed from 1996 through 1997 as an additional capital
contribution and received additional standard membership
interests in the LLCs.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In February and July 2004, we issued
2,875,000&nbsp;shares of our common stock to five institutional
investors and one individual accredited investor for an
aggregate purchase price of $20,125,000 in cash. In addition, as
part of this transaction, we issued Class&nbsp;A warrants to
purchase&nbsp;718,750&nbsp;shares of our common stock at an
exercise price per share of $10.00 and Class&nbsp;B warrants to
purchase&nbsp;718,750&nbsp;shares of our common stock at an
exercise price per share of $12.00 to these institutional
investors.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In January 2004, we issued 11,331&nbsp;shares of
our Series&nbsp;A 8% cumulative convertible preferred stock to
five accredited investors as an offering price of
$12.00&nbsp;per share for an aggregate purchase price of
$135,972 in cash.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In April 2004, we granted options to purchase
510,250&nbsp;shares of our common stock exercisable at
$7.00&nbsp;per share to 27 officers, directors and employees
pursuant to our stock option plans.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In December 2003, we granted options to purchase
25,000 shares of our common stock exercisable at $7.00&nbsp;per
share to one director pursuant to our stock option plan.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Between March and December 2003, we issued
(i)&nbsp;3,005,186&nbsp;shares of our Series&nbsp;A 8%
cumulative convertible preferred stock to six accredited
investor drilling programs formed from 1994 through 1997 and two
joint venture programs formed in 2000 and 2001 as an additional
capital contribution and received additional standard membership
interests in the LLCs; (ii)&nbsp;905,537&nbsp;shares of our
Series&nbsp;A 8% cumulative convertible preferred stock to
accredited investors at an offering price of $12.00&nbsp;per
share for an aggregate purchase price of $10,866,444 in cash;
and (iii)&nbsp;393,522&nbsp;shares of our Series&nbsp;A 8%
cumulative convertible
</FONT>

<P align="center"><FONT size="2">II-3
</FONT>

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<DIV align="left">
<FONT size="2">preferred stock to individual and entity holders
of $4,722,264 principal amount of our 2007 and 2017 convertible
bonds who elected to convert their bonds into our preferred
stock at a conversion price of $12 principal amount per share.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In November 2003, we issued 419,287&nbsp;shares
of our Series&nbsp;A institutional 8% cumulative convertible
preferred stock to three accredited investors at an offering
price of $12.00&nbsp;per share for an aggregate purchase price
of $5,031,444 in cash. As part of this transaction, we issued
Class&nbsp;A warrants to purchase 180,625&nbsp;shares of our
common stock at an exercise price per share of $10.00 to
investors and their representatives.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In September 2003, we granted options to purchase
85,000 shares of our common stock exercisable at $4.00&nbsp;per
share to eight officers, directors and employees pursuant to our
stock option plans.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In May 2003, we granted options to purchase
1,264,053 shares of our common stock exercisable at
$7.00&nbsp;per share to 24 officers, directors and employees
pursuant to our stock option plans.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In December 2002, we issued
(i)&nbsp;359,694&nbsp;shares of our Series&nbsp;A 8% cumulative
convertible preferred stock to accredited investors at an
offering price of $12.00&nbsp;per share for an aggregate
purchase price of $4,316,328 in cash;
(ii)&nbsp;81,543&nbsp;shares of our Series&nbsp;A 8% cumulative
convertible preferred stock to individual and entity holders of
$978,516 principal amount of our 2007 and 2017 bonds who elected
to convert their bonds into our preferred stock at a conversion
price of $12.00 principal amount per share; and
(iii)&nbsp;1,342,960&nbsp;shares of our Series&nbsp;A 8%
cumulative convertible preferred stock to six accredited
investor drilling programs formed from 1994 through 1997 as an
additional capital contribution and received additional standard
membership interests in the LLCs.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During September 2001, we granted options to
purchase 2,505,242&nbsp;shares our common stock exercisable at
$10.00&nbsp;per share to 22 officers, directors and employees
under our stock option plans.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="9%"></TD>
    <TD width="91%"></TD>
</TR>

<TR valign="top">
    <TD><B><FONT size="2">Item&nbsp;16.</FONT></B></TD>
    <TD>
    <B><FONT size="2">Exhibits and Financial Statement
    Schedules.</FONT></B></TD>
</TR>

</TABLE>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="83%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exhibit</FONT></B></TD>
    <TD></TD>
    <TD></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Description</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">1.1*</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Underwriting Agreement among Warren
    Resources, Inc. and the underwriters named therein
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">2.1(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Stock Exchange Agreement dated September&nbsp;1,
    2000 by and among Warren Resources, Inc., Petroleum Development
    Corporation, James C. Johnson,&nbsp;Jr. and Gregory S. Johnson.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">3.1(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">9)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Articles of Incorporation of Warren Resources,
    Inc. filed May&nbsp;20, 2004 (Maryland)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">3.2(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">9)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Articles Supplementary (Series&nbsp;A 8%
    Cumulative Convertible Preferred Stock ($.0001&nbsp;par value))
    (Maryland)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">3.3(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">9)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Articles Supplementary (Series&nbsp;A
    Institutional 8% Cumulative Convertible Preferred Stock
    ($.0001&nbsp;par value)) (Maryland)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">3.4(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">9)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Certificate of Correction to Articles
    Supplementary (Series A 8% Cumulative Convertible Preferred
    Stock) (Maryland)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">3.5(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">9)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Certificate of Correction to Articles
    Supplementary (Series&nbsp;A Institutional 8% Cumulative
    Convertible Preferred Stock) (Maryland)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">3.6(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">9)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Bylaws of the Warren Resources, Inc.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.1*</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Specimen Stock Certificate for Common Stock
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.2(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Indenture between Warren Resources, Inc. and
    Continental Stock Transfer and Trust Company, as Trustee, dated
    December&nbsp;1, 2000 regarding 12%&nbsp;debentures due
    December&nbsp;31, 2007
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.3(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Bond Certificate for 12%&nbsp;debentures
    due December&nbsp;31, 2007
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.4(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Indenture between Warren Resources, Inc. and
    Continental Stock Transfer and Trust Company, as Trustee, dated
    February&nbsp;1, 1999 regarding 13.02%&nbsp;sinking fund
    convertible bonds due December&nbsp;31, 2010 and
    December&nbsp;31, 2015
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.5(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Bond Certificate for
    13.02%&nbsp;debentures due December&nbsp;31, 2010
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">II-4
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="83%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exhibit</FONT></B></TD>
    <TD></TD>
    <TD></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Description</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.6(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Bond Certificate for
    13.02%&nbsp;debentures due December&nbsp;31, 2015
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.11</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(6)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Class&nbsp;A Common Stock Purchase Warrant
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.12</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(6)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Class&nbsp;B Common Stock Purchase Warrant
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.13</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(2)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Registration Rights Agreement dated
    December&nbsp;12, 2002 by and between Warren Resources, Inc. and
    the Investors in the Series&nbsp;A 8% Cumulative Convertible
    Preferred Stock
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.14</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(7)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Subscription and Registration Rights
    Agreement dated February&nbsp;3, 2004 by and between Warren
    Resources, Inc. and the Accredited Investors in Warren
    Resources, Inc.&#146;s private placement dated January&nbsp;21,
    2004
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.15</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(9)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Subscription and Registration Rights
    Agreement dated July&nbsp;30, 2004 by and between Warren
    Resources, Inc. and the Accredited Investors in Warren
    Resources, Inc.&#146;s private placement dated July&nbsp;9, 2004
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.16</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(5)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Contribution Agreement by and between
    Warren Resources, Inc. and various Delaware limited liability
    companies
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">5.1*</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Opinion of Patton Boggs LLP, counsel to Warren
    Resources, Inc.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.1(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">2000 Equity Incentive Plan for Employees of
    Warren E&#38;P, Inc. (formerly Petroleum Development
    Corporation, a wholly owned subsidiary of Warren Resources, Inc.)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.2(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Amendment to 2000 Stock Incentive Plan for
    Employees of Warren E&#38;P, Inc. (formerly Petroleum
    Development Corporation, a wholly owned subsidiary of Warren
    Resources, Inc.)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.3(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">2001 Stock Incentive Plan
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.4(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">2001 Key Employee Stock Incentive Plan
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.5(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Employment Agreement dated January&nbsp;1, 2001,
    between Warren Resources, Inc. and Norman F. Swanton
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.6(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">8)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Amendment to Employment Agreement dated
    January&nbsp;1, 2004, between Warren Resources, Inc. and Norman
    F. Swanton
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.7(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Employment Agreement dated January&nbsp;1, 2001,
    between Warren Resources, Inc. and Timothy A. Larkin
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.8(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">8)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Amendment to Employment Agreement dated
    January&nbsp;1, 2004, between Warren Resources, Inc. and Timothy
    A. Larkin
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.9(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">8)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Employment Agreement dated January&nbsp;1, 2004,
    between Warren Resources, Inc. and David E. Fleming
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(8)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Employment Agreement dated March&nbsp;1, 2004,
    between Warren Resources, Inc. and Lloyd Davies
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.11</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(9)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Employment Agreement dated January&nbsp;1, 2004,
    between Warren Resources, Inc. and Ellis Vickers
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.12</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Indemnification Agreement between Warren
    Resources, Inc. and each of the directors and certain officers
    of Warren Resources, Inc.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.13</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Joint Venture Agreement dated May&nbsp;24, 1999,
    by and between Warren Resources of California, Inc., Warren
    Development Corp., Warren E&#38;P, Inc. and Magness Petroleum
    Company
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.14</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Gas Purchase Agreement dated January&nbsp;28,
    2000, by and between Western Gas Resources, Inc. and Big Basin
    Petroleum, LLC
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.15</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">December&nbsp;20, 2000 Letter of Agreement to
    Amend the Gas Purchase Contract dated January&nbsp;28, 2000,
    between Western Gas Resources Inc. and Petroleum Development
    Corp., as successor in interest to Big Basin Petroleum, LLC
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.16</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Gas Purchase and Sales Contract dated
    April&nbsp;1, 2000, between Warren Resources, Inc. and Tenaska
    Marketing Ventures
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.17</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Master Gas Purchase and Sale Agreement
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.18</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(3)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Exchange Agreement dated December&nbsp;13, 2002
    between Anadarko Petroleum Corporation and Warren Resources, Inc.
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">II-5
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="83%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exhibit</FONT></B></TD>
    <TD></TD>
    <TD></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Description</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.19</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(3)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Joint Exploration Agreement dated
    December&nbsp;11, 2002 between Anadarko Petroleum Corporation
    and Warren Resources, Inc.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">14(4)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Code of Ethics for Senior Financial Officers
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">21*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Subsidiaries of Warren Resources, Inc.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">23.1*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Consent of Grant Thorton LLP
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">23.2*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Consent of Williamson Petroleum Consultants, Inc.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">23.3*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Consent of CBIZ Valuation Group, Inc.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">23.4*</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Consent of Patton Boggs LLP (contained in
    Exhibit&nbsp;5.1)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">24.1*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Powers of Attorney (included on signature page of
    this registration statement)
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="3%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Incorporated by reference to the Company&#146;s
    Registration Statement on Form&nbsp;10, Commission File
    No.&nbsp;000-33275, filed on October&nbsp;26, 2001.
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(2)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Incorporated by reference to the Company&#146;s
    Current Report on Form&nbsp;8-K, Commission File
    No.&nbsp;000-33275, filed on December&nbsp;17, 2002.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(3)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Incorporated by reference to the Company&#146;s
    Current Report on Form&nbsp;8-K, Commission File
    No.&nbsp;000-33275, filed on December&nbsp;24, 2002.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(4)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Incorporated by reference to the Company&#146;s
    Annual Report on Form&nbsp;10-K for the year ended
    December&nbsp;31, 2002, Commission File No.&nbsp;000-33275,
    filed on March&nbsp;31, 2003.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(5)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Incorporated by reference to the Company&#146;s
    Quarterly Report on Form&nbsp;10-Q for the quarter ended
    June&nbsp;30, 2003, Commission File No.&nbsp;000-33275, filed on
    August&nbsp;13, 2003.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(6)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Incorporated by reference to the Company&#146;s
    Annual Report on Form&nbsp;10-K for the year ended
    December&nbsp;31, 2003, Commission File No.&nbsp;000-33275,
    filed on March&nbsp;15, 2004.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(7)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Incorporated by reference to the Company&#146;s
    Current Report on Form&nbsp;8-K, Commission File
    No.&nbsp;000-33275, filed on February&nbsp;11, 2004.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(8)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Incorporated by reference to the Company&#146;s
    Quarterly Report on Form&nbsp;10-Q for the quarter ended
    March&nbsp;31, 2004, Commission File No.&nbsp;000-33275, filed
    on May&nbsp;12, 2004.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(9)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Incorporated by reference to the Company&#146;s
    Quarterly Report on Form&nbsp;10-Q for the quarter ended
    June&nbsp;30, 2004, Commission File No.&nbsp;000-33275, filed on
    August&nbsp;16, 2004.
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="2%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">*&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Filed herewith.
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="3%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">**&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">To be filed by amendment.
    </FONT></TD>
</TR>

</TABLE>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="9%"></TD>
    <TD width="91%"></TD>
</TR>

<TR valign="top">
    <TD><B><FONT size="2">Item&nbsp;17.</FONT></B></TD>
    <TD>
    <B><FONT size="2">Undertakings.</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than payment by the registrant
of expenses incurred or paid by a director, officer, or
controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The undersigned registrant hereby undertakes that:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <FONT size="2">(1)&nbsp;For purposes of determining any
    liability under the Securities Act of 1933, the information
    omitted from the form of prospectus filed as part of this
    registration statement in reliance upon
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">II-6
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <FONT size="2">Rule&nbsp;430A and contained in a form of
    prospectus filed by the registrant pursuant to
    Rule&nbsp;424(b)(1) or (4)&nbsp;or 497(h) under the Securities
    Act shall be deemed to be part of this registration statement as
    of the time it was declared effective.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <FONT size="2">(2)&nbsp;For the purpose of determining any
    liability under the Securities Act of 1933, each post-effective
    amendment that contains a form of prospectus shall be deemed to
    be a new registration statement relating to the securities
    offered therein, and the offering of such securities at that
    time shall be deemed to be the initial <I>bona fide </I>offering
    thereof.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">II-7
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<P align="center">
<B><FONT size="2">SIGNATURES</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Pursuant to the requirements of the Securities
Act of 1933, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in New York, New York, on this
25th&nbsp;day of August, 2004.
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="40%"></TD>
    <TD width="60%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <B><FONT size="2">WARREN RESOURCES, INC.</FONT></B></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="40%"></TD>
    <TD width="2%"></TD>
    <TD width="58%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">By:&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">/s/ NORMAN F. SWANTON
    </FONT></TD>
</TR>

</TABLE>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="40%"></TD>
    <TD width="60%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <HR size="1" align="left" noshade></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <FONT size="2">Norman F. Swanton
    </FONT></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <FONT size="2">Chairman and Chief Executive Officer
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Each person whose signature appears below as a
signatory to this registration statement constitutes and
appoints Norman F. Swanton and Timothy A. Larkin, or either one
of them, his true and lawful attorney-in-fact and agent with
full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign
any and all amendments to this registration statement, and to
file the same, with all exhibits thereto, and all other
documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every
act and thing requisite and necessary to be done in and about
the premises, as fully to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all that
said attorney-in-fact and agent or his substitute may lawfully
do or cause to be done by virtue hereof. Pursuant to the
requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons
in the capacities and on the dates indicated, in multiple
counterparts with the effect of one original.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Pursuant to the requirements of the Securities
Act of 1933, this registration statement has been signed by the
following persons in the capacities on August&nbsp;25, 2004.
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="39%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="49%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Signatures</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Title</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="5"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <FONT size="2">/s/ NORMAN F. SWANTON<BR>
    <HR size="1" noshade>Norman F. Swanton
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">President, Chairman of the Board and Chief<BR>
    Executive Officer
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <FONT size="2">/s/ TIMOTHY A. LARKIN<BR>
    <HR size="1" noshade>Timothy A. Larkin
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Executive Vice President and Chief Financial
    Officer
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <FONT size="2">/s/ DOMINICK D&#146;ALLEVA<BR>
    <HR size="1" noshade>Dominick D&#146;Alleva
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Director
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <FONT size="2">/s/ CHET BORGIDA<BR>
    <HR size="1" noshade>Chet Borgida
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Director
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <FONT size="2">/s/ ANTHONY L. COELHO<BR>
    <HR size="1" noshade>Anthony L. Coelho
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Director
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <FONT size="2">/s/ LLOYD G. DAVIES<BR>
    <HR size="1" noshade>Lloyd G. Davies
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Director
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <FONT size="2">/s/ MARSHALL MILLER<BR>
    <HR size="1" noshade>Marshall Miller
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Director
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">II-8
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="51%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="36%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Signatures</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Title</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="5"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <FONT size="2">/s/ THOMAS G. NOONAN<BR>
    <HR size="1" noshade>Thomas G. Noonan
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Director
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <FONT size="2">/s/ MICHAEL R. QUINLAN<BR>
    <HR size="1" noshade>Michael R. Quinlan
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Director
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">II-9
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<P align="center">
<B><FONT size="2">INDEX TO EXHIBITS</FONT></B>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="83%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exhibit</FONT></B></TD>
    <TD></TD>
    <TD></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Description</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">1.1*</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Underwriting Agreement among Warren
    Resources, Inc. and the underwriters named therein
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">2.1(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Stock Exchange Agreement dated September&nbsp;1,
    2000 by and among Warren Resources, Inc., Petroleum Development
    Corporation, James C. Johnson,&nbsp;Jr. and Gregory S. Johnson.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">3.1(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">9)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Articles of Incorporation of Warren Resources,
    Inc. filed May&nbsp;20, 2004 (Maryland)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">3.2(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">9)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Articles Supplementary (Series&nbsp;A 8%
    Cumulative Convertible Preferred Stock ($.0001&nbsp;par value))
    (Maryland)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">3.3(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">9)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Articles Supplementary (Series&nbsp;A
    Institutional 8% Cumulative Convertible Preferred Stock
    ($.0001&nbsp;par value)) (Maryland)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">3.4(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">9)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Certificate of Correction to Articles
    Supplementary (Series A 8% Cumulative Convertible Preferred
    Stock) (Maryland)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">3.5(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">9)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Certificate of Correction to Articles
    Supplementary (Series&nbsp;A Institutional 8% Cumulative
    Convertible Preferred Stock) (Maryland)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">3.6(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">9)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Bylaws of the Warren Resources, Inc.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.1*</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Specimen Stock Certificate for Common Stock
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.2(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Indenture between Warren Resources, Inc. and
    Continental Stock Transfer and Trust Company, as Trustee, dated
    December&nbsp;1, 2000 regarding 12%&nbsp;debentures due
    December&nbsp;31, 2007
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.3(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Bond Certificate for 12%&nbsp;debentures
    due December&nbsp;31, 2007
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.4(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Indenture between Warren Resources, Inc. and
    Continental Stock Transfer and Trust Company, as Trustee, dated
    February&nbsp;1, 1999 regarding 13.02%&nbsp;sinking fund
    convertible bonds due December&nbsp;31, 2010 and
    December&nbsp;31, 2015
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.5(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Bond Certificate for
    13.02%&nbsp;debentures due December&nbsp;31, 2010
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.6(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Bond Certificate for
    13.02%&nbsp;debentures due December&nbsp;31, 2015
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.11</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(6)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Class&nbsp;A Common Stock Purchase Warrant
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.12</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(6)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Class&nbsp;B Common Stock Purchase Warrant
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.13</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(2)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Registration Rights Agreement dated
    December&nbsp;12, 2002 by and between Warren Resources, Inc. and
    the Investors in the Series&nbsp;A 8% Cumulative Convertible
    Preferred Stock
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.14</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(7)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Subscription and Registration Rights
    Agreement dated February&nbsp;3, 2004 by and between Warren
    Resources, Inc. and the Accredited Investors in Warren
    Resources, Inc.&#146;s private placement dated January&nbsp;21,
    2004
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.15</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(9)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Subscription and Registration Rights
    Agreement dated July&nbsp;30, 2004 by and between Warren
    Resources, Inc. and the Accredited Investors in Warren
    Resources, Inc.&#146;s private placement dated July&nbsp;9, 2004
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.16</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(5)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Contribution Agreement by and between
    Warren Resources, Inc. and various Delaware limited liability
    companies
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">5.1*</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Opinion of Patton Boggs LLP, counsel to Warren
    Resources, Inc.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.1(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">2000 Equity Incentive Plan for Employees of
    Warren E&#38;P, Inc. (formerly Petroleum Development
    Corporation, a wholly owned subsidiary of Warren Resources, Inc.)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.2(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Amendment to 2000 Stock Incentive Plan for
    Employees of Warren E&#38;P, Inc. (formerly Petroleum
    Development Corporation, a wholly owned subsidiary of Warren
    Resources, Inc.)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.3(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">2001 Stock Incentive Plan
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.4(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">2001 Key Employee Stock Incentive Plan
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.5(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Employment Agreement dated January&nbsp;1, 2001,
    between Warren Resources, Inc. and Norman F. Swanton
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.6(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">8)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Amendment to Employment Agreement dated
    January&nbsp;1, 2004, between Warren Resources, Inc. and Norman
    F. Swanton
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="83%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exhibit</FONT></B></TD>
    <TD></TD>
    <TD></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Description</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.7(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Employment Agreement dated January&nbsp;1, 2001,
    between Warren Resources, Inc. and Timothy A. Larkin
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.8(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">8)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Amendment to Employment Agreement dated
    January&nbsp;1, 2004, between Warren Resources, Inc. and Timothy
    A. Larkin
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.9(</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">8)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Employment Agreement dated January&nbsp;1, 2004,
    between Warren Resources, Inc. and David E. Fleming
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(8)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Employment Agreement dated March&nbsp;1, 2004,
    between Warren Resources, Inc. and Lloyd Davies
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.11</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(9)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Employment Agreement dated January&nbsp;1, 2004,
    between Warren Resources, Inc. and Ellis Vickers
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.12</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Indemnification Agreement between Warren
    Resources, Inc. and each of the directors and certain officers
    of Warren Resources, Inc.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.13</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Joint Venture Agreement dated May&nbsp;24, 1999,
    by and between Warren Resources of California, Inc., Warren
    Development Corp., Warren E&#38;P, Inc. and Magness Petroleum
    Company
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.14</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Gas Purchase Agreement dated January&nbsp;28,
    2000, by and between Western Gas Resources, Inc. and Big Basin
    Petroleum, LLC
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.15</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">December&nbsp;20, 2000 Letter of Agreement to
    Amend the Gas Purchase Contract dated January&nbsp;28, 2000,
    between Western Gas Resources Inc. and Petroleum Development
    Corp., as successor in interest to Big Basin Petroleum, LLC
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.16</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Gas Purchase and Sales Contract dated
    April&nbsp;1, 2000, between Warren Resources, Inc. and Tenaska
    Marketing Ventures
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.17</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(1)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Master Gas Purchase and Sale Agreement
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.18</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(3)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Exchange Agreement dated December&nbsp;11, 2002
    between Anadarko Petroleum Corporation and Warren Resources, Inc.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.19</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">(3)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Joint Exploration Agreement dated
    December&nbsp;13, 2002 between Anadarko Petroleum Corporation
    and Warren Resources, Inc.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">14(4)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Code of Ethics for Senior Financial Officers
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">21*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Subsidiaries of Warren Resources, Inc.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">23.1*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Consent of Grant Thorton LLP
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">23.2*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Consent of Williamson Petroleum Consultants, Inc.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">23.3*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Consent of CBIZ Valuation Group, Inc.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">23.4*</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Consent of Patton Boggs LLP (contained in
    Exhibit&nbsp;5.1)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">24.1*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Powers of Attorney (included on signature page of
    this registration statement)
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="3%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Incorporated by reference to the Company&#146;s
    Registration Statement on Form&nbsp;10, Commission File
    No.&nbsp;000-33275, filed on October&nbsp;26, 2001.
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(2)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Incorporated by reference to the Company&#146;s
    Current Report on Form&nbsp;8-K, Commission File
    No.&nbsp;000-33275, filed on December&nbsp;17, 2002.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(3)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Incorporated by reference to the Company&#146;s
    Current Report on Form&nbsp;8-K, Commission File
    No.&nbsp;000-33275, filed on December&nbsp;24, 2002.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(4)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Incorporated by reference to the Company&#146;s
    Annual Report on Form&nbsp;10-K for the year ended
    December&nbsp;31, 2002, Commission File No.&nbsp;000-33275,
    filed on March&nbsp;31, 2003.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(5)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Incorporated by reference to the Company&#146;s
    Quarterly Report on Form&nbsp;10-Q for the quarter ended
    June&nbsp;30, 2003, Commission File No.&nbsp;000-33275, filed on
    August&nbsp;13, 2003.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(6)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Incorporated by reference to the Company&#146;s
    Annual Report on Form&nbsp;10-K for the year ended
    December&nbsp;31, 2003, Commission File No.&nbsp;000-33275,
    filed on March&nbsp;15, 2004.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(7)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Incorporated by reference to the Company&#146;s
    Current Report on Form&nbsp;8-K, Commission File
    No.&nbsp;000-33275, filed on February&nbsp;11, 2004.
    </FONT></TD>
</TR>

</TABLE>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(8)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Incorporated by reference to the Company&#146;s
    Quarterly Report on Form&nbsp;10-Q for the quarter ended
    March&nbsp;31, 2004, Commission File No.&nbsp;000-33275, filed
    on May&nbsp;12, 2004.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(9)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Incorporated by reference to the Company&#146;s
    Quarterly Report on Form&nbsp;10-Q for the quarter ended
    June&nbsp;30, 2004, Commission File No.&nbsp;000-33275, filed on
    August&nbsp;16, 2004.
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="2%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">*&nbsp;</FONT></TD>
    <TD align="left">
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[{"type": "S-1", "sequence": "1", "filename": "y99523sv1.htm", "description": "FORM S-1", "secsgml_size_bytes": 1938945}]
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FORM S-1
Table of Contents
As filed with the Securities and Exchange
Commission on August 25, 2004
Registration
No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Warren Resources, Inc.
(Exact name of Registrant as specified in its
charter)
Maryland
1311
11-3024080
(State or jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification Number)
489 Fifth Avenue, 32nd Floor
New York, NY 10017
(212) 697-9660
(Address, including zip code,
    and
telephone number, including area code, of
Registrant's principal executive offices)
Norman F. Swanton
Chief Executive Officer
489 Fifth Avenue, 32nd Floor
New York, NY 10017
(212) 697-9660
(Name, address, including zip
    code, and
telephone number, including area code, of
agent for service)
Copies to:
Alan L. Talesnick
JoEllen L. Legg
Patton Boggs LLP
1660 Lincoln Street, Suite 1900
Denver, CO 80264-1901
(303) 830-1776
Christopher M. Kelly
Timothy J. Melton
Jones Day
North Point
901 Lakeside Avenue
Cleveland, OH 44114-1190
(216) 586-3939
Approximate date of
commencement of proposed sale to public:
As soon as
practicable after this Registration Statement becomes effective.
If any of the securities
being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities
Act of 1933, check the following
box.
o
If this Form is filed to
register additional securities for an offering pursuant to
Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same
offering.
o
If this Form is a
post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same
offering.
o
If this Form is a
post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same
offering.
o
If delivery of the
prospectus is expected to be made pursuant to Rule 434,
please check the following
box.
o
CALCULATION OF REGISTRATION FEE
Proposed Maximum
Title of Each Class of Securities
Aggregate Offering
Amount of
to be Registered
Amount
Registration Fee(2)
Common Stock, par value $.0001 per share(1)
$70,000,000
$8,869.00
(1)
Includes shares of common stock that may be
    purchased by the underwriters solely to cover over-allotments,
    if any.
(2)
Estimated solely for the purpose of calculating
    the registration fee pursuant to Rule 457(o) of the
    Securities Act of 1933.
The Registrant hereby
amends this Registration Statement on such date or dates as may
be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that
this Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933
or until this Registration Statement shall become effective on
such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
Table of Contents
The information contained in
this preliminary prospectus is not complete and may be changed.
These securities may not be sold until the registration
statement filed with the Securities and Exchange Commission is
effective. This preliminary prospectus is not an offer to sell
these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION,
DATED           ,
2004
Shares
Common Stock
This is an initial public offering of shares of
common stock of Warren Resources, Inc. All of the shares in this
offering are being sold by us.
Prior to this offering, there has been no public
market for our common stock. It is currently estimated that the
initial public offering price per share will be between
$          and
$          .
We intend that our common stock will be quoted on the Nasdaq
National Market under the symbol "WRES".
Investing in our common stock involves risks. See "Risk
Factors" beginning on page 10 to read about factors
you should consider before buying shares of our common stock.
Per Share
Total
Price to the public
$
$
Underwriting discount
$
$
Proceeds, before expenses, to Warren Resources,
    Inc.
$
$
We have granted an over-allotment option to the
underwriters. Under this option, the underwriters may elect to
purchase a maximum
of                     additional
shares from us within 30 days following the date of this
prospectus to cover over-allotments.
Neither the Securities and Exchange Commission
nor any state securities commission has approved or disapproved
of these securities or determined if this prospectus is truthful
or complete. Any representation to the contrary is a criminal
offense.
K
EY
B
ANC
C
APITAL
M
ARKETS
J
EFFERIES
& C
OMPANY,
I
NC.
S
ANDERS
M
ORRIS
H
ARRIS
The date of this prospectus
is                     ,
2004
TABLE OF CONTENTS
Page
Prospectus Summary
1
Risk Factors
10
Cautionary Note Regarding
    Forward-Looking Statements
24
Use Of Proceeds
25
Dividend Policy
26
Capitalization
27
Dilution
28
Selected Consolidated
    Financial Data
29
Management's Discussion
    And Analysis Of Financial Condition And Results Of Operations
31
Business
46
Management
65
Certain Relationships And
    Related Transactions
78
Principal Stockholders
79
Description Of Capital
    Stock
81
Shares Eligible For Future
    Sale
87
Underwriting
89
Legal Matters
91
Experts
91
Where You Can Find More
    Information
91
Index To Consolidated
    Financial Statements
F-1
Appendix A To
    Prospectus — Glossary Of Certain Oil And Natural Gas
    Terms
A-1
Appendix B To
    Prospectus — Summary Reserve Report Of Williamson
    Petroleum Consultants, Inc. As Of December 31, 2003
B-1
SUBSIDIARIES OF WARREN RESOURCES, INC.
CONSENT OF GRANT THORTON LLP
CONSENT OF WILLIAMSON PETROLEUM CONSULTANTS, INC.
CONSENT OF CBIZ VALUATION GROUP, INC.
You should rely only on the information
contained in this prospectus. We have not, and the underwriters
have not, authorized any other person to provide you with
different information from that contained in this prospectus. If
anyone provides you with different or inconsistent information,
you should not rely on it. We are not, and the underwriters are
not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted.
Our logo is a trademark or service mark of Warren
Resources, Inc. Other trademarks or service marks appearing in
this prospectus are the property of their respective holders.
i
Table of Contents
PROSPECTUS SUMMARY
This summary highlights information contained
elsewhere in this prospectus. You should carefully read the
entire prospectus before investing in our common stock. Unless
the context otherwise requires, all references to
"Warren", "we", "us" and
"our" refer to Warren Resources, Inc. and its
subsidiaries. The term "you" refers to a prospective
investor. References to our oil and gas interests include our
allocable share of oil and gas leasehold interests held by
drilling programs that we sponsor together with minority
interests allocable to other interest holders in 13 limited
liability companies that we control. We have included
definitions of technical terms and abbreviations important to an
understanding of our business under "Glossary of Certain
Oil and Natural Gas Terms" beginning on
page A-1.
Overview
We are a growing independent energy company
engaged in the exploration and development of domestic onshore
natural gas and oil reserves. We focus our efforts primarily on
the exploration and development of coalbed methane, or CBM,
properties located in the Rocky Mountain region and on our
waterflood oil recovery program in the Wilmington Townlot Unit,
or Wilmington unit, in the Wilmington field within the Los
Angeles Basin of California. Our CBM operations are located in
two core areas: the Washakie Basin, which comprises
approximately the southeast one-third of the Greater Green River
Basin in southwestern Wyoming, and the Powder River Basin in
northeastern Wyoming. As of June 30, 2004, we owned natural
gas and oil leasehold interests in approximately
261,880 gross (146,550 net) acres, 95% of which are
undeveloped. Substantially all our undeveloped acreage is
located in the Rocky Mountains. We have identified approximately
1,162 drilling locations on our acreage, primarily on 80-acre
and 160-acre well spacing.
In the Washakie Basin, we have assembled a large,
predominantly undeveloped CBM leasehold, which we believe
positions us for significant long-term growth. Our operations in
the Washakie Basin consist of the Atlantic Rim project located
along the Basin's eastern rim and the Pacific Rim project
located along its western rim. As of June 30, 2004, we had
247,450 gross (140,782 net) acres prospective for CBM
development in this area, of which 136,157 are net undeveloped
acres. This acreage contains approximately 1,049 identified
drilling locations. We own a 57% average working interest in
this acreage.
Our Atlantic Rim project consists of
approximately 212,258 gross (113,248 net) acres. As of
June 30, 2004, we participated in the drilling of 46 CBM
wells in this project. These wells included 22 producing wells
and 24 wells that are awaiting completion of production
facilities, all of which we believe are capable of commercial
production. Based on geological and seismic data, we previously
drilled 26 geological test wells, 11 of which we believe are
capable of commercial production. As of December 31, 2003,
the proved reserves for the 22 producing wells and for their 23
proved undeveloped offset locations average 1.01 Bcfe
per gross well on 80-acre and 160-acre spacing, based upon a
reserve report prepared by Williamson Petroleum Consultants,
Inc., an independent petroleum engineering firm. In 2004, we
entered into an agreement to jointly construct, own and operate
gathering systems, compression facilities and a pipeline in the
Atlantic Rim with Anadarko Petroleum Corporation. During 2005,
we plan to increase our drilling activity in the Atlantic Rim by
participating in the drilling of 52 gross (20.0 net) additional
wells in this area.
During the last half of 2003, we established our
Pacific Rim project which consists of approximately
35,192 gross (27,534 net) acres prospective for CBM
development. As of June 30, 2004, we had drilled nine CBM
wells and acquired four previously drilled wells in this
project, all on 160-acre spacing. In our first pilot program, we
expect to complete construction of a gathering system and
commence production from nine of these wells by the end of 2004.
During 2005, we also plan to increase our drilling activity in
the Pacific Rim by participating in the drilling of 38 gross
(24.4 net) additional wells in this area.
As of December 31, 2003, we had estimated
net proved reserves of 106.2 Bcfe, with a PV-10 value of
$183.0 million, based on the reserve report prepared by
Williamson Petroleum Consultants. These estimated net proved
reserves are located on less than 4% of our net acreage. We
currently have interests in 205 gross (79.0 net)
producing wells and are the operator of record for 55% 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. On June 30, 2004,
total production from these wells was 18.6 MMcfe/d gross
(5.5 MMcfe/d net).
1
Table of Contents
For 2005, we have a total capital expenditure
budget of approximately $40.8 million to participate in the
drilling of 142 gross (88.4 net) wells.
The following table provides information
regarding our operations by area:
As of December 31, 2003
As of June 30, 2004
Estimated Net
Identified
Net
Net
Proved Reserves
PV-10
Drilling
Producing
Undeveloped
Area
(Bcfe)(1)
(in millions)(1)
Locations(2)
Wells
Acreage
Washakie
10.6
$
18.6
1,049
4.1
136,157
Powder River
1.8
3.6
10
57.0
453
Wilmington
85.8
143.5
100
14.6
908
Other(3)
8.0
17.3
3
3.3
1,291
Total
106.2
$
183.0
1,162
79.0
138,809
(1)
Our reserves and the present value of future net
    revenues were determined using $4.50 per Mcf of natural gas and
    $28.45 per barrel of oil. These are the prices used in our
    reserve report as of December 31, 2003, which was prepared
    by Williamson Petroleum Consultants. See
    "Business — Natural Gas and Oil Reserves".
(2)
Identified drilling locations consist of total
    gross locations that we have identified and currently are
    estimating for our future drilling activities on existing
    acreage. The total locations shown in the table include 126
    proved undeveloped locations. Actual drilling activities may
    differ from this estimate. See "Risk Factors —
    Risks Relating to Our Business" and "— Risks
    Relating to the Oil and Gas Industry".
(3)
Includes conventional oil and gas operations
    primarily in New Mexico, Texas and North Dakota.
Our History
From our inception in 1990 through 2003, we
functioned principally as the sponsor of privately placed
drilling programs and joint ventures. During that period, we
sponsored 31 drilling programs that raised an aggregate of
approximately $228 million. Under these programs, we
contribute drilling locations, pay tangible drilling costs and
provide turnkey drilling services to the drilling programs and
retain an interest in the wells drilled. On behalf of the
drilling programs, we have participated in the drilling of
approximately 470 conventional, horizontal and CBM wells, of
which approximately 90% were completed as commercial producing
wells. At June 30, 2004, we had deferred income from
turnkey drilling contracts of approximately $19 million
related to the drilling programs. The drilling programs will
participate with us on a pro rata basis in all our drilling
activities until the turnkey contracts have been completed,
which we expect to occur in the first half of 2005.
Since 1999, we have been assembling larger
acreage positions primarily in the Rocky Mountains. After we
have completed all our turnkey drilling contracts, we intend to
invest more of our own capital in future wells to accelerate our
growth in production and reserves. We anticipate that future
drilling activities with third parties will consist of joint
ventures and similar arrangements.
Anadarko Joint Venture
In December 2002, we entered into a joint venture
with Anadarko Petroleum Corporation, one of the largest
independent oil and gas exploration and production companies in
the world. This joint venture provides for exploration and
development within the Atlantic Rim project on a 50/50 basis
covering over 141,000 net acres within a 211,000 acre area of
mutual interest, or AMI. Under the joint venture, we contributed
88,993 net acres, and Anadarko contributed 52,444 net acres and
paid us $20.2 million, which included reimbursement for
$2.2 million of our prior drilling expenses. In 2004, we
expanded our relationship with Anadarko to jointly construct,
own and operate gathering systems, compression facilities and a
pipeline in the Atlantic Rim project of the Washakie Basin on a
50/50 basis.
2
Table of Contents
Recent Institutional Equity Investment
In 2004, we have raised a total of
$20 million through the private placement of
2,850,000 shares of our common stock and 1,425,000 common
stock warrants to institutional investors managed by a large
Boston-based investment advisor.
Business Strategy
The principal elements of our business strategy
are designed to generate growth in oil and gas reserves,
production volumes and cash flows at a positive return on
invested capital. We plan to focus on the following:
•
Exploit Existing Properties Through the
    Drillbit.
We intend to increase
    our proved reserves by drilling numerous locations identified on
    our Rocky Mountain CBM properties and on our Wilmington unit. As
    of June 30, 2004, we have identified a total of 1,162
    drilling locations, of which we plan to participate in the
    drilling of 142 gross wells during 2005.
•
Increase Our Working Interest in Future
    Wells.
We plan to increase our
    level of participation in future wells by investing more of our
    own capital in drilling operations in our high growth areas. We
    believe this will enable us to accelerate our growth in
    production, reserves and cash flows.
•
Pursue Selective Acquisitions and Joint
    Ventures.
We believe we are well
    positioned, given our asset base and technical expertise, to
    pursue selected acquisitions and attract industry joint venture
    partners. We expect to pursue further acquisitions of natural
    gas and oil properties in areas where we have specific technical
    knowledge and experience. We also plan to enter into additional
    joint ventures to increase our CBM acreage and develop our
    reserves.
•
Reduce Costs Through Economies of Scale and
    Efficient Operations.
As we
    continue to increase our production and develop our existing
    properties, we expect that our unit cost structure will benefit
    from economies of scale. With respect to our CBM operations, we
    anticipate reducing unit costs by greater utilization of our
    existing infrastructure over a larger number of wells. We seek
    to exert more control over costs and timing in our exploration,
    development and production activities through our operating
    activities and relationships with our joint venture partners.
Competitive Strengths
As a result of the following strengths, we
believe we are well positioned to execute our business strategy:
•
Substantial Rocky Mountain Undeveloped CBM
    Acreage Position.
We believe that
    the Rocky Mountain region is one of the few remaining high
    potential CBM natural gas provinces in North America. We have
    assembled a substantial undeveloped acreage position in the
    Rocky Mountains of 240,170 gross (136,610 net) acres
    containing 1,059 identified drilling locations. In the Rocky
    Mountains, our estimated total net proved reserves of 12.4 Bcf
    are located on approximately 2% of our net acreage.
•
Technical
    Expertise.
Since the beginning of
    our CBM operations in 1996, we have gained considerable
    expertise in advanced CBM drilling, completion and re-entry
    techniques. We also have expertise in directional and horizontal
    drilling relating to our waterflood recovery program in the
    Wilmington unit.
•
Experienced Management
    Team.
Our management team has
    25 years of experience on average in the oil and gas
    industry, and our technical professionals have 17 years of
    experience on average in oil and gas operations. Our personnel
    have extensive experience in managing large-scale operations in
    each of our areas of concentration. Most members of our senior
    management have been with us since the mid-1990's.
•
Incentivized Management
    Ownership.
The equity ownership of
    our management team is strongly aligned with that of our
    stockholders. As of August 18, 2004, our 14 directors
    and executive officers beneficially owned 5,610,544 shares
    of common stock, which includes exercisable options to purchase
    1,278,252 shares of our common stock.
3
Table of Contents
Our Properties
Information concerning our properties is set
forth in the table and narrative below:
Planned
2005
Gross
Net
Gross Wells
Capital
Area
Acres
Acres
in 2005
Expenditures
(in millions)
Washakie:
Atlantic Rim
212,258
113,248
52
$
11.4
(1)
Pacific Rim
35,192
27,534
38
12.7
Powder River
5,190
2,536
12
1.3
Wilmington
1,440
1,243
40
15.4
Other(2)
7,800
1,989
—
—
Total
261,880
146,550
142
$
40.8
(1)
Includes $950,000 for the construction of
    gathering systems, compression facilities and a pipeline
    pursuant to our agreement with Anadarko.
(2)
Includes conventional oil and gas properties
    located primarily in New Mexico, Texas and North Dakota.
Washakie Basin
The Washakie Basin is located in southeastern
Wyoming and represents our largest acreage position. Our
activities in this basin are focused on CBM development and are
conducted through our Atlantic Rim and Pacific Rim projects.
Atlantic Rim.
Our Atlantic Rim project comprises
approximately 212,258 gross (113,248 net) acres on the
eastern rim of the Washakie Basin. In April 2002, we established
commercial production through the 10 wells in our first
pilot program. The 12 wells in our second pilot program are
currently dewatering. We expect commercial production for this
program to commence by the end of the first quarter of 2005. Key
statistics for this project include:
•
3,510 Mcf/d gross (856 Mcf/d net)
    production as of June 30, 2004 from the 10 wells in
    our first pilot program, compared with 2,559 Mcf/d gross (529
    Mcf/d net) production as of June 30, 2003;
•
45.5 Bcf gross (10.6 Bcf net) estimated
    proved reserves as of December 31, 2003, based on an
    evaluation of 22 producing wells and their 23 proved undeveloped
    offsets;
•
22 gross (4.1 net) producing wells as
    of June 30, 2004; and
•
$10.5 million capital expenditure budget for
    2005 to participate in the drilling of 52 gross wells and
    $950,000 to construct a pipeline and related facilities with
    Anadarko.
Pacific Rim.
We established our Pacific Rim
project in the last half of 2003. This project comprises
approximately 35,192 gross (27,534 net) acres on the
western rim of the Washakie Basin, approximately 60 miles
west of our Atlantic Rim project. Key developments for this
project include:
•
Drilled nine CBM wells and acquired four
    previously drilled wells on 160-acre spacing;
•
Constructed a gathering system connecting the
    wells to establish our first CBM nine-well pilot program, which
    we anticipate will commence production by the end of 2004;
•
Acquired a 6 1/2-mile gas pipeline that
    connects to the Kern River pipeline system; and
•
$12.7 million capital expenditure budget for
    2005 to participate in the drilling of 38 gross wells.
4
Table of Contents
Powder River Basin
The Powder River Basin is located in northeastern
Wyoming. This project comprises approximately 5,190 gross (2,536
net) acres. Our operations consist primarily of developed CBM
projects. Key statistics for this project include:
•
6,068 Mcf/d gross (2,788 Mcf/d net)
    production as of June 30, 2004, compared to
    5,063 Mcf/d gross (1,200 Mcf/d net) production as of
    June 30, 2003;
•
6.8 Bcf gross (1.8 Bcf net) estimated
    proved reserves as of December 31, 2003;
•
119 gross (57.0 net) producing wells as
    of June 30, 2004; and
•
$1.3 million capital expenditure budget for
    2005 to participate in the drilling of 12 gross wells.
Wilmington Unit
Our Wilmington unit is located in the Wilmington
field in the Los Angeles Basin of California, which has produced
over 2.5 billion barrels of oil since its discovery in the
1920's. Our Wilmington unit oil reserves are primarily
proved undeveloped, or PUD. We seek to develop these reserves
using directional and horizontal drilling and secondary recovery
techniques, such as a waterflood recovery program. Key
statistics for our position in this unit include:
•
522 Bbls/d gross (254 Bbls/d net)
    production as of June 30, 2004, compared to 538 Bbls/d
    gross (200 Bbls/d net) production as of June 30, 2003;
•
23.3 MMbbls gross (14.3 MMbbls net)
    estimated proved reserves as of December 31, 2003, 97% of
    which are PUDs;
•
31 gross (14.6 net) producing wells as
    of June 30, 2004; and
•
$15.4 million capital expenditure budget for
    2005 to participate in the drilling of 40 gross wells.
We currently are involved in an arbitration with
Magness Petroleum Company, our joint venture partner, concerning
our interests in the Wilmington unit. In the arbitration
proceeding, Magness Petroleum is asserting that the joint
venture be dissolved. Although we do not believe that this is
the most likely outcome, if it were to occur, we would retain
our existing interests in the 31 producing wells and a 47%
working interest in the undeveloped properties. Additionally, if
the joint venture were dissolved, our estimated net proved
reserves and our estimated discounted net future cash flows from
the Wilmington unit would be reduced significantly.
Risk Factors
The competitive strengths that we maintain, the
implementation of our business strategy and our future operating
results and financial condition are subject to a number of risks
and uncertainties, including the accuracy of reserve estimates,
volatility of natural gas and oil prices, the possibility of
environmental delays and restrictions impeding our activities,
the effect of the arbitration concerning our Wilmington unit,
our obligations to repurchase drilling program interests and
other factors. The factors that could adversely affect our
actual results and performance, as well as the successful
implementation of our business strategy, are discussed under
"Risk Factors" beginning on page 10.
Our Executive Offices
Our executive offices are located at 489 Fifth
Avenue, 32nd Floor, New York, NY 10017, and our telephone
number is (212) 697-9660. Warren E&P, Inc. is
headquartered at 123 West 1st Street, Suite 505,
Casper, WY 82601. Information contained on our website,
www.warrenresources.com, is not intended to be part of this
prospectus.
5
Table of Contents
The Offering
Common stock offered by us
shares
Common stock to be outstanding after this offering
shares
Use of proceeds
We intend to use the proceeds from this offering
    primarily to accelerate our exploration and development
    activities in the Atlantic Rim and Pacific Rim projects of the
    Washakie Basin, as well as in the Wilmington unit, and for
    general corporate purposes.
Over-allotment option
We have granted to the underwriters an option to
    purchase up to an
    additional           common
    shares solely to cover over-allotments.
Nasdaq National Market Symbol
WRES
The number of common shares to be outstanding
after the offering is based on shares outstanding as of
June 30, 2004. The number of shares of our common stock to
be outstanding after this offering does not include
15,814,172 shares issuable upon the exercise and conversion
of the following:
•
2,751,262 shares are issuable upon exercise
    of stock options with a weighted average exercise price of
    $5.45 per share;
•
686,875 shares are issuable upon exercise of
    class A warrants at an exercise price of $10.00 per
    share;
•
506,250 shares are issuable upon exercise of
    class B warrants at an exercise price of $12.50 per
    share;
•
5,317,111 shares are issuable upon
    conversion of outstanding bonds with a weighted average exercise
    price of $7.11 per share; and
•
6,552,674 shares are issuable upon
    conversion of preferred stock with a conversion price of
    $12.00 per share.
Unless otherwise stated, all information
contained in this prospectus assumes no exercise of the
over-allotment option granted to the underwriters.
6
Table of Contents
Summary Consolidated Historical Financial Data
(Dollars in thousands, except share and per share
data)
This section presents our summary consolidated
historical financial data. You should read carefully the
consolidated financial statements included in this prospectus,
including the accompanying notes. The summary consolidated
historical financial data is not intended to replace the
consolidated financial statements.
We derived the statement of operations data and
statement of cash flows data for the years ended
December 31, 2003, 2002 and 2001, and the balance sheet
data as of December 31, 2003 and 2002 from our audited
consolidated financial statements included in this prospectus.
We derived the statement of operations data and statement of
cash flows data for the six months ended June 30, 2004 and
2003, and the balance sheet data as of June 30, 2004, from
the unaudited consolidated financial statements included in this
prospectus. The interim unaudited consolidated financial
statements have been prepared on the same basis as the annual
audited financial statements and include, in the opinion of
management, all adjustments consisting of normal and recurring
adjustments necessary to present fairly the data for such
periods and may not necessarily be indicative of full year
results.
Six Months Ended
Year Ended December 31,
June 30,
2003
2002
2001
2004
2003
(unaudited)
Statement of Operations Data:
Revenues:
Turnkey contracts with affiliated partnerships
$11,301
$ 5,841
$ 30,103
$ 3,250
$ 1,877
Oil and gas sales from marketing activities
5,621
11,272
14,867
2,795
2,790
Well services
1,168
1,895
5,574
512
501
Oil and gas sales
5,717
593
948
2,681
2,832
Total revenues
23,807
19,601
51,492
9,238
8,000
Costs and operating expenses:
Turnkey contracts
7,285
4,965
25,953
3,344
1,235
Cost of marketed oil and gas purchased from
    affiliated partnerships
5,500
11,121
15,299
2,725
2,731
Well services
662
839
3,519
261
330
Production and exploration
3,812
1,326
568
2,046
1,952
Depreciation, depletion, amortization and
    impairment
3,249
9,930
14,462
1,534
519
General and administrative
4,496
6,278
5,485
2,337
2,165
Contingent repurchase obligation
—
(3,065
)
3,319
—
—
Total costs and operating expenses
25,004
31,394
68,605
12,247
8,932
Income (loss) from operations
(1,197
)
(11,793
)
(17,113
)
(3,009
)
(932
)
Other income (expense):
Interest and other income
1,340
5,258
1,977
1,092
752
Interest expense
(1,528
)
(6,313
)
(5,776
)
(256
)
(1,238
)
Gain on sale of oil and gas properties
494
4,287
—
120
—
Net gain (loss) on investment
21
464
(10
)
(88
)
126
Total other income (expense)
327
3,696
(3,809
)
868
(360
)
Loss before income taxes, extraordinary item and
    cumulative effect of change in accounting principle
(870
)
(8,097
)
(20,922
)
(2,141
)
(1,292
)
Income tax expense (benefit)
129
(471
)
152
146
(194
)
Loss before minority interest and cumulative
    effect of change in accounting principle
(999
)
(7,626
)
(21,074
)
(2,287
)
(1,098
)
Minority interest
(112
)
—
—
(32
)
(62
)
Net loss before change in accounting principle
(1,111
)
(7,626
)
(21,074
)
(2,319
)
(1,160
)
Cumulative effect of change in accounting
    principle
(88
)
—
—
—
(88
)
Net loss
(1,199
)
(7,626
)
(21,074
)
(2,319
)
(1,248
)
Preferred dividends and accretion
4,562
16
—
3,290
1,736
Net loss applicable to common stockholders
$(5,761
)
$ (7,642
)
$(21,074
)
$ (5,609
)
$(2,984
)
Basic and diluted loss per common share
$ (0.34
)
$  (0.44
)
$  (1.20
)
$  (0.31
)
$ (0.17
)
Weighted average shares outstanding basic and
    diluted
16,827,857
17,339,869
17,532,882
18,357,891
16,871,121
7
Table of Contents
Six Months Ended
Year Ended December 31,
June 30,
2003
2002
2001
2004
2003
(unaudited)
Statement of Cash Flows Data:
Net cash provided by (used in):
Operating activities
$
5,278
$
(6,101
)
$
(15,712
)
$
(4,491
)
$
668
Investing activities
(13,524
)
5,317
(17,635
)
(10,032
)
(2,723
)
Financing activities
9,591
1,045
(2,700
)
10,027
(102
)
At December 31,
At June 30,
2003
2002
2004
(unaudited)
Balance Sheet Data:
Cash and cash equivalents
$ 24,529
$ 23,185
$ 20,033
Oil and gas properties, net
94,950
48,684
102,423
Total assets
151,054
108,262
153,295
Long-term debt (including current maturities)
49,916
56,202
48,667
Convertible preferred stock
76,334
20,956
77,021
Total stockholders' equity
56,394
7,002
65,429
8
Table of Contents
Summary Reserve And Production Data
The following table sets forth summary
information concerning our estimated proved oil and gas reserves
at December 31, 2003, 2002 and 2001 based on reports
prepared by Williamson Petroleum Consultants, Inc., our
independent petroleum consultants. A copy of a summary reserve
report as of December 31, 2003 is attached to this
prospectus as Appendix B. All calculations of estimated net
proved reserves have been made in accordance with the rules and
regulations of the Securities and Exchange Commission, or the
SEC, and, except as otherwise indicated, give no effect to
federal or state income taxes. You should refer to "Risk
Factors", "Management's Discussion and Analysis
of Financial Condition and Results of Operations",
"Business — Natural Gas and Oil Reserves"
and the reserve report included in this prospectus in evaluating
the material presented below.
At December 31,
2003
2002
2001
Estimated Net Proved Reserves:
Natural gas (MMcf)(1)
15,448
8,503
2,495
Oil (MBbls)(2)
15,124
12,324
8,478
Natural gas equivalent (MMcfe)
106,190
82,447
53,365
PV-10 value (in thousands)
$
182,985
$
113,954
$
20,482
Standardized measure of discounted future net
    cash flows
(in thousands)(3)
$
146,126
$
71,418
$
19,512
Prices Used in Calculating Estimated Value of
    Proved Reserves:
Natural gas (per Mcf)
$
4.50
$
3.36
$
1.76
Oil (per Bbl)
28.45
27.15
13.87
Other Reserve Data:
Proved developed reserves (MMcfe)
9,862
6,967
1,697
The following table sets forth summary
information concerning our production results and average sales
prices for the years ended December 31, 2003, 2002 and 2001
and the six months ended June 30, 2004.
For the
Year Ended December 31,
Six Months
Ended
2003
2002
2001
June 30, 2004
Net Production Volume:
Natural gas (MMcf)
785.8
54.8
32.6
359.3
Oil (MBbls)
87.4
4.3
2.3
33.4
Total equivalents (MMcfe)
1,310.1
80.3
46.7
559.7
Average Sales Prices:
Natural gas (per Mcf)
$
3.70
$
1.90
$
2.83
(4)
$
4.58
Oil (per Bbl)
25.42
20.84
16.74
30.97
Weighted average (per Mcfe)
3.92
2.40
2.82
4.79
(1)
Included in 2003 and 2002 reserves,
    1,028 MMcf and 577 MMcf is attributable to
    consolidated subsidiaries in which there is an average minority
    interest of 25% and 34%, respectively.
(2)
Included in 2003 and 2002 reserves,
    2,469 MBbls and 1,195 MBbls is attributable to
    consolidated subsidiaries in which there is an average minority
    interest of 25% and 34%, respectively.
(3)
Standardized measure of discounted future net
    cash flows differs from PV-10 value because it includes the
    effect of future income taxes. Included in 2003 and 2002
    standardized measure of discounted future net cash flows,
    $23,017 and $10,462 is attributable to consolidated subsidiaries
    in which there is an average minority interest of 25% and 34%,
    respectively.
(4)
Average sales price for natural gas in 2001
    includes $0.24 per Mcf hedging loss.
9
Table of Contents
RISK FACTORS
An investment in our common stock involves a
high degree of risk. You should carefully consider the following
risk factors, together with the other information contained in
this prospectus, before deciding to invest in our common stock.
Some of the following risks relate principally to the industry
in which we operate and to our business. Other risks relate
principally to the securities markets and ownership of our
common shares. If any of the following risks develop into actual
events, our business, financial condition or results of
operations could be materially adversely affected, the trading
price of your shares could decline, and you may lose all or part
of your investment.
Risks Relating to Our
Business
Our reserve estimates depend on many
assumptions that may turn out to be inconclusive, subject to
varying interpretations or inaccurate.
This prospectus contains estimates of our proved
natural gas and oil reserves and the estimated future net
revenues from these reserves. 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. It requires interpretations of available geological,
geophysical, engineering and economic data for each reservoir.
Therefore, these estimates are inherently imprecise. 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 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
prospectus. 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 prices and other factors, many of which are beyond
our control.
As of December 31, 2003, approximately 91%
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 be able to raise the capital we need to develop these
proved reserves. Most of these proved reserves are located in
the Wilmington unit where drilling activities have been
suspended since late 1999. Further delays or an unfavorable
resolution of our dispute with Magness Petroleum Company, our
joint venture partner, in the Wilmington unit would result in a
downward revision of our proved reserves. See
"Business — Legal Proceedings".
You should not assume that the present value of
future net revenues referred to in this prospectus 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 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 from 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
10
Table of Contents
gas industry and oil and gas prices will affect
whether the 10% discount factor accurately reflects the market
value of our estimated reserves.
If we are unable to settle our disagreements
with Magness Petroleum Company, our joint venture partner in the
Wilmington unit, the value of our interest there or realization
of that value could be significantly diminished or
delayed.
Approximately 81% of the estimated net present
value of our proved reserves as of December 31, 2003 is
attributable to our interests in the Wilmington unit. Our
operations in this unit to date have been governed by the joint
venture agreement and the purchase and sale agreement with
Magness Petroleum Company, our joint venture partner in the
Wilmington unit. These agreements require a substantial degree
of coordination and cooperation between us and Magness
Petroleum. Our business relationship with Magness Petroleum has
been characterized by significant discord, litigation and
arbitration and, as a result of litigation and arbitration
initiated against us by Magness Petroleum, no new drilling or
development operations have taken place in this unit since
November 1999. Magness Petroleum continues to operate 31
producing wells in the Wilmington unit, including three wells
drilled pursuant to the joint venture. Additional information
concerning these litigation and arbitration proceedings between
us and Magness Petroleum is set forth under
"Business — Legal Proceedings".
The ultimate outcome of this litigation, which is
currently in arbitration, could affect our percentage ownership
interest in the Wilmington unit or its value. Specifically, if
Magness Petroleum were to prevail in its attempt to cause a
termination of the joint venture, we would retain our existing
interests in the 31 producing wells and a 47% working interest
in the undeveloped properties. Additionally, if the joint
venture were dissolved, our estimated total proved natural gas
and oil reserves, as
of                     ,
2004, would decrease from 106.2 Bcfe to
approximately       Bcfe and the
estimated discounted future net cash flows from our estimated
proved reserves would decrease from $183.0 million to
approximately
$           million.
Continued delays in conducting drilling operations in the
Wilmington unit due to litigation with Magness Petroleum is
likely to affect the realization of the value of our interests
in that unit because most of our proved reserves in that unit
are undeveloped and require further drilling to become producing
reserves.
Failure to obtain financing and environmental
approvals for the development of our Washakie Basin properties
in which we own interests could have a material adverse effect
on our business, financial condition or results of
operations.
Our future growth plans rely heavily on
establishing significant production and reserves in the Washakie
Basin. However, an inability to obtain financing at acceptable
rates could prevent us from developing the Washakie Basin.
Furthermore, environmental restrictions in this area could
prevent us from developing this acreage as planned. The
U.S. Bureau of Land Management, or the BLM, has begun
preparation of an environmental impact statement, or EIS, which
involves a series of scientific studies, surveys and public
hearings and formulation of a plan for drilling and production
in the Washakie Basin. The EIS is currently expected to be
completed by the end of 2005, although this projected completion
date may be extended. Our prior drilling in this basin, along
with our projected drilling through 2005, is being conducted
under an interim drilling policy of the BLM, under which up to a
total of 200 wells can be drilled in this basin, 165 of
which have been allocated to us and our drilling partners. If
public opposition to continued drilling in this basin or other
regulatory complications occur, the EIS may not be completed
during 2005, or could cause the BLM to condition, severely
restrict or prohibit drilling on a more permanent basis. Legal
challenges to the EIS could also materially affect the timing
and ultimate environmental restrictions that are imposed on our
drilling and production operations. 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 in
the Washakie Basin as planned. We cannot predict the timing or
outcome of the EIS. 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.
11
Table of Contents
Our substantial contingent obligations to
repurchase 10% of our outstanding bonds and debentures
annually and to repurchase drilling program interests could
strain our financial resources.
As of June 30, 2004, we had
$46.9 million of outstanding bonds and debentures. Holders
of these securities are entitled each year to tender up to 10%
of the original aggregate face amount of each series of
debentures for repurchase by us at their face amount, or
$4.7 million in 2004 and $4.2 million in 2005.
In addition, under the terms of 13 of our
drilling programs formed before 1998, to the extent that the
drilling programs and other program investors elect not to
purchase a withdrawing partner's interest, the minority
interest investors have the right to require us to repurchase
their interests in each program for a formula price. This right
is effective either seven years from the date of a
partnership's formation, or between the 15th and 25th
anniversary of their formation. As of June 30, 2004, we
have potential repurchase obligations for programs which mature
on January 1, 2005 of approximately $4.5 million and
for programs which mature on and after December 2009 of
approximately $1.4 million. At June 30, 2004, a
portion of our repurchase obligation was secured by
$1.1 million market value of U.S. treasury bonds held
by an independent trustee.
Depending upon the amount of cash distributions
to investors in our programs prior to the repurchase obligation
dates and the number of investors who tender their interests for
repurchase as their tender rights become available, a
significant amount of funds may be required for these
repurchases. These repurchase obligations could put a strain
upon our financial resources and otherwise adversely affect our
ability to execute our business plan. Any payment made under
this obligation would be recorded as a reduction to minority
interest as shown on our balance sheet.
Under the terms of our seven drilling programs
formed between 1998 and 2001 investors have the right to require
us to repurchase their interests in each program seven to
25 years from the date of a partnership's formation,
to the extent that the drilling programs and other program
investors elect not to purchase the investor's interest.
The price of our repurchase is fixed by the drilling program
agreement to be the lower of the PV-10 value of the assets of
the program and a formula based on the amount of the
investor's cash investment reduced by the amount of any
cash distributions received. As of June 30, 2004, based on
the December 31, 2003 reserve reports of the respective
drilling programs, the aggregate PV-10 value of the assets in
these programs was $15.8 million. Because this amount is
less than the formula price of $96.5 million as of
June 30, 2004, the PV-10 of $15.8 million is our
maximum repurchase obligation as of June 30, 2004. This
PV-10 amount may increase when we drill the remaining 22 net
wells on behalf of these seven drilling programs. As a result of
oil and gas price increases since December 31, 2003, we
anticipate that the PV-10 value has increased since that time.
Based on the formula price as of June 30,
2004, if in the future the drilling program PV-10 value were to
exceed $96.5 million, then our maximum obligation would be
the formula price of $96.5 million, consisting of
obligations of $43.3 million between July 1, 2005 and
June 30, 2007, $51.7 million between July 1, 2007
and June 30, 2009 and $1.5 million thereafter.
We face significantly increasing water
disposal costs in our CBM drilling operations.
The Wyoming Department of Environmental Quality,
or Wyoming DEQ, has restrictive regulations applying 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 re-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
12
Table of Contents
the Washakie Basin, will become more difficult to
obtain. In Wyoming, our produced water is currently injected at
six wells, and we have obtained permits to drill six more of
these underground injection 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.
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 no existing pipeline in
the southern portion of the Washakie Basin. Therefore, if
drilling results are positive in the entire length of the
Washakie Basin, an entirely new gathering system would need to
be built at a cost of approximately $20 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 also may be harmed by:
•
the lack of pipeline transmission facilities or
    carrying capacity;
•
federal and state regulation of natural gas and
    oil production; and
•
federal and state transportation, tax and energy
    policies.
We recently entered into an agreement with
Anadarko to jointly construct gathering systems, 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 its price. 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
were made to deliver our production to market.
Our level of indebtedness reduces our
financial flexibility and could impede our ability to
operate.
As of June 30, 2004, our long-term debt was
$48.7 million, substantially all of which consists of
debentures we have issued from time to time with due dates
ranging from December 31, 2007 through December 31,
2022. At June 30, 2004, the ratio of our debt to equity was
0.7 to 1.0, and the ratio of our debt to total assets was 0.3 to
1.0. We are required to make sinking fund payments on
$46.9 million principal amount of our outstanding
debentures, with respect to which we have deposited
$20.5 million of principal amount of U.S. treasury
bonds as of June 30, 2004, with estimated sinking fund
payments required of $2.8 million by the end of 2004 and
$3.0 million by the end of 2005. We are also contingently
obligated to repurchase 10% of our outstanding bonds
annually. We may not have sufficient funds to make repayments or
sinking fund payments throughout all future maturities.
Our level of debt affects our operations in
several important ways, including the following:
•
a large portion of our net cash flow from
    operations has and will continue to be used to pay interest on
    borrowings;
•
a high level of debt may impair our ability to
    obtain additional financing in the future for working capital,
    capital expenditures, acquisitions, general corporate or other
    purposes; and
•
our leveraged financial position may make us more
    vulnerable to economic downturns and may limit our ability to
    withstand competitive pressures.
13
Table of Contents
We may incur additional debt in order to fund
our exploration and development activities, which would continue
to reduce our financial flexibility and could have a material
adverse effect on our business, financial condition or results
of operations.
We 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 out of cash on
hand, we could attempt to refinance the debt or repay the debt
with the proceeds of an 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.
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 projected these capital expenditures to be
approximately $40.8 million in 2005. Historically, we have
financed our capital expenditures primarily through drilling
programs that participated in the exploration, drilling and
development of the projects, and to a lesser extent through debt
and equity financing. In the future, we intend to finance these
capital expenditures through the proceeds of this equity
offering 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:
•
the success of our CBM projects in the Washakie
    Basin;
•
our success in locating and producing new
    reserves;
•
the level of production from existing
    wells; and
•
prices of natural gas and oil.
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:
•
a substantial portion of our operating cash flow
    being dedicated to the payment of principal and interest;
•
our being more vulnerable to competitive
    pressures and economic downturns; and
•
restrictions on our operations.
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 June 30, 2004, we had an accumulated
deficit of $70.0 million and total stockholders'
equity of $65.4 million. We have recognized annual net
losses in each year since 1999. See "Selected Consolidated
14
Table of Contents
Financial Data". We may not achieve or
sustain profitability or positive cash flows from operating
activities in the future.
Properties that we buy may not produce as
projected, and we may be unable to determine reserve potential,
identify liabilities associated with the properties or obtain
protection from sellers against them, which could cause us to
incur losses.
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 assess fully 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.
Our operations in Wyoming could be adversely
affected by abnormally poor weather conditions.
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.
Unusually severe weather could further curtail these operations,
including drilling of new wells or production from existing
wells, and depending on the severity of the weather, could have
a material adverse effect on our business, financial condition
and results of operations.
As general partner of limited partnerships and
co-venturer in joint ventures, we are liable for various
obligations of those partnerships and joint ventures.
We currently serve as the managing general
partner of nine limited partnerships and participate in four
joint ventures as a result of our sponsorship of drilling
programs. As general partner or co-venturer, we are contingently
liable for the obligations of the partnerships or joint
ventures, as applicable, including responsibility for their
day-to-day operations and liabilities which cannot be repaid
from partnership or venture assets, insurance proceeds or
indemnification by others. In the future, we might be exposed to
litigation in connection with partnership or joint venture
activities or find it necessary to advance funds on behalf of
certain partnerships or 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. See "Business — Drilling
Programs".
Our role as general partner of limited
partnerships and co-venturer in joint ventures may result in
conflicts of interest, which may not be resolved in our best
interests or the best interests of our stockholders.
Our role as general partner of limited
partnerships and co-venturer in joint ventures may result in
conflicts of interest between the interests of those entities
and our stockholders. For example, we plan to continue drilling
natural gas and oil wells for the various drilling programs we
have sponsored. The allocation of those wells to the drilling
programs may give rise to a conflict of interest between our
interests and the interests of the partners or co-venturers in
our drilling programs. 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, and Kenneth A. Gobble,
our senior vice president of exploration and production, and
other key management
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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:
•
environmental hazards, such as uncontrollable
    flows of natural gas, oil, brine, well fluids, toxic gas or
    other pollution into the environment, including groundwater and
    shoreline contamination;
•
abnormally pressured formations;
•
mechanical difficulties, such as stuck oil field
    drilling and service tools and casing collapse;
•
fires and explosions;
•
personal injuries and death;
•
regulatory investigations and penalties; and
•
natural disasters.
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 — Operating Hazards And Insurance".
We have limited control over activities on
properties we do not operate, which could reduce our production
and revenues.
Substantially all 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. The success and timing of our drilling and
development activities on properties operated by others
therefore depends upon a number of factors outside of our and
the operator's control, including:
•
timing and amount of capital expenditures;
•
expertise and financial resources;
16
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•
inclusion of other participants in drilling
    wells; and
•
use of technology.
Defects in the title to any of our natural gas
and oil interests could result in the loss of some of our
natural gas and oil properties or portions thereof or liability
for losses resulting from defects in the assignment of leasehold
rights.
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 unit from Magness Petroleum in
1999, which had acquired the interest from a third party that in
turn had acquired its interest from Exxon Corporation with no
warranty of title. Exxon had owned the Wilmington unit for over
25 years before its sale in 1997. We have acquired no title
opinion as to the interests we own in that field, which may
ultimately prove to be less than the interests we believe we
own. Losses in this field may result from title defects or from
ownership of a lesser interest than we assume we acquired or
from the assignment of leasehold rights by us to our drilling
programs. 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 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.
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
will 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.
Among the factors that cause this fluctuation are:
•
changes in domestic and global supply and demand
    for natural gas and oil;
•
levels of production and other activities of the
    Organization of Petroleum Exporting Countries and other natural
    gas and oil producing nations;
•
market expectations about future prices;
•
the level of global natural gas and oil
    exploration, production activity and inventories;
•
political conditions, including embargoes, in or
    affecting other oil producing activity; and
•
the price and availability of alternative fuels.
Lower natural gas and oil prices may not only
decrease our revenues on a per unit basis, 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 exploitation, exploration, 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 cost 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:
•
unexpected drilling conditions;
•
pressure or irregularities in geological
    formations;
•
equipment failures or accidents;
•
well blow-outs;
•
fires and explosions;
•
pipeline and processing interruptions or
    unavailability;
•
title problems;
•
adverse weather conditions;
•
lack of market demand for natural gas and oil;
•
delays imposed by or resulting from compliance
    with environmental and other regulatory requirements;
•
shortages of or delays in the availability of
    drilling rigs and the delivery of equipment; and
•
reductions in natural gas and oil prices.
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
options or 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.
If natural gas and oil prices decrease, we may
be required to record an impairment, which would reduce our
stockholders' equity.
We use the successful efforts method of
accounting for costs related to our natural gas and oil
properties. Accordingly, we capitalize the cost to acquire,
explore for and develop gas and oil properties. Wells are
evaluated on a field-by-field basis for impairment. We review
our natural gas and oil properties on a field level when
circumstances indicate that the capitalized costs, less
accumulated depreciation, depletion and amortization or the
carrying value of the property, may not be recoverable. If the
carrying value of the property exceeds the expected future
undiscounted cash flows, an amount equal to the excess of the
carrying value over the fair value of the property, generally
based upon discounted cash flow, is charged to expense. An
impairment results in a non-cash charge to earnings which does
not impact cash flow from operating activities, but does reduce
our stockholders' equity. The risk that we will be required
to write down the carrying value of our oil and gas properties
increases when oil and gas prices are low or volatile. In
addition, write-downs may occur if we experience substantial
downward adjustments to our estimated proved reserves.
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Once incurred, a write-down of oil and gas
properties is not reversible at a later date. See
"Management's Discussion and Analysis of Financial
Condition and Results of Operations — Critical
Accounting Policies" for additional information on these
matters.
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:
•
acquiring desirable producing properties or new
    leases for future exploration;
•
marketing our natural gas and oil production;
•
integrating new technologies; and
•
acquiring the equipment and expertise necessary
    to develop and operate our properties.
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 exploitation, 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 laws and environmental laws and regulations, and requires
various permits and approvals from federal, state and local
agencies. If these permits are not issued or 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. Further, these laws and
regulations, particularly in the Rocky Mountain region, 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:
•
water discharge and disposal permits for drilling
    operations;
•
drilling permits;
•
drilling bonds;
•
reclamation;
•
spacing of wells;
•
occupational safety and health;
•
unitization and pooling of properties;
•
air quality, noise levels and related permits;
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•
rights-of-way and easements;
•
reports concerning operations to regulatory
    authorities;
•
calculation and payment of royalties;
•
gathering, transportation and marketing of gas
    and oil;
•
taxation; and
•
waste disposal.
Under these laws and regulations, we could be
liable for:
•
personal injuries;
•
property damage;
•
oil spills;
•
discharge of hazardous materials;
•
well reclamation costs;
•
remediation and clean-up costs;
•
fines and penalties;
•
natural resource damages; and
•
other environmental protection and damages issues.
See "Business — Regulations"
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 increases,
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,
these costs have sharply increased and could do so again. The
demand for and wage rates of qualified drilling rig crews
generally rise 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.
Unless we replace, maintain or expand our
natural gas and oil reserves, our reserves and production will
decline, which could have a material adverse effect on our
business, financial condition and results of
operations.
In general, production from natural gas and oil
properties declines over time as reserves are depleted, with the
rate of decline depending on reservoir characteristics. If we
are not successful in our exploitation, exploration, development
and enhancement activities or in acquiring properties containing
proved reserves, our proved reserves will decline as reserves
are produced. Our future natural gas and oil production is
highly dependent upon our ability to economically find, develop
or acquire reserves in commercial quantities.
To the extent cash flow from operations is
reduced, either by a decrease in prevailing prices for natural
gas and oil or an increase in finding and development costs, and
external sources of capital become limited or unavailable, our
ability to make the necessary capital investment to maintain or
expand our asset base of natural gas and oil reserves would be
impaired. Even with sufficient available capital, our future
exploration and development activities may not result in
additional proved reserves, and we may not be able to drill
productive wells at acceptable costs.
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Risks Relating to Ownership of Our Common
Stock
Purchasers in this offering will experience
immediate dilution and will experience further dilution with the
future exercise of stock options.
If you purchase shares of our common stock in
this offering, you will pay more for your shares than the per
share book value as of June 30, 2004. As a result, the
value of your investment based on the net tangible book value
per share of our common stock will be less than what it would
have been had you and all of the existing stockholders and
existing option holders paid the same amount per share of common
stock as you will pay in this offering. The net tangible book
value dilution to new investors in this offering will be
$          per
share at an assumed initial public offering price of
$          per
share. The exercise of outstanding options and notes or bonds
convertible into common stock may result in further dilution to
you. See "Dilution" for a more complete description of
how the value of your investment in our common stock will be
diluted upon completion of this offering.
The number of shares eligible for future sale
or which have registration rights could adversely affect any
future market that develops for our common stock.
Sales of substantial amounts of our common stock
in a public market, or the perception that a large number of
shares are available for sale, could depress the market price of
our common stock. Upon completion of this
offering,              shares
of common stock will be outstanding, 11,798,447 shares of
common stock are issuable upon conversion of our convertible
debt and convertible preferred stock and 2,712,512 shares
of common stock are issuable upon exercise of outstanding
options and warrants. In addition to the shares of common stock
sold in this offering, approximately 13,310,571 shares of
our common stock will immediately be eligible for sale in the
public market. An additional 4,038,499 shares held by our
affiliates will immediately be eligible for sale in the public
market subject to the volume and other limitations of
Rule 144. Further, upon conversion by the holders of
existing convertible debt and preferred stock into common stock,
8,456,888 shares will immediately be eligible for sale in the
public market, and 3,341,559 shares held by our affiliates will
immediately be eligible for sale subject to the volume and other
limitations of Rule 144. In addition, as soon as
practicable following the date of this prospectus, we intend to
file a registration statement on Form S-8 under the
Securities Act to register up to 6,876,250 shares of our
common stock reserved for grant or previously granted under our
stock option plans. These shares generally will be available for
sale in the public market by holders who are not our affiliates
and, subject to the volume and other applicable limitations of
Rule 144, by holders who are our affiliates, subject to
vesting restrictions. Further, upon conversion by holders of
outstanding warrants to purchase shares of our common stock, an
aggregate of 1,618,125 shares will be eligible for sale in
the public market upon satisfying the one-year holding period of
Rule 144.
All of our directors, executive officers and
certain of our stockholders, holding approximately 8,322,009
shares of our common stock, will be subject to agreements with
the underwriters or us that restrict their ability to sell or
transfer their stock for 180 days from the date of this
prospectus. After these agreements expire, such shares will be
eligible for sale in the public market. For a detailed
discussion of the shares eligible for future sale, see
"Shares Eligible for Future Sale".
In accordance with the terms and conditions of
the registration rights agreement dated December 12, 2002,
holders of 6,552,674 shares of our convertible preferred
stock as of June 30, 2004 have a one-time right to demand
that their shares of common stock issuable upon conversion of
the convertible preferred stock be registered under the
Securities Act commencing 180 days after the date of this
offering. Also, commencing 180 days after completion of
this offering, these holders may have the right to include their
shares of common stock, subject to the consent of any
underwriter, in registration statements that we may file, if
any, to register shares of our common stock under the Securities
Act for ourselves or other stockholders. Additionally,
commencing February 3, 2005, we are required to file a
registration statement for 2,875,000 shares of outstanding
common stock and 1,437,500 shares of common stock issuable
upon exercise of our class A and class B warrants
under the Securities Act. The holders of these securities have
agreed to certain restrictions on the transfer of their stock
for a period of 180 days after this offering. If our
stockholders sell significant amounts of common stock on 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
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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 management has broad discretion over the
use of the net proceeds from this offering, and you may not
agree with how they use them.
Our management has significant flexibility in
applying the proceeds we receive in this offering. Because the
proceeds are not required to be allocated to any specific
purpose, investment or transaction, you cannot determine the
value or propriety of our management's application of the
proceeds on our behalf. See "Use of Proceeds" for a
more detailed description of how management intends to apply the
proceeds of this offering.
There has been no public market for our common
stock, and you may be unable to resell your shares at or above
the offering price.
There currently is no public market for our
common stock, and an active trading market may not develop or be
sustained after this offering. The initial public offering price
for the shares will be determined by negotiations between us and
the representatives of the underwriters and may not be
indicative of the market price for our common stock after this
offering. The market price of our common stock could fluctuate
significantly in response to many risk factors listed in this
section.
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:
•
domestic and worldwide supplies and prices of and
    demand for natural gas and oil;
•
political conditions in natural gas and oil
    producing regions;
•
war and acts of terrorism;
•
demand for our common stock;
•
revenue and operating results failing to meet the
    expectations of securities analysts or investors in any
    particular quarter;
•
changes in expectations as to our future
    financial performance or changes in financial estimates, if any,
    of public market analysts;
•
investor perception of our industry or our
    prospects;
•
general economic trends;
•
limited trading volume of our stock;
•
changes in environmental and other governmental
    regulations;
•
actual or anticipated quarterly variations in our
    operating results;
•
our involvement in litigation;
•
conditions generally affecting the oil and
    natural gas industry;
•
the prices of oil and natural gas;
•
announcements relating to our business or the
    business of our competitors;
•
our liquidity; and
•
our ability to raise additional funds.
Control by our executive officers and
directors will limit your ability to influence the outcome of
matters requiring stockholder approval and could discourage our
potential acquisition by third parties.
As of August 18, 2004, our executive
officers and directors beneficially owned approximately 25.7% of
our common stock. These stockholders, if acting together, would
be able to influence significantly all matters
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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:
•
giving the board the exclusive right to fill all
    board vacancies;
•
providing that special meetings of stockholders
    may only be called by the board pursuant to a resolution adopted
    by
—
a majority of the board, either upon a motion or
    upon written request by holders of at least 66 2/3% of the
    voting power of the shares entitled to vote, or
—
by our president;
•
a classified board of directors;
•
permitting removal of directors only for cause
    and with a super-majority vote of the stockholders; and
•
prohibiting cumulative voting in the election of
    directors.
These provisions also could discourage proxy
contests and make it more difficult for you and other
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 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 acquiror 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.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING
STATEMENTS
This prospectus and the documents incorporated by
reference in this prospectus contain forward-looking statements
within the meaning of the federal securities laws.
These forward-looking statements include, among
others, the following:
•
our growth strategies;
•
our reserve estimates;
•
our ability to successfully and economically
    explore for and develop oil and gas resources;
•
anticipated trends in our business;
•
our future results of operations;
•
our liquidity and ability to finance our
    exploration and development activities;
•
market conditions in the oil and gas industry;
•
our ability to make and integrate
    acquisitions; and
•
the impact of environmental and other
    governmental regulation.
These statements may be found under
"Prospectus Summary", "Risk Factors",
"Management's Discussion and Analysis of Financial
Condition and Results of Operation", "Business"
and other sections of this prospectus. 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
prospectus 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 prospectus 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:
•
the failure to obtain sufficient capital
    resources to fund our operations;
•
an inability to replace our reserves through
    exploration and development activities;
•
unsuccessful drilling activities;
•
a decline in oil or natural gas production or oil
    or natural gas prices;
•
incorrect estimates of required capital
    expenditures;
•
increases in the cost of drilling, completion and
    gas gathering or other costs of production and operations;
•
impact of environmental and other governmental
    regulation;
•
hazardous and risky drilling operations; and
•
an inability to meet growth projections.
You should also consider carefully the statements
under "Risk Factors" and other sections of this
prospectus, 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 prospectus. 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.
24
Table of Contents
USE OF PROCEEDS
We estimate that we will receive net proceeds of
approximately
$           million
based on an assumed offering price of $ from the sale
of       shares of our common
stock in this offering. The total net proceeds would be
approximately
$           million
if the underwriters' over-allotment option is exercised in
full. "Net proceeds" is what we expect to receive
after paying the underwriting discounts and commissions and
other expenses of the offering.
We intend to use the proceeds from this offering
primarily to accelerate our exploration and development
activities in the Atlantic Rim and Pacific Rim projects of the
Washakie Basin, as well as in the Wilmington unit, and for
general corporate purposes. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations — Liquidity and Capital Resources".
25
Table of Contents
DIVIDEND POLICY
We have never paid or declared any cash dividends
on our common stock. We intend to retain all future earnings for
the development of our business. Our convertible preferred stock
restricts our ability to pay dividends on our common stock.
Since issuing our convertible preferred stock in
December 2002, we have paid six consecutive quarterly cash
dividends on this stock at the rate of 8% per annum. At our
option, these dividends may be paid in cash or paid in kind
through the issuance of additional shares of convertible
preferred stock at a rate of 8% per annum. See
"Description of Capital Stock — Preferred
Stock".
26
Table of Contents
CAPITALIZATION
The following table sets forth, as of
June 30, 2004, a summary of our capitalization, both on an
actual basis and on an as adjusted basis, to give effect to this
offering at an assumed initial public offering price of
$           per
share, after deducting underwriting discounts and commissions
and the estimated offering expenses payable by us and assuming
sales
of                      shares
of our common stock in this offering and the application of the
estimated net proceeds of
$          .
See "Use of Proceeds".
You should read the following table in
conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our
consolidated financial statements and related notes that are
included elsewhere in this prospectus.
As of June 30, 2004
Actual
As Adjusted
(in thousands)
(unaudited)
Cash and cash equivalents
$
20,003
Current portion of long-term debt
5,019
Long-term debt:
Debentures and other long-term liabilities(1)
43,648
Stockholders' equity:
Preferred stock, $0.0001 par value,
    10,000,000 shares authorized, of which
    6,552,674 shares are issued and outstanding
77,021
Common stock, $0.0001 par value,
    100,000,000 shares authorized
2
Actual — 19,374,070 shares issued
    and outstanding
As
    adjusted —            shares
    issued and outstanding
Additional paid in capital
58,623
Treasury stock, at cost, 632,250 shares
(728
)
Accumulated other comprehensive income
558
Accumulated deficit
(70,047
)
Total stockholders' equity
65,429
Total capitalization
$
134,099
$
(1)
Our net debt is approximately $29.7 million
    after offsetting zero coupon U.S. treasury bonds having a
    market value of $13.9 million held in bank escrow as
    collateral for repayment of debentures.
27
Table of Contents
DILUTION
The net tangible book value of our common stock
as of June 30, 2004 was $62 million, or $3.20 per
share. After giving effect to the sale of common stock pursuant
to this offering at the initial public offering price of
$          per
share, assuming the underwriters option to purchase additional
shares in this offering is not exercised, and after deducting
underwriting discounts and estimated offering expenses payable
by us, the adjusted pro forma net tangible book value as of
June 30, 2004 would have been
$          or
$          per
share.
The net tangible book value per share before the
offering has been determined by dividing pro forma net tangible
book value, which is calculated as total tangible assets less
total liabilities, by the pro forma number of shares of common
stock outstanding, as of June 30, 2004. This offering will
result in an increase in pro forma net tangible book value per
share of
$          to
existing stockholders and dilution in pro forma net tangible
book value per share of
$          to
new investors who purchase shares in this offering. Dilution is
determined by subtracting pro forma net tangible book value per
share from the initial public offering price of
$          per
share. The following table illustrates this dilution:
Initial public offering price per share
$
Net tangible book value per share as of
    June 30, 2004
3.20
Increase in net tangible book value per share
    attributable to this offering
Pro forma net tangible book value per share as of
    June 30, 2004 after giving effect to this offering
Dilution of net tangible book value per share to
    new investors in this offering
If the underwriters exercise their option to
purchase additional shares in this offering, the pro forma net
tangible book value per share after the offering would be
$          per
share, the increase in net tangible book value per share to
existing stockholders would be
$          per
share and the dilution to new investors would be
$          per
share.
The following table summarizes, on a pro forma
basis as of June 30, 2004, the differences between the
number of shares of common stock purchased from us, the total
consideration paid to us and the average price per share paid by
existing stockholders and by new investors. The calculation
below is based on the initial public offering price of
$          per
share, before deduction of underwriting discounts and
commissions and estimated offering expenses payable by us:
Shares Purchased
Total Consideration
Average Price
Number
Percent
Number
Percent
Per Share
Existing stockholders
%
$
%
$
New investors
Total
100.0
%
$
%
$
The tables above do not include
15,814,172 shares of common stock issuable upon exercise or
conversion of the following:
•
2,751,262 shares are issuable upon exercise
    of stock options with a weighted average exercise price of
    $5.45 per share;
•
686,875 shares are issuable upon exercise of
    class A warrants at an exercise price of $10.00 per
    share;
•
506,250 shares are issuable upon exercise of
    class B warrants at an exercise price of $12.50 per
    share;
•
5,317,111 shares are issuable upon
    conversion of outstanding bonds with a weighted average exercise
    price of $7.11 per share; and
•
6,552,674 shares are issuable upon
    conversion of preferred stock with a conversion price of
    $12.00 per share.
If all of such outstanding stock options and
warrants had been exercised and bonds and preferred stock
converted as of June 30, 2004, net tangible book value per
share after this offering would be
$          and
total dilution per shares to new investors would be
$          .
28
Table of Contents
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except share and per share
data)
This section presents our selected consolidated
financial data. You should read the following selected
consolidated financial data in conjunction with
"Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated
financial statements and related notes included elsewhere in
this prospectus. The selected data in this section is not
intended to replace the consolidated financial statements.
We derived the statement of operations data and
statement of cash flows data for the years ended
December 31, 2003, 2002 and 2001, and balance sheet data as
of December 31, 2003 and 2002 from the audited consolidated
financial statements included in this prospectus. We derived the
statement of operations data and statement of cash flows data
for the years ended December 31, 2000 and 1999 and the
balance sheet data as of December 31, 2001, 2000 and 1999
from audited consolidated financial statements that are not
included in this prospectus. We derived the statement of
operations data and statement of cash flows data for the six
months ended June 30, 2004 and 2003, and balance sheet data
as of June 30, 2004 from the unaudited consolidated
financial statements included in this prospectus. The interim
unaudited consolidated financial statements have been prepared
on the same basis as the annual audited financial statements and
include in the opinion of management, all adjustments,
consisting of normal recurring adjustments necessary to present
fairly the data for such periods and may not necessarily be
indicative of full year results.
Six Months Ended
Year Ended December 31,
June 30,
2003
2002
2001
2000
1999
2004
2003
(unaudited)
Statement of Operations Data:
Revenues:
Turnkey contracts with affiliated partnerships
$11,301
$  5,841
$ 30,103
$33,985
$ 25,406
$ 3,250
$ 1,877
Oil and gas sales from marketing activities
5,621
11,272
14,867
15,421
—
2,795
2,790
Well services
1,168
1,895
5,574
4,297
2,611
512
501
Oil and gas sales
5,717
593
948
200
68
2,681
2,832
Total revenues
23,807
19,601
51,492
53,903
28,085
9,238
8,000
Costs and operating expenses:
Turnkey contracts
7,285
4,965
25,953
22,783
18,126
3,344
1,235
Cost of marketed oil and gas purchased from
    affiliated partnerships
5,500
11,121
15,299
15,800
—
2,725
2,731
Well services
662
839
3,519
3,168
1,351
261
330
Production and exploration
3,812
1,326
568
355
43
2,046
1,952
Depreciation, depletion, amortization and
    impairment
3,249
9,930
14,462
3,065
9,197
1,534
519
General and administrative
4,496
6,278
5,485
6,416
4,491
2,337
2,165
Contingent repurchase obligation
—
(3,065
)
3,319
—
—
—
—
Total costs and operating expenses
25,004
31,394
68,605
51,587
33,208
12,247
8,932
Income (loss) from operations
(1,197
)
(11,793
)
(17,113
)
2,316
(5,123
)
(3,009
)
(932
)
Other income (expense):
Interest and other income
1,340
5,258
1,977
2,457
1,641
1,092
752
Interest expense
(1,528
)
(6,313
)
(5,776
)
(6,968
)
(5,791
)
(256
)
(1,238
)
Gain on sale of oil and gas properties
494
4,287
—
—
—
120
—
Net gain (loss) on investment
21
464
(10
)
587
(1,104
)
(88
)
126
Total other income (expense)
327
3,696
(3,809
)
(3,924
)
(5,254
)
868
(360
)
Loss before income taxes, extraordinary item and
    cumulative effect of change in accounting principle
(870
)
(8,097
)
(20,922
)
(1,608
)
(10,337
)
(2,141
)
(1,292
)
Income tax expense (benefit)
129
(471
)
152
(412
)
702
146
(194
)
29
Table of Contents
Six Months Ended
Year Ended December 31,
June 30,
2003
2002
2001
2000
1999
2004
2003
(unaudited)
Loss before minority interest and cumulative
    effect of change in accounting principle
(999
)
(7,626
)
(21,074
)
(1,196
)
(11,079
)
(2,287
)
(1,098
)
Minority interest
(112
)
—
—
—
—
(32
)
(62
)
Net loss before change in accounting principle
(1,111
)
(7,626
)
(21,074
)
(1,196
)
(11,079
)
(2,319
)
(1,160
)
Cumulative effect of change in accounting
    principle
(88
)
—
—
—
—
—
(88
)
Net loss
(1,199
)
(7,626
)
(21,074
)
(1,196
)
(11,079
)
(2,319
)
(1,248
)
Preferred dividends and accretion
4,562
16
—
—
—
3,290
1,736
Net loss applicable to common stockholders
$(5,761
)
$(7,642
)
$(21,074
)
$(1,196
)
$(11,079
)
$(5,609
)
$(2,984
)
Basic and diluted loss per common share
$ (0.34
)
$ (0.44
)
$  (1.20
)
$ (0.10
)
$  (1.00
)
$ (0.31
)
$ (0.17
)
Weighted average shares outstanding basic and
    diluted
16,827,857
17,339,869
17,532,882
12,461,814
11,115,522
18,357,891
16,871,121
Statement of Cash Flows Data:
Net cash provided by (used in):
Operating activities
$  5,278
$(6,101
)
$(15,712
)
$ 10,659
$ 16,502
$ (4,491
)
$  668
Investing activities
(13,524
)
5,317
(17,635
)
(19,012
)
(21,540
)
(10,032
)
(2,723
)
Financing activities
9,591
1,045
(2,700
)
26,701
16,726
10,027
(102
)
At December 31,
At June 30,
2003
2002
2001
2000
1999
2004
(unaudited)
Balance Sheet Data:
Cash and cash equivalents
$24,529
$23,185
$22,924
$58,970
$40,622
$20,033
Oil and gas properties, net
94,950
48,684
39,975
35,930
17,449
102,423
Total assets
151,054
108,262
94,900
128,649
82,144
153,295
Long-term debt
(including current maturities)
49,916
56,202
61,880
60,447
56,306
48,667
Convertible preferred stock
76,334
20,956
—
—
—
77,021
Total stockholders' equity (deficit)
56,394
7,002
(6,434
)
14,876
(14,618
)
65,429
30
Table of Contents
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
prospectus. 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, and 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 prospectus, 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
natural gas and oil reserves. We focus our efforts primarily on
the exploration and development of coalbed methane, or CBM,
properties located in the Rocky Mountain region and on our
waterflood oil recovery program in the Wilmington Townlot Unit,
or the Wilmington unit, in the Wilmington field within the Los
Angeles Basin of California. As of June 30, 2004, we owned
natural gas and oil leasehold interests in approximately
261,880 gross (146,550 net) acres, 95% 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 4% 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
contribute drilling locations, pay tangible drilling costs and
provide turnkey drilling services, natural gas marketing
services and well services to the drilling partnerships and
retain an interest in the wells. Historically, a substantial
portion of our revenue was attributable to these turnkey
drilling services.
From December 2002 to March 2003, 13 drilling
programs formed from 1994 though 1997 converted from Delaware
limited partnerships to Delaware limited liability companies. As
a result of these conversions, we issued an aggregate of
3,333,424 restricted convertible preferred shares to the 13 LLCs
as additional capital contributions and received as
consideration additional standard membership interests in the
LLCs. This increased our pro rata beneficial interests in the
oil and gas wells owned by the LLCs.
We anticipate that revenue from turnkey drilling
services will become increasingly less material to our business
in the future. Our future revenue growth is primarily dependent
on our ability to increase our oil and gas reserves and
production. We plan to participate in all our drilling
activities on a pro rata basis with our drilling programs until
the turnkey drilling contracts related to our existing deferred
income of approximately $19 million have been completed.
Subsequently, after completion of these turnkey drilling
contracts, we intend to invest more of our own capital in
drilling operations in order to accelerate the growth of our
production and reserves. We also anticipate that any future
drilling activities that we undertake with third parties will be
through joint ventures and similar arrangements.
31
Table of Contents
The schedule below reflects revenue and expense
from gas and oil sales and from turnkey contracts for the years
ended December 31, 2003 and 2002 and for the first six
months of 2004.
Year Ended
Six Months
December 31,
Ended
June 30,
2003
2002
2004
(unaudited)
(in thousands)
Oil and gas sales
$
5,718
$
593
$
2,681
Production and exploration expense
3,812
1,326
2,046
Gross margin
$
1,906
$
(733
)
$
635
Turnkey contract revenue with affiliated
    partnerships
$
11,301
$
5,841
$
3,250
Turnkey contract expense
7,285
4,965
3,343
Gross margin
$
4,016
$
876
$
(93
)
We estimate that the completion of drilling
activities on behalf of our drilling programs and the subsequent
commencement of drilling activities primarily for our own
account will occur during the first half of 2005. We anticipate
that, depending upon our drilling results, our production
revenue may not be sufficient for us to achieve positive cash
flow from operating activities on or before the end of 2006.
Even if we are able to achieve positive cash flow from operating
activities on or before the end of 2006, which we cannot assume,
we may not be able to achieve positive cash flow from operating
activities on a cumulative basis for 2006. To the extent we are
able to achieve increases in natural gas and oil production
revenue, we also will experience increases in production and
exploration expense.
Our capital expenditure budget for 2005 is
$40.8 million, which includes participation in the drilling
of 142 gross (88.4 net) wells. At the present time, we are
concentrating our drilling activities in our Atlantic Rim and
Pacific Rim projects of the Washakie Basin, where we are
planning to participate in the drilling of 52 gross wells
and 38 gross wells, respectively, during 2005. Although we
expect our activities in the Powder River Basin to continue to
produce additional revenues, we already have conducted drilling
activities on a substantial part of our acreage in that project.
In addition to our CBM activities, we intend to
pursue an active development program on our acreage in the
Wilmington unit. These activities in the Wilmington unit
currently are being delayed because our interests in this unit
are the subject of arbitration with Magness Petroleum, our joint
venture partner. Magness Petroleum is preventing us from
pursuing any additional activity in the field. This arbitration
is being conducted in two separate proceedings. We received a
favorable decision from one of these in August 2004. We
anticipate receiving a decision from the other arbitration by
the end of November 2004. As soon as both arbitrations have
concluded, or Magness Petroleum otherwise agrees with us to
proceed with drilling activity, we intend to resume drilling.
Compared with the development of our CBM properties, due to a
shorter period of time needed to obtain the required permits and
commence commercial production, we anticipate that development
of our oil properties in the Wilmington unit could have a more
immediate impact on our cash flows. We also anticipate that we
will be able to conduct drilling operations in the Wilmington
unit on a year-round basis without weather-induced 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.
Critical Accounting Policies
Oil and Gas
Producing Activities
We use the successful efforts method of
accounting for oil and gas properties. Under this methodology,
costs incurred to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that
32
Table of Contents
find proved reserves and to drill and equip
development wells are capitalized. Costs to drill exploratory
wells that do not find proved reserves, geological and
geophysical costs and costs of carrying and retaining unproved
properties are expensed.
Unproved oil and gas properties that are
individually significant are periodically assessed for
impairment of value and a loss is recognized at the time of
impairment by providing an impairment allowance. Other unproved
properties are amortized based on our experience of successful
drilling, terms of leases and historical lease expirations.
Capitalized costs of producing oil and gas
properties are depleted by the units-of-production method on a
field-by-field basis. Lease costs are depleted using total
proved reserves while lease equipment and intangible development
costs are depleted using proved developed reserves. Our proved
properties are evaluated on a field-by-field basis for
impairment. An impairment loss is indicated whenever net
capitalized costs exceed expected future net cash flow based on
engineering estimates. In this circumstance, we recognize an
impairment loss for the amount by which the carrying value of
the properties exceeds the estimated fair value based on
discounted cash flow.
On the sale or retirement of a complete unit of a
proved property, the cost and related accumulated depletion and
amortization are eliminated from the property accounts, and the
resulting gain or loss is recognized. On the retirement or sale
of a partial unit of proved property, the cost is charged to
accumulated depletion and amortization with a resulting gain or
loss recognized in earnings.
On the sale of an entire interest in an unproved
property, a gain or loss on the sale is recognized, taking into
consideration the amount of any recorded impairment if the
property had been assessed individually. If a partial interest
in an unproved property is sold, the amount received is treated
as a reduction of the cost of the interest retained.
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.
Revenue Recognition
Affiliated partnerships enter into agreements
with us to drill wells to completion for a fixed price. We, in
turn, enter into drilling contracts primarily with unrelated
parties to drill wells on a day work basis. Therefore, if
problems are encountered on a well, the cost of that well will
increase and gross profit will decrease and could result in a
loss on the well. We recognize revenue from the turnkey drilling
agreements on a proportional performance method as services are
performed. This involves management making judgments and
estimates as to their various stage of completion of each well
based on the review of drilling logs, status reports from
engineers and historical experience in completing similar wells.
When estimates of revenues and expenses indicate a loss, the
total estimated loss is accrued. 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. Oil and gas
sales from marketing activities result from sales by us of oil
and gas produced by affiliated joint ventures and partnerships
and are recognized when delivered to purchasers.
Capitalized Interest
Statement of Financial Accounting Standards
No. 34, "Capitalization of Interest Cost",
provides standards for the capitalization of interest cost as
part of the historical cost of acquiring assets. Costs of
33
Table of Contents
investments in unproved properties on which
exploration or development activities are in progress or are the
subject of pending litigation qualify for capitalization of
interest. Capitalized interest is calculated by multiplying our
weighted-average interest rate on debt by the amount of
qualifying costs. Capitalized interest cannot exceed gross
interest expense.
New Accounting Pronouncement
In June 2001, the Financial Accounting Standard
Board issued Statements of Financial Accounting Standards
No. 143, or SFAS 143, "Accounting for Asset
Retirement Obligations", which requires entities to record
the fair value of a liability for an asset retirement obligation
in the period in which it is incurred and a corresponding
increase in the carrying amount of the related long-lived asset.
This statement is effective for fiscal years beginning after
June 15, 2002. We adopted SFAS 143 on January 1,
2003 and recorded a net asset of $557,000, a related liability
of $645,000, using a 10% discount rate, and a cumulative effect
on change in accounting principle on prior years of $88,000. As
of December 31, 2002, we had an allowance for asset
retirement obligations of $434,000 relating to certain
nonproducing wells. The new standard had no material impact on
income before the cumulative effect of adoption in the first
quarter of 2003, nor would it have had a material impact on the
quarterly results for 2002, assuming an adoption of this
accounting standard on a pro forma basis. During 2003, the asset
retirement liability was increased by approximately $62,000 as a
result of accretion and recorded as interest expense. Also
during 2003, we sold certain non-strategic oil and gas
properties deemed not commercially productive, which resulted in
a decrease to the asset retirement liability of approximately
$245,000. We have treasury bonds held in escrow with a fair
market value as of June 30, 2004 of $2,721,000 that are
legally restricted for potential plugging and abandonment
liability in the Wilmington unit.
Results of Operations
Six Months Ended June 30, 2004
    Compared To Six Months Ended June 30, 2003
Turnkey contract revenue and
    expenses.
Turnkey contract revenue increased
$1.4 million in the first six months of 2004 to
$3.3 million, a 73% increase compared to the corresponding
period of the preceding year. Additionally, turnkey contract
expense increased $2.1 million during the first six months
of 2004 to $3.3 million, a 171% increase compared to the
same period in 2003. The drilling activity was more active
during the first six months of 2004 compared to the
corresponding period of 2003.
Net loss from turnkey activities was
$94,000 for the first six months of 2004. This compares to
net income of $642,000 for the corresponding period in
2003. This decrease in net income during the first six months of
2004 results from drilling Washakie wells with lower profit
margins in the first six months of 2004 as compared to drilling
shallow re-entry wells in 2003 with higher profit margins.
Oil and gas sales and costs from marketing
    activities.
Oil and gas sales from marketing activities
increased $6,000 in the first six months of 2004 to
$2.8 million, a nominal increase compared to the same
period last year. Cost of oil and gas marketing activities
decreased $7,000 in the first six months of 2004 to
$2.7 million, a nominal decrease compared to the same
period in 2003. Oil and gas production from the wells in the
drilling programs in which we earn a marketing fee for the six
months ended June 30, 2004 and 2003 was 0.66 Bcfe and
0.66 Bcfe, respectively. The average price per Mcfe during
the first six months of 2004 and 2003 was $4.20 and $4.22,
respectively.
The gross profit from marketing activities for
the first six months of 2004 was $71,000 as compared to $58,000
in the same period last year.
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Well services activities.
Well services revenue increased $11,000 in the
first six months of 2004 to $500,000, a 2% increase compared to
the corresponding period of the preceding year. Well services
expense decreased $68,000 in the first six months of 2004 to
$261,000.
Gross profit from well services activities was
$251,000 for the first six months of 2004 as compared to gross
profit of $172,000 for the corresponding period last year.
Oil and gas sales.
Revenue from oil and gas sales decreased $151,000
in the first six months of 2004 to $2.7 million, a 5%
decrease compared to the same period in 2003. This decrease
resulted from a retroactive adjustment which reduced our oil and
gas sales in accordance with the reduction in our working
interest percentage in the Sun Dog unit in the Washakie Basin.
Net gain (loss) on investments.
Net loss on investments was $88,000 for the first
six months of 2004. Net gain on investments was $126,000 during
the first six months of 2003. Our investments consist primarily
of zero coupon U.S. treasury bonds held in our inventory.
Fluctuations in net gain or loss on investments resulted from
changes in long-term interest rates.
Interest and other income.
Interest and other income increased $340,000 in
the first six months of 2004 to $1.1 million, a 45%
increase compared to the same period in 2003. The increase
reflects the reversal of a reserve related to the recognition of
drilling credits.
Production & exploration
    expenses.
Production and exploration expense increased
$94,000 in the first six months of 2004 to $2.0 million, a
5% increase compared to the same period in 2003. We incurred
increased lease operating expenses related to environmental
charges in our Washakie Basin properties. The increase was
offset by a retroactive adjustment which reduced our production
and exploration expense in accordance with the reduction in our
working interest percentage in the Sun Dog unit in the Washakie
Basin.
Depreciation, depletion, amortization and
    impairment.
Depreciation, depletion and amortization expense
increased $1.0 million for the first six months of 2004 to
$1.5 million, a 195% increase compared to the corresponding
period last year. This increase resulted from the expiration of
certain leases with a cost basis of approximately $700,000.
Additionally, this increase represents a higher cost basis in
oil and gas properties in 2004 due to the consent solicitation,
as compared to the same quarter in 2003, resulting in a higher
depletion expense.
General and administrative expenses.
General and administrative expenses increased
$172,000 in the first six months of 2004 to $2.3 million,
an 8% increase compared to the corresponding quarter last year.
This increase reflects an increase in legal fees relating to our
California property. See "Business — Legal
Proceedings".
Interest expense.
Interest expense decreased $1.0 million in
the first six months of 2004 to $256,000, a 79% decrease
compared to the same period last year. This decrease reflects an
increase in the amount of interest capitalized on our Wyoming
and California properties due to the consent solicitation.
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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 deductible temporary timing
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 June 30, 2004, we had a net operating
loss carryforward of approximately $65 million and no
alternative minimum tax credit carry forward. Our net operating
loss carryforwards expire in 2012 and subsequent years.
Year Ended December 31, 2003 Compared
    To Year Ended December 31, 2002
Turnkey contract revenue and
expenses.
Turnkey contract revenue increased
$5.5 million in 2003 to $11.3 million, a 93% increase
compared to 2002. Additionally, turnkey contract expense
increased $2.3 million during 2003 to $7.3 million, a
47% increase compared to 2002. These increases resulted from a
higher level of drilling activity during 2003 compared to 2002.
The level of drilling activity is affected by many factors
including obtaining the requisite governmental permits necessary
to commence drilling on the leases. Additionally, during the
fourth quarter of 2002, we entered into a joint venture with
Anadarko whereby we sold partial interests in wells that had
been previously allocated to drilling programs. As a result,
during the fourth quarter of 2002, previously recognized turnkey
revenue was reversed. During 2003, we were able to drill
38 gross and 24.3 net wells on behalf of the drilling
programs.
Gross profit from turnkey activities was
$4.0 million or 36% for 2003. This compares to gross profit
of $876,000 or 15% for 2002. The increase in gross profit
percentage during 2003 results from drilling certain wells more
economically than the corresponding period of 2002 and changes
in the working interests of various wells in our drilling
programs resulting from the recapitalization of our drilling
programs in 2002.
Oil and gas sales and costs from marketing
    activities.
Oil and gas sales from marketing activities
decreased $5.7 million in 2003 to $5.6 million, a 50%
decrease compared to the previous year. Cost of oil and gas
marketing activities decreased $5.6 million in 2003 to
$5.5 million, a 51% decrease compared to 2002. These
decreases primarily resulted from the recapitalizations of our
drilling programs in 2002, whereby we now receive oil and gas
production previously allocated to drilling programs. Oil and
gas production from the wells in the drilling programs in which
we earn a marketing fee for 2003 and 2002 was 1.2 Bcfe and
3.5 Bcfe, respectively. This decrease was offset by higher
average gas prices. The average price per Mcfe during 2003 and
2002 was $3.92 and $2.40, respectively.
The gross profit from marketing activities for
2003 was $120,000 as compared to $151,000 in the same period of
the previous year.
Well services activities.
Well services revenue decreased $728,000 in 2003
to $1.2 million, a 38% decrease compared to the preceding
year. Well services expense decreased $177,000 million for
2003 to $662,000, a 21% decrease compared to 2002. The decreases
in well services revenue resulted from the sale of certain
assets of our drilling subsidiary, CJS Pinnacle Petroleum LLC on
February 14, 2002, for total consideration of
$4.2 million. Well services revenue from CJS Pinnacle
Petroleum LLC was approximately $400,000 during the first
quarter of 2002. Following the sale, Pinnacle ceased operations.
Additionally, certain well services revenue approximating
$300,000 earned on drilling program wells during 2002 was not
earned in 2003. We obtained oil and gas interests from our
drilling programs in these wells through the recapitalization of
our drilling programs in 2002.
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Oil and gas sales.
Revenue from oil and gas sales increased
$5.1 million in 2003 to $5.7 million, an 865% increase
compared to the previous year, due to increased ownership in our
drilling programs. We obtained oil and gas interests from our
drilling programs as a result of the recapitalization of our
drilling programs in 2002. Our share of pre-payout production
from drilling programs formed subsequent to 1998 is generally
25% of the production allocated to these drilling programs.
Net gain on investments.
Net gain on investments was $21,000 for 2003 and
$464,000 for 2002. Investments consist primarily of zero coupon
U.S. treasury bonds held in our inventory. Fluctuations in
net gain or loss on investments resulted from changes in
long-term interest rates.
Interest and other income.
Other income decreased $3.9 million in 2003
to $1.3 million, a 74% decrease compared to 2002. During
2002, our executive vice president, James C.
Johnson Jr., died. As a result, we received key man life
insurance proceeds of $3.8 million.
Gain on sale of assets.
The gain on sale of assets was $494,000 in 2003
compared to $4.3 million in 2002. The $494,000 gain in 2003
resulted from the sale of certain non-strategic properties in
New Mexico during the third quarter of 2003. The
$4.3 million gain in 2002 resulted from the sale of certain
interests in our Atlantic Rim CBM reserves to Anadarko.
Production & exploration
    expenses.
Production and exploration expense increased
$2.5 million in 2003 to $3.8 million, a 188% increase
compared to the previous year. This resulted from increased
ownership in our drilling programs. We obtained oil and gas
interests from our drilling programs as a result of the
recapitalization of our drilling programs in 2002 referred to
above. Additionally, a plugging and abandonment liability of
$1.2 million was reversed during the third quarter of 2002.
Depreciation, depletion, amortization and
    impairment.
Depreciation, depletion and amortization expense
decreased $6.7 million for 2003 to $3.2 million, a 67%
decrease compared to the previous year. During 2002, we recorded
impairment expense totaling $9.3 million relating to
certain properties primarily in Texas and Montana. This was
offset by impairment expense recorded in 2003 of
$1.6 million related to expiring leases in the Atlantic Rim
Project in the Washakie Basin in Wyoming.
General and administrative expenses.
General and administrative expenses decreased
$1.8 million in 2003 to $4.5 million. During 2002, we
wrote off approximately $900,000 of previously capitalized
offering expenses. Additionally, the decrease resulted from a
reduction in the number of employees employed during 2003
compared to 2002.
Interest expense.
Interest expense decreased $4.8 million in
2003 to $1.5 million, a 76% decrease compared to the
previous year. Primarily, this decrease reflects an increase in
the amount of interest of $4.3 million capitalized to our
Wyoming and California properties.
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Contingent repurchase obligation.
Repurchase obligation expense of
$3.3 million was recorded in 2001 based on pricing at
March 15, 2002. The repurchase obligation expense was
reversed during the first quarter of 2002. As stated above, the
determination of whether a repurchase liability exists is based
upon estimates of future net cash flows from reserve studies
prepared by petroleum engineers compared to the potential
repurchase of drilling program units. Significant decreases in
natural gas and oil prices at December 31, 2001 lowered the
estimated future cash flows when compared to future potential
repurchase obligations. As a result, a repurchase liability and
a repurchase obligation expense of $3.3 million was
recorded in 2001.
Year Ended December 31, 2002 Compared
    To Year Ended December 31, 2001
Turnkey contract revenue and
    expenses.
Turnkey contract revenue decreased
$24.3 million in 2002 to $5.8 million, an 81% decrease
compared to levels during 2001. The decrease in turnkey revenue
resulted from significantly less drilling and completion
activity on behalf of the drilling programs during 2002 compared
to 2001. The amount of funds raised from our drilling programs
in the prior fiscal year determines in large part the level of
drilling activity in the following fiscal year. We raised
$18.1 million from our drilling programs during 2001
compared to $46.5 million during 2000. During 2002 and
2001, we drilled zero and five East Texas James Lime wells,
respectively. These wells were multi-lateral, horizontal wells
that cost an average of approximately $3.0 million to drill
and complete. Additionally, we contributed a 50% working
interest in 24 previously drilled or partially drilled wells in
the AMI to Anadarko as part of the joint venture. These wells
had been previously allocated to drilling programs. As a result,
we reversed previously recognized turnkey revenue during the
fourth quarter of 2002.
Turnkey contract expense decreased
$21.0 million during 2002 to $5.0 million, an 81%
decrease compared to 2001. This decrease resulted from the
decrease in drilling and completion activities on behalf of the
drilling programs during 2002 compared to 2001, as mentioned
above. Additionally, certain intangible drilling costs incurred
from August 1, 2002 through December 12, 2002 were
reimbursed by Anadarko at the closing of the joint venture on
December 13, 2002. Lastly, a portion of the proceeds
received by Anadarko from the joint venture was allocated to
previously drilled wells in the AMI, thereby reducing turnkey
expense and reducing the gain recognized on the transaction.
Gross profit from turnkey contract revenue and
expenses was $876,000 or 15% in 2002. This is compared to gross
profit of $4.1 million or 14% in 2001. The fluctuation in
gross profit percentage is not considered material.
Oil and gas sales and costs from marketing
    activities.
Natural gas and oil sales from marketing
activities decreased $3.6 million in 2002 to
$11.3 million, a 24% decrease compared to 2001. Cost of oil
and gas marketing activities decreased $4.2 million in 2002
to $11.1 million, a 27% decrease compared to 2001. These
decreases resulted from a decrease in the average prices of
natural gas and oil during 2002 compared to 2001. The average
price of natural gas and oil marketed and sold during 2002 was
$1.90 per Mcf and $20.84 per barrel, respectively, or
$2.40 per Mcfe. This is compared to the average price of
natural gas and oil marketed and sold during 2001 of $2.83 and
$16.74, respectively, or $2.82 per Mcfe. Additionally,
natural gas and oil related to our drilling programs being
purchased by us at the wellhead and subsequently marketed and
sold decreased. Natural gas and oil production allocated to
drilling programs totaled 3.5 Bcfe in 2002 compared to
5.1 Bcfe in 2001.
The gross profit (loss) from marketing activities
for 2002 was a $151,000 profit compared to a $432,000 loss in
2001. The 2001 loss resulted from a hedging transaction, which
expired on March 31, 2001. We incurred a total hedging loss
of $500,000 from January 2001 to March 2001.
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Well services activities.
Well services revenue decreased $3.7 million
in 2002 to $1.9 million, a 66% decrease compared to 2001.
Well services expense decreased $2.7 million in 2002 to
$839,000, a 76% decrease compared to 2001. These decreases
resulted from the sale of our drilling rig subsidiary in
February 2002.
Gross profit from well services activities was
$1.1 million or 56% in 2002. This is compared to gross
profit of $2.1 million or 37% in 2001. This increase in
gross profit percentage during 2002 resulted from the increase
in gross profit percentage related to drilling supervision and
administrative overhead. Drilling supervision and administrative
overhead revenue totaled $1.5 million in 2002 compared to
the related expense of approximately $600,000, resulting in a
gross profit percentage of 60%. Drilling supervision and
administrative overhead revenue totaled $1.6 million in
2001 compared to the related expense of approximately $900,000,
resulting in a gross profit percentage of 45%.
Oil and gas sales.
Natural gas and oil sales decreased $356,000 in
2002 to $593,000, a 38% decrease compared to 2001. The decrease
resulted from a settlement payment of $400,000 received by us in
2001 from an unaffiliated entity relating to previously held
suspense funds.
Net gain (loss) on investments.
Net gain on investments was $464,000 for 2002.
Net loss on investments was $10,000 for 2001. Originally, we
obtained U.S. treasury bonds, which typically represented
less than 1% of our total current assets, to assure the
financial capability to repurchase partnership units under the
partnership agreements and fund the repayment of outstanding
debentures. This obligation was eliminated for the majority of
partnership units and debenture holders in 1998. As a result,
U.S. treasury bonds held in escrow were released for our
unrestricted use and liquidated shortly thereafter.
Investments consist primarily of zero coupon
U.S. treasury bonds held in our inventory. Fluctuations in
net gain or loss on investments resulted from changes in long
term interest rates.
Gain on sale of assets.
The gain on the sale of assets of
$4.3 million resulted from the joint venture with Anadarko.
Under the joint venture, we contributed 86,394 net acres
and Anadarko contributed 49,846 net acres to the joint
venture. Additionally, Anadarko paid to us $12.0 million in
cash, $6.0 million in future drilling credits and
$2.2 million of expense reimbursements. As a result, we
recognized a $4.3 million gain on sale of assets.
Interest and other income.
Interest and other income increased
$3.3 million in 2002 to $5.3 million, a 166% increase
compared to 2001. This increase resulted primarily from a key
man life insurance payment received by us relating to the death
of our executive vice president, James C. Johnson, Jr. in
December 2002. The insurance proceeds totaled $3.8 million.
This increase was partially offset by lower interest income
earned during 2002 resulting from lower interest rates.
Production & exploration
    expenses.
Production and exploration expense increased
$758,000 in 2002 to $1.3 million, a 134% increase compared
to 2001. The increase resulted primarily from $310,000 of
plugging and abandonment expense and $190,000 of 3-D seismic
expense recorded in 2002.
Depreciation, depletion, amortization and
    impairment.
Depreciation, depletion and amortization expense
decreased $4.5 million in 2002 to $9.9 million, a 31%
decrease compared to 2001. This decrease resulted from depletion
and impairment expense of $9.3 million
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during 2002 compared to $10.3 million during
2001. Additionally, during 2002, depletion expense on oil and
gas properties decreased $1.4 million due to the lower oil
and gas property balances during 2002 compared to 2001. In 2001,
we recorded approximately $600,000 impairment expense related to
the fixed assets of Pinnacle. Depreciation and depletion related
to the Warren E&P acquisition was approximately $300,000 in
2001.
General and administrative expenses.
General and administrative expenses increased
$793,000 in 2002 to $6.3 million, a 14% increase compared
to 2001. This increase resulted primarily from allocating a
higher percentage of payroll and office expenses to general and
administrative expense and a lower percentage of these expenses
to turnkey expense.
Interest expense.
Interest expense increased $536,000 in 2002 to
$6.3 million, a 9% increase compared to 2001. Primarily,
the increase is attributable to an decrease in capitalized
interest during 2002 compared to 2001. We recorded
$1.4 million of capitalized interest during 2002 compared
to $2.3 million during 2001. Primarily, capitalized
interest relates to our development project in the Washakie
Basin.
Contingent repurchase obligation.
Repurchase obligation expense of
$3.3 million was recorded in 2001 based on pricing at
March 15, 2002. The repurchase obligation expense was
reversed during the first quarter of 2002. As stated above,
the determination of whether a repurchase liability exists is
based upon estimates of future net cash flows from reserve
studies prepared by petroleum engineers compared to the
potential repurchase of drilling program units. Significant
decreases in natural gas and oil prices at December 31,
2001 lowered the estimated future cash flows when compared to
future potential repurchase obligations. As a result, a
remarketing liability and a remarketing obligation expense of
$3.3 million was recorded in 2001.
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Liquidity and Capital Resources
Our primary source of liquidity since our
formation has been the private sale of our equity and debt
securities. These private placements primarily were made through
a network of independent broker dealers. Since 1992, we
sponsored 31 drilling programs that raised an aggregate of
approximately $228.0 million. Additionally, we have raised
$71.6 million through the issuance of our debt securities
and $64.4 million through the issuance of shares of our
common and preferred stock. In our drilling programs, we fund
the costs associated with acreage acquisition and the tangible
portion of drilling activities, while investors in the drilling
programs fund all intangible drilling costs. Our primary use of
capital has been for the acquisition, development and
exploration of our natural gas and oil properties. Additional
uses of capital include the payment of dividends on our
preferred stock, sinking fund requirements related to debentures
and operating losses from operations.
During the first six months of 2004, we raised
$14.2 million from the sale of our common stock.
Additionally, during July 2004, we raised $5.9 million from
the sale of our common stock. During 2003, we raised
$6.4 million through the private placements of interests in
our drilling program. Cumulatively, we raised $29.9 million
during fiscal years 2003, 2002 and 2001 through the private
placements of interests in our drilling programs. During 2003,
we raised $15.8 million through the private placements of
our series A 8% cumulative convertible preferred stock.
Cumulatively, we raised $20.1 million during fiscal years
2003, 2002 and 2001 through the private placements of our debt
or equity securities.
Cash Flow from Operating
    Activities
Net cash provided from operating activities was
$5.3 million for 2003. This compares to net cash used in
operating activities of $6.1 million and $15.7 million
in 2002 and 2001, respectively. Net cash used in operating
activities was $4.5 million for the six months ended
June 30, 2004 compared to net cash provided from operating
activities of $700,000 for the comparable period in 2003.
Primarily, in prior periods, increases and decreases in net cash
flows from operating activities resulted from turnkey contract
operations with our drilling programs.
Our most material commitment of funds for 2004
relates to our drilling programs. Our deferred income balance
relating to our drilling commitments totaled $19.0 million
at June 30, 2004. We expect to drill the wells allocated to
drilling programs and satisfy our related drilling obligations
by the end of the first half of 2005.
We believe that the proceeds of this offering
will be sufficient to meet our planned capital expenditures and
our other cash needs during the next 12 months. To
supplement our cash needs, we also intend to obtain a credit
facility based on our proved reserves. Additionally, we are
entitled to $2.0 million of deferred drilling credits from
Anadarko.
2005 Capital Expenditure
    Program
Our total net capital budget spending program for
2005 is $40.8 million, exclusive of the intangible turnkey
drilling costs allocable to our participating drilling programs.
The majority of these estimated expenditures relate to the
development of our Atlantic Rim and Pacific Rim projects in the
Rocky Mountains and the development of our oil reserves in the
Wilmington unit. The development of these properties focuses our
resources on the primary objective to increase production
volumes and cash flow. For 2005, we plan to participate in the
drilling of 52 gross (20.0 net) wells in the Atlantic Rim,
38 gross (24.4 net) wells in the Pacific Rim and 12 gross
(6.0 net) wells in the Powder River Basin projects.
Additionally, we plan to participate in the drilling of 40 gross
(38.0 net) wells in the Wilmington unit. However, our
working interests and the number of net wells in the Wilmington
unit activities, as well as our ability to undertake these
activities will depend on resolution of the arbitration with
Magness Petroleum. These spending programs and other cash
requirements will be funded by existing cash balances, cash flow
from operations and proceeds
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from this offering. The final determination
regarding whether to drill the budgeted wells referred to above
is dependent upon many factors including:
•
the availability of sufficient capital resources;
•
the ability to acquire proper governmental
    permits and approvals;
•
economic and industry conditions at the time of
    drilling such as prevailing and anticipated energy prices and
    the availability of drilling equipment; and
•
the outcome of our litigation with Magness
    regarding the Wilmington unit.
Debentures
As of June 30, 2004, we had
$46.9 million of debentures of which $37.8 million are
convertible into our common shares and $9.1 million are not
convertible. Additionally, $14.2 million of debentures are
currently callable by us, $9.1 million are callable at our
option at 103% to 100% of par value ratably from 2004 to 2007,
and $5.1 million are generally callable at our option at
107% to 100% of par value ratably from 2004 to 2011.
Further, all convertible debentures are callable
by us if the average bid price of our common shares publicly
trade 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 between 100% and 110% par
value plus accrued interest.
We have issued secured debentures and sinking
fund debentures. The principal of the 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 principal of the sinking fund debentures is
required to be secured by equal annual deposits of zero coupon
U.S. treasury bonds, which shall be sufficient in the
aggregate to fund repayment of the principal of the outstanding
debentures at their respective maturity date.
The table below reflects the outstanding
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 2005 at June 30, 2004. The
conversion prices listed below will increase in the future for
certain debentures.
Conversion
Fair Market
Estimated
Outstanding
Price as of
Value of
Debenture
at June 30,
June 30,
U.S.
Interest
Debentures (in thousands, except for conversion prices)
2004
2004
Treasuries
for 2005
12% Sinking Fund Debentures due December 31,
    2007
$
9,141
n/a
$
3,107
$
1,097
12% Secured Fund Debentures due December 31,
    2009
770
$
8.00
623
92
12% Secured Fund Debentures due December 31,
    2010
1,700
8.00
1,301
204
13.02% Sinking Fund Debentures due
    December 31, 2010
14,545
5.00
4,674
1,894
13.02% Sinking Fund Debentures due
    December 31, 2015
11,643
8.00
1,946
1,516
12% Secured Fund Debentures due December 31,
    2016
1,365
8.00
715
164
12% Sinking Fund Debentures due December 31,
    2017
5,135
15.00
598
616
12% Secured Fund Debentures due December 31,
    2020
1,485
20.00
598
178
12% Secured Fund Debentures due December 31,
    2022
1,136
20.00
405
136
$
46,920
$
13,967
$
5,897
Preferred Stock
As of June 30, 2004, we had
6,552,674 shares of convertible preferred stock issued and
outstanding. See "Description of Capital Stock —
Preferred Stock" for a description of our preferred stock.
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Dividends paid on preferred shares totaled
$3.3 million and $1.7 million for the six months ended
June 30, 2004 and 2003, respectively. Dividends paid on
preferred shares totaled $4.6 million, and $16,000 for the
years ended 2003 and 2002, respectively. Dividends may be paid
in cash or in kind at management's option.
Contractual Obligations
The contractual obligations table below assumes
the maximum amount is tendered each year, net of the effects of
the sinking fund requirements. The table does not give effect to
the conversion of any bonds to stock which would reduce payments
due. As described in more detail in the "Debentures"
section above, all debentures are secured at maturity, or
partially secured at maturity, by zero coupon U.S. treasury
bonds deposited into an escrow account equaling the par value of
the debentures maturing on or before the maturity of the
debentures. The table below reflects the release of
U.S. treasury bonds to us upon redemption. The estimated
annual sinking fund requirements disclosed below are calculated
using U.S. treasury bond pricing as of June 30, 2004.
Additionally, the table reflects the redemption of certain
debentures callable by us utilizing certain proceeds from this
Offering to retire the related debentures.
Payments Due by Period
Less Than
More Than
Contractual Obligations
Total
1 Year
1-3 Years
3-5 Years
5 Years
As of June 30, 2004
(in thousands)
Debentures — Net of sinking fund
    requirements
$
24,092
$
1,858
$
3,289
$
4,325
$
14,620
Debenture sinking fund requirements
22,828
2,834
6,095
5,059
8,840
Leases
594
83
316
195
—
Total
$
47,514
$
4,775
$
9,700
$
9,579
$
23,460
The contractual obligation schedule above does
not reflect $20.5 million principal amount of zero coupon
U.S. treasury bonds held by us in escrow to secure the
repayment of the debentures upon maturity. Such
U.S. treasury bonds have a fair market value of
$13.7 million as of June 30, 2004.
Off-Balance Sheet Arrangements
Under the terms of our drilling programs formed
from 1998 to 2001, investors have the right to tender their
interest back to the drilling program and other program
investors during the period from seven to 25 years after
the date of the partnership's formation. To the extent that
an investor tenders a drilling program interest for sale and the
drilling program and other investors elect not to repurchase the
withdrawing partner's interest, we will be required to
repurchase the interest from the investor. The price of our
repurchase is fixed by the drilling program agreement to be the
lower of the PV-10 value of the assets of the program and a
formula based on the amount of the investor's cash
investment reduced by the amount of any cash distributions
received. As of June 30, 2004, based on the
December 31, 2003 reserve reports of the respective
drilling programs, the aggregate PV-10 value of the assets in
these programs is $15.8 million. Because this PV-10 value
is less than the formula price of $96.5 million at
June 30, 2004, the maximum repurchase price obligation at
June 30, 2004 was $15.8 million. This PV-10 value
would be higher under current prices for crude oil and natural
gas and is anticipated to increase when we drill the remaining
22 net wells on behalf of these seven drilling programs. In
the event of repurchase, we receive the investor's interest
in the program, which includes the investor's beneficial
share of the program's reserves and related future net cash
flows.
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The table below presents the projected timing of
our maximum potential repurchase commitment associated with
these programs as of June 30, 2004:
Amount of Repurchase Commitment Per Period
Less Than
More Than
1 Year
1-3 Years
3-5 Years
5 Years
Total
(in thousands)
Maximum potential repurchase commitment(1)
—
$
5,806
$
9,609
$
382
$
15,797
(1)
Based on partnership reserves taken from the
    Williamson partnership reserve report as of December 31,
    2003 and using pricing at that date. This report does not
    include reserves for 22 net wells that are scheduled to be
    drilled for these programs through the first half of 2005.
Additional Repurchase Commitments
Under the terms of 13 of our drilling programs
formed before 1998, the minority interest investors have the
right to require us to repurchase their interests in each
program for a formula price, to the extent that the drilling
programs and other program investors elect not to purchase a
withdrawing partner's interest. This right is effective
either seven years from the date of a partnership's
formation, or between the 15th and 25th anniversary of its
formation. The formula price is computed as the original capital
contribution of the investor reduced by the greater of cash
distributions we made to the investor, or 10% for every $1.00
which the oil price at the repurchase date is below
$13.00 per barrel adjusted by the CPI changes since the
program's formation. If we purchase interests in drilling
programs, we receive the investor's interest in the
program, which includes the investor's beneficial share of
the reserves and related future net cash flows. The table below
presents the repurchase commitment associated with the pre-1998
drilling programs, giving no effect to any reserve value that is
acquired in repurchase.
Amount of Repurchase Commitment per Period
Less Than
More Than
1 Year
1-3 Years
3-5 Years
5 Years
Total
(in thousands)
Partnership repurchase commitments:
Pre-1998 partnerships
$
4,532
—
—
$
1,353
$
5,885
Quantitative and Qualitative Disclosures About
Market Risk
Commodity Risk
Our major market risk exposure is the commodity
pricing applicable to our natural gas and oil production.
Realized commodity prices received for our production are
primarily driven by the prevailing worldwide price for crude oil
and spot prices applicable to natural gas. The effects of price
volatility are expected to continue.
Interest Rate Risk
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.
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Financial Instruments
Our financial instruments consist of cash and
cash equivalents, U.S. treasury bonds, accounts receivable
and other long-term liabilities. The carrying amounts of cash
and cash equivalents, U.S. treasury bonds, accounts
receivables and accounts payable approximate fair market value
due to the highly liquid nature of these short-term instruments.
Inflation and Changes in
    Prices
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.
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Table of Contents
BUSINESS
Overview
We are a growing independent energy company
engaged in the exploration and development of domestic onshore
natural gas and oil reserves. We focus our efforts primarily on
the exploration and development of CBM properties located in the
Rocky Mountain region and on our waterflood oil recovery program
in the Wilmington Townlot Unit, or the Wilmington unit, in the
Wilmington field within the Los Angeles Basin of
California. Our CBM operations are located in two core areas:
the Washakie Basin, which comprises approximately the southeast
one-third of the Greater Green River Basin in southwestern
Wyoming, and the Powder River Basin in northeastern Wyoming. We
also own conventional production principally in Texas, New
Mexico and North Dakota. As of June 30, 2004, we owned
natural gas and oil leasehold interests in approximately
261,880 gross (146,550 net) acres, 95% of which are
undeveloped. Substantially all our undeveloped acreage is
located in the Rocky Mountains. We have identified approximately
1,162 drilling locations on our acreage, primarily on 80-acre
and 160-acre well spacing.
In the Washakie Basin, we have assembled a large,
predominantly undeveloped CBM leasehold, which we believe
positions us for significant long-term growth. Our operations in
the Washakie Basin consist of the Atlantic Rim project located
along the Basin's eastern rim and the Pacific Rim project
located along its western rim. As of June 30, 2004, we had
247,450 gross (140,782 net) acres prospective for CBM
development in this area, of which 136,157 are net undeveloped
acres. This acreage contains approximately 1,049 identified
drilling locations. We own a 57% average working interest in
this acreage.
Our Atlantic Rim project comprises approximately
212,258 gross (113,248 net) acres. As of June 30,
2004, we had participated in the drilling of 46 CBM wells in
this project. These wells included 22 producing wells and
24 wells that are awaiting completion of production
facilities, all of which we believe are capable of commercial
production. Based on geological and seismic data, we previously
drilled 26 geological test wells, 11 of which we believe
are capable of commercial production. As of December 31,
2003, the proved reserves for the 22 producing wells and
for their 23 proved undeveloped offset locations
average 1.01 Bcfe per gross well on 80-acre and
160-acre spacing, based upon the reserve report prepared by
Williamson Petroleum Consultants, Inc., an independent petroleum
engineering firm. In 2004, we entered into an agreement to
jointly construct, own and operate gathering systems,
compression facilities and a pipeline in the Atlantic Rim with
Anadarko Petroleum Corporation. During 2005, we plan to increase
our drilling activity in the Atlantic Rim by participating in
the drilling of 52 gross (20.0 net) additional wells
in this area.
During the last half of 2003, we established our
Pacific Rim project which consists of approximately
35,192 gross (27,534 net) acres prospective for CBM
development. As of June 30, 2004, we had drilled nine CBM
wells and acquired four previously drilled wells in this
project, all on 160-acre spacing. In our first pilot program, we
expect to complete construction of a gathering system and
commence production from these nine wells by the end of 2004.
During 2005, we also plan to increase our drilling activity in
the Pacific Rim by participating in the drilling of
38 gross (24.4 net) additional wells in this area.
As of December 31, 2003, we had estimated net
proved reserves of 106.2 Bcfe, with a PV-10 value of $183.0
million, based on the reserve report prepared by Williamson
Petroleum Consultants. These estimated net proved reserves are
located on less than 4% of our net acreage. We currently have
interests in 205 gross (79.0 net) producing wells and are the
operator of record for 55% of these wells. Through our joint
venture agreements, we participate in operating activities for
most of the wells for which we are not operator of record. On
June 30, 2004, total production from these wells was 18.6
MMcfe/d gross (5.5 MMcfe/d net). For 2005, we have a total
capital budget of approximately $40.8 million to
participate in the drilling of 142 gross (88.4 net)
wells.
From our inception in 1990 through 2003, we
functioned principally as the sponsor of privately placed
drilling programs and joint ventures. During that period, we
sponsored 31 drilling programs that raised an aggregate of
approximately $228 million. Under these programs, we
contribute drilling locations, pay tangible drilling costs and
provide turnkey drilling services, natural gas marketing
services and well services to the drilling programs and retain
an interest in the wells drilled. The programs utilized these
funds to pay for intangible gas and oil drilling costs on
properties for which we had assembled the acreage and designated
the
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Table of Contents
drilling prospects. On behalf of the drilling
programs, we have participated in the drilling of approximately
470 conventional, horizontal and CBM wells, of which
approximately 90% were completed as commercial producing wells.
At June 30, 2004, we had deferred income from turnkey
drilling contracts of approximately $19 million related to
the drilling programs. The drilling programs will participate
with us on a pro rata basis in our drilling activities until the
turnkey contracts have been completed, which we expect to occur
by the first half of 2005. We intend to participate with greater
working interests in the wells we drill in the future in order
to accelerate our growth in production and reserves. We
anticipate that future drilling activities with third parties
will consist of joint ventures and similar arrangements. As of
June 30, 2004, we had distributed $59.9 million in
cash and $60.1 million in our securities to these programs.
In December 2002, we entered into a joint venture
with Anadarko Petroleum Corporation, one of the largest
independent oil and gas exploration and production companies.
This joint venture provides for the exploration and development
of the Atlantic Rim project on a 50/50 basis covering over
141,000 net acres within a 211,000 acre area of mutual interest,
or AMI. Under the joint venture, we contributed 88,993 net
acres, and Anadarko contributed 52,444 net acres and paid us
$20.2 million, which included reimbursement for
$2.2 million of our prior drilling expenses. In 2004, we
expanded our relationship with Anadarko by entering into an
agreement to construct, own and operate gathering systems and a
pipeline in the Atlantic Rim project of the Washakie Basin on a
50/50 basis.
In 2003, we raised approximately
$56.7 million of equity through the private placement of
our convertible preferred stock to accredited investors. These
placements included issuing $15.8 million of preferred
stock for cash, issuing $36.1 million of preferred stock in
exchange for oil and gas properties, and issuing
$4.8 million of preferred stock for the redemption of
debentures. In February and July 2004, we raised a total of
$20 million through the private placement of
2,850,000 shares of our common stock, together with
warrants to purchase 1,425,000 shares of our common
stock to institutional investors managed by a large Boston-based
investment advisor.
Our Business Strategy and Strengths
Our business strategy is designed to generate
growth in oil and gas reserves, production volumes and cash
flows at a positive return on invested capital while minimizing
geological risk. Key elements of our business strategy include
the following:
•
Exploit Existing Properties Through the
    Drillbit.
We intend to increase
    our proved reserves by drilling numerous locations identified on
    our Rocky Mountain CBM properties and on our Wilmington unit. As
    of June 30, 2004, we have identified a total of 1,162
    drilling locations, of which we plan to participate in the
    drilling of 142 gross wells during 2005.
•
Increase Our Working Interest in Future
    Wells.
We plan to increase our
    level of participation in future wells by investing more of our
    own capital to drilling operations in our high growth areas. We
    believe this will enable us to accelerate our growth in
    production, reserves and cash flows.
•
Pursue Selective Acquisitions and Joint
    Ventures.
We believe we are well
    positioned, given our asset base and technical expertise, to
    pursue selected acquisitions and attract industry joint venture
    partners. We expect to pursue further acquisitions of natural
    gas and oil properties in areas where we have specific technical
    knowledge and experience. We also plan to enter into additional
    joint ventures to increase our CBM acreage and develop our
    reserves.
•
Reduce Costs Through Economies of Scale and
    Efficient Operations.
As we
    continue to increase our production and develop our existing
    properties, we expect that our unit cost structure will benefit
    from economies of scale. With respect to our CBM operations, we
    anticipate reducing unit costs by greater utilization of our
    existing infrastructure over a larger number of wells. We seek
    to exert more control over costs and timing in our exploration,
    development and production activities through our operating
    activities and relationships with our joint venture partners.
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As a result of the following strengths, we
believe we are well positioned to execute our business strategy:
•
Substantial Rocky Mountain Undeveloped CBM
    Acreage Position.
We believe that
    the Rocky Mountain region is one of the few remaining high
    potential CBM natural gas provinces in North America. We
    have assembled a substantial undeveloped acreage position in the
    Rocky Mountains of 240,170 gross (136,610 net) acres
    containing 1,059 identified drilling locations. In the
    Rocky Mountains, our estimated total net proved reserves of
    12.4 Bcf are located on approximately 2% of our net acreage.
•
Technical
    Expertise.
Since the beginning of
    our CBM operations in 1996, we have gained considerable
    expertise in advanced CBM drilling, completion and re-entry
    techniques. We also have expertise in directional and horizontal
    drilling relating to our waterflood recovery program in the
    Wilmington unit.
•
Experienced Management
    Team.
Our management team has
    25 years of experience on average in the oil and gas
    industry, and our technical professionals have 17 years of
    experience on average in oil and gas operations. Our personnel
    have extensive experience in managing large-scale operations in
    each of our areas of concentration. Most members of our senior
    management have been with us since the mid-1990's.
•
Incentivized Management
    Ownership.
The equity ownership of
    our management team is strongly aligned with that of our
    stockholders. As of August 18, 2004, our 14 directors
    and executive officers beneficially owned 5,610,544 shares
    of our common stock, which includes exercisable options to
    purchase 1,278,252 shares of our common stock.
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 in the Wilmington unit in
California. The table below highlights our main areas of
activity:
Planned
2005
Gross
Net
Gross Wells
Capital
Area
Acres
Acres
in 2005
Expenditures
(in millions)
Washakie:
Atlantic Rim
212,258
113,248
52
$
11.4
(1)
Pacific Rim
35,192
27,534
38
12.7
Powder River
5,190
2,536
12
1.3
Wilmington
1,440
1,243
40
15.4
Other(2)
7,800
1,989
—
—
Total
261,880
146,550
142
$
40.8
(1)
Includes $950,000 for the construction of
    gathering systems, compression facilities and a pipeline
    pursuant to our agreement with Anadarko.
(2)
Includes conventional oil and gas properties
    located primarily in New Mexico, Texas and North Dakota.
Rocky Mountain CBM Projects
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
June 30, 2004, we had assembled 247,450 gross
(140,782 net) acres prospective for CBM development in
this area, of which 136,157 are net undeveloped. This area
contains approximately 1,049 identified drilling locations
primarily on 80-acre and 160-acre well spacing. The report
prepared by Williamson Petroleum Consultants as of
December 31, 2003 estimates that the gross recoverable
proved reserves for the 22 wells drilled and their
23 well offsets in our
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first two pilot programs in this basin were
45.5 Bcfe on 80-acre and 160-acre spacing. We own a 57%
average working interest in this acreage.
Commercial CBM production in the Washakie Basin
was initially established in 2002 on the eastern rim of the
Washakie Basin both by us and by Double Eagle Petroleum Co., an
independent energy company. The Washakie Basin is generally
characterized by 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 Unit 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.
Atlantic Rim Project
Our Atlantic Rim project comprises approximately
212,258 gross (113,248 net) acres on the eastern rim
of the Washakie Basin. Following completion of the Doty Mountain
unit, we expect to have drilled a total of 56 CBM wells in
the Atlantic Rim project in 2004. Additionally, upon completion
of an ongoing environmental impact study being conducted on the
Atlantic Rim area by the Rawlins Office of the BLM covering
approximately 310,000 acres, we plan to significantly
increase drilling activities in the Atlantic Rim project. We
believe this EIS should be completed in 2005. We are jointly
developing all of our Atlantic Rim projects within the AMI with
Anadarko. Anadarko is the operator of record for the Atlantic
Rim project, and under the Anadarko agreements, our personnel
and Anadarko's personnel have equal input in
decision-making for most decisions, including budgets and
drilling.
Sun Dog Unit.
Our initial pod, the Sun Dog unit, is a 10-well
pilot program drilled on 80-acre spacing. The Sun Dog unit
commenced production in April 2002 at a gross rate of
approximately 400 Mcf/d of gas and 12,000 Bbls/d of
water. Since April 2002, production rates from the Sun Dog unit
wells have increased steadily to over 3,600 Mcf/d of gas
and 13,000 Bbls/d of water. As of June 30, 2004, the
wells have continued to exhibit a typical CBM negative decline
curve, increasing daily gas production with relative water
production rates decreasing as a percentage of gas production.
Based on a report from Williamson Petroleum Consultants, as of
December 31, 2003, estimated gross ultimate recoverable
reserves for the 10 producing wells and eight undrilled
offset locations in the Sun Dog unit average 1.1 Bcfe per
well. We currently own a working interest of approximately 29.1%
in the wells drilled in the initial pod of the Sun Dog unit and,
together with our drilling programs, we own a working interest
of approximately 76.1%.
Blue Sky Unit.
Our second producing pod in the Atlantic Rim
project, the Blue Sky unit, is a 12-well pilot program drilled
on 160-acre spacing. This program commenced production in August
2003 and as of June 30, 2004, was producing 203 Mcf/d
of natural gas and approximately 12,500 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
negative decline curve similar to other CBM wells. In the first
half of 2004, we drilled a second water injection well in the
Blue Sky unit in order to reduce the water pressure on the
producing wells to potentially accelerate gas production from
these wells. Based on a report from Williamson Petroleum
Consultants, as of December 31, 2003, estimated gross
ultimate recoverable reserves for the 12 producing wells and 13
undrilled offset locations in the Blue Sky unit average
1.0 Bcfe per well. We currently own an approximate 39.7%
working interest in the wells drilled in the initial pod of the
Blue Sky unit and, together with our drilling programs, we own
an approximate 9.9% working interest.
Red Rim Unit.
We are currently developing our first pod in the
Red Rim unit. This pod consists of 16 planned wells on
160-acre spacing. We completed eight CBM producing wells and one
water injection well during 2003. We
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plan to participate in the drilling of eight
additional wells in this pod by the end of 2004. We plan to
commence production from these 16 CBM wells by the end of 2004.
We currently own a working interest of approximately 11.8% in
the wells drilled in the initial pod of the Red Rim unit and,
together with our drilling programs, we own a working interest
of approximately 47.0%.
Doty Mountain Unit.
We are currently developing our first pod in the
Doty Mountain unit. This pod consists of 24 planned wells
on 80-acre spacing. We drilled eight wells in the second quarter
of 2004 and plan to participate in the drilling of the remaining
16 wells and one water injection well by the end of 2004.
We plan to commence production from these wells by the end of
2004. We currently own an approximate 8.5% working interest in
the wells drilled in the initial pod of the Doty Mountain unit
and, together with our drilling programs, we own an approximate
34.0% working interest.
Jolly Roger Unit.
We are currently developing our first pod in the
Jolly Roger unit. This pod consists of 24 planned wells on
160-acre spacing. We drilled eight wells and one water injection
well in 2002, and we expect to participate in the drilling of
the remaining 16 wells by the end of 2005. We currently own
a working interest of approximately 11.8% in the wells drilled
in the initial pod of the Jolly Roger unit and, together with
our drilling programs, we own a working interest of
approximately 47.0%.
Pacific Rim Project
Since 2003, we have been acquiring our Pacific
Rim acreage located on the western rim of the Washakie Basin,
60 miles west of our Atlantic Rim project. At June 30,
2004, our Pacific Rim project comprised approximately
35,192 gross (27,534 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 property
includes four previously drilled CBM test wells from which we
obtained technical test data, similar in many respects to the
data from our Atlantic Rim wells.
In April 2004, we entered into an agreement to
acquire an existing 6 1/2-mile gas pipeline that connects
the Pacific Rim project to a 20-inch main gas pipeline. This
pipeline connects to the Kern River pipeline, which carries gas
to Bakersfield, California.
We plan to significantly increase our drilling
activity in the Pacific Rim project by up to 120 CBM wells,
upon approval of a pending EA submitted by us to the Rock
Springs, Wyoming office of the BLM. We currently expect to
receive BLM approval by the end of 2004.
Pacific Isle
Unit.
We are currently developing our first pod in the
Pacific Isle unit. This pod consists of nine wells, two of which
we acquired with the property and seven of which we drilled in
late 2003. We also drilled a water injection well on this unit
in late 2003. We expect to complete construction of a gathering
system and to commence production from these nine wells by the
end of 2004. We currently own an approximate 20.0% working
interest in the wells drilled in the initial pod of the Pacific
Isle unit and, together with our drilling programs, we own an
approximate 80.0% working interest.
Rifes Rim
Unit.
We are currently developing our first pod in the
Rifes Rim unit. This pod consists of 10 planned wells, two
of which we acquired with the property, one of which we drilled
in late 2003 and seven of which we intend to participate in the
drilling of by the end of 2005. We currently own a working
interest of approximately 17.9% in the wells drilled in the
initial pod of the Rifes Rim unit and, together with our
drilling programs, we own a working interest of approximately
71.8%.
Chicken Springs
Unit.
We are currently developing our first pod in the
Chicken Springs unit. This pod consists of four planned wells,
one of which we drilled in the second quarter of 2004. We intend
to participate in the drilling of the
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three remaining wells by the end of 2004. We
currently own an approximate 15.0% working interest in the wells
drilled in the initial pod of the Chicken Springs unit and,
together with the drilling programs, we own an approximate 60.0%
working interest.
Powder River Basin
At June 30, 2004, we owned and operated
interests in 119 gross (57.0 net) producing CBM wells
on approximately 5,190 gross (2,536 net) acres in the
Powder River Basin near Gillette, Wyoming. At June 30,
2004, these wells were producing approximately 6,068 Mcf/d
gross (2,788 Mcf/d net). At December 31, 2003, our
total estimated net proved reserves in this portion of the
Powder River Basin were 6.8 Bcf gross (1.8 Bcf net).
Since 2003, we have deepened and recompleted 21 gross
(7.2 net) wells in the LX-Bar field in the Powder River
Basin to a lower coal seam. At June 30, 2004, gross
production from these formerly non-producing wells was
3,684 Mcf/d gross (1,492 Mcf/d net).
Wilmington Townlot Unit
Our Wilmington 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 1920's. Since that time, the
Wilmington unit, a unitized oil field consisting of
1,440 gross (1,243 net) acres, has produced more than
149 million barrels of oil from primary production. In
1999, through our wholly owned subsidiary, Warren Resources of
California, Inc., we acquired 50% of Magness Petroleum's
94% working interest in the Wilmington unit. All the working
interests in the Wilmington unit are subject to the terms and
provisions of a unit operating agreement. Magness Petroleum
currently serves as operator for the Wilmington unit.
Our Wilmington unit oil reserves are primarily
PUDs. We seek to develop these reserves using directional and
horizontal drilling and secondary recovery techniques, such as a
waterflood recovery program. As of June 30, 2004, we had
522 Bbls/d gross (254 Bbls/d net) production, compared
to 538 Bbls/d gross (200 Bbls/d net) production as of
June 30, 2003. In addition, estimated proved reserves as of
December 31, 2003 were 23.3 MMbbls gross
(14.3 MMbbls net), of which 97% are PUDs. Further, as of
June 30, 2004, there were 31 gross (14.6 net)
producing wells.
Simultaneous with our acquisition of this
interest, we entered into a joint venture with Magness
Petroleum, referred to as the WRI-Magness joint venture. We and
Magness Petroleum each agreed to contribute our respective 47%
working interests in the wells to be developed by the joint
venture. The purpose of the joint venture was to develop the
property through directional drilling, applying secondary
recovery techniques, such as waterflood redevelopment. Magness
Petroleum was to serve as operator for the joint venture wells,
with Warren E&P to supervise, coordinate and control the
drilling and completion operations. As of June 30, 2004,
there were 31 producing wells in the Wilmington unit. Three of
these wells were drilled pursuant to the joint venture
agreement, and we acquired a 47% working interest in the other
28 wells, outside of the joint venture, at the time of our
original acquisition.
The WRI-Magness joint venture provides that we
are responsible, through our drilling funds or otherwise, to pay
for all the intangible drilling and development costs incurred
by the joint venture, and that we and Magness Petroleum each
will pay one-half of all tangible drilling and equipping costs.
Revenues and other operating expenses incurred by the joint
venture are to be allocated 90% to the party paying the
intangible costs, until repayment of 100% of those costs, and,
during that same period, 10% proportionately to the parties
paying the tangible costs. Thereafter, revenues and costs and
expenses incurred by the joint venture are to be allocated 60%
to the party paying the intangible costs and 40% proportionately
to the parties paying the tangible costs.
The joint venture also provides that we and
Magness Petroleum have mutual rights of first refusal to
purchase the other's interests in the Wilmington unit
before either of us may sell to a third party.
We currently are involved in an arbitration with
Magness Petroleum concerning our interests in the Wilmington
unit. In the arbitration proceeding Magness Petroleum is
asserting that the joint venture be dissolved. Although we do
not believe that this is the most likely outcome, if it were to
occur, we would retain our existing interest in the producing
wells and a 47% working interest in the undeveloped properties.
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As a result, our estimated net proved reserves
and our estimated discounted net future cash flows from the
Wilmington unit would be reduced significantly. See
"Business — Legal Proceedings".
Drilling Programs
Since 1992, we have sponsored 31 drilling
programs that have raised approximately $228 million. We
have decreased our sponsorship of drilling programs since 2001,
raising approximately $13 million in one drilling program
in 2001, $5.4 million in one drilling program in 2002 and
$6.5 million in one drilling program in 2003. On behalf of
the drilling programs, we have participated in the drilling of
approximately 470 conventional, horizontal wells and CBM wells,
virtually all of which were operated by us, with approximately
90% of such wells being completed and commercially productive.
Under these programs, we contribute drilling
locations and pay all tangible drilling costs, while the other
investor partners in the drilling programs pay all intangible
drilling costs. Warren E&P, Inc., our wholly owned
subsidiary, typically contracts with the drilling programs to
conduct drilling services on a turnkey, fixed-price basis. Under
such contracts, the drilling programs pay a specific price to
Warren E&P, based on the depth of the well, for each well
drilled regardless of the actual amount of time, materials and
expenses required by Warren E&P to drill the well.
We act as the sole managing general partner of
each drilling program, and we typically receive a before-payout
working interest of 25% (55% after-payout) and an average
turnkey drilling contract profit of approximately 20% to drill
the wells on a fixed-cost basis. As of December 31, 2003,
none of the active 22 drilling programs managed by us had
achieved payout status.
In addition, we have marketing agreements with
most of the drilling programs under which we purchase oil and
gas produced by affiliated joint ventures and partnerships at
current field prices, which we transport and market to third
parties. We construct our own gas gathering and transportation
lines that connect wells owned by joint ventures and
partnerships to the pipelines owned by gas transportation
companies. We enter into transportation contracts with these
companies and sales contracts for the sale of oil and gas to the
third party purchasers.
As of June 30, 2004, investor partners in
our drilling programs have received cash distributions ranging
from below 10% of original capital contributions for programs
formed since 2000; between 13% and 28%, or 52% to 68% after
federal tax benefits are included assuming the maximum marginal
federal income tax rate, for programs formed between 1997 and
1999; and between 40% and 80%, or 78% to 122% after federal tax
benefits are included, assuming the maximum marginal federal
income tax rate, for 13 of the 15 programs formed in 1996 or
earlier. Cash distributions to investor partners are made
monthly. Our drilling programs have distributed approximately
$59.9 million to investor partners through June 30,
2004, of which $55.7 million were from cash flow generated
from oil and gas revenues from the respective drilling
programs' wells and $4.2 million were from sales of
wells or well equipment. Between December 2002 and March 2003,
13 drilling programs converted from Delaware limited
partnerships to Delaware LLCs and on average 75% of the
drilling program members elected to convert their interests to
preferred member interests in their respective LLCs. Preferred
member interests have the right to a preferential return and
other preferential rights senior to our and other standard
member interests. As a result of these conversions, we issued an
aggregate of 3,333,424 restricted convertible preferred shares
to the LLCs as additional capital contributions and received as
consideration additional standard membership interests in the
LLCs, which increased our pro rata beneficial interests in
the oil and gas wells owned by the LLCs. Additionally, during
1996 and 1997, we issued $6.3 million of convertible
debentures and common stock to purchase investors'
interests in the two remaining drilling programs. To the extent
that we have an existing obligation to drill program wells as of
June 30, 2004, the drilling programs will continue to
participate with us on a pro rata basis in our drilling
activities until the wells have been drilled, which we
anticipate will continue through the first half of 2005.
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, 2003, 2002 and 2001 based on
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reserve reports prepared by Williamson Petroleum
Consultants. 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.
A significant portion of our proved developed
reserves has been accumulated through our interests in the
drilling programs for which we serve as managing general
partner. The estimates of future net cash flows and their
present values, based on period end prices, are based upon
certain assumptions of the drilling programs in which we own
interests will achieve payout status in the future. As of
December 31, 2003, none of the active 22 drilling programs
managed by us had achieved payout status. As of July 1,
2001, we began receiving our before payout share of production,
typically 25%, from all programs formed in 1999 and subsequent.
Year Ended December 31,
2003
2002
2001
Estimated Net Proved Natural Gas and Oil
    Reserves:
Net natural gas reserves (MMcf):
Proved developed
7,006
4,544
1,648
Proved undeveloped
8,442
3,959
0,847
Total(1)
15,448
8,503
2,495
Net oil reserves (MBbls):
Proved developed
476
404
8
Proved undeveloped
14,648
11,920
8,470
Total(2)
15,124
12,324
8,478
Total Net Proved Natural Gas & Oil
    Reserves (MMcfe)
106,190
82,447
53,365
Estimated Present Value of Net Proved
    Reserves:
PV-10 value (in thousands)
Proved developed
$
20,461
$
10,041
$
1,246
Proved undeveloped
162,524
103,913
19,236
Total
$
182,985
$
113,954
$
20,482
Standardized measure of discounted future net
    cash flows (in thousands)(3)
$
146,126
$
71,418
$
19,512
Prices Used in Calculating Reserves:
Natural gas (per Mcf)
$
4.50
$
3.36
$
1.76
Oil (per Bbl)
28.45
27.15
13.87
Proved Developed Reserves (MMcfe)
9,862
6,967
1,697
(1)
Included in 2003 and 2002 reserves,
    1,028 MMcf and 577 MMcf is attributable to
    consolidated subsidiaries in which there is an average minority
    interest of 25% and 34%, respectively.
(2)
Included in 2003 and 2002 reserves,
    2,469 MBbls and 1,195 MBbls is attributable to
    consolidated subsidiaries in which there is an average minority
    interest of 25% and 34%, respectively.
(3)
Standardized measure of discounted future net
    cash flows differ from PV-10 value because it includes the
    effect of future income taxes. Included in 2003 and 2002
    standardized measure of discounted future net cash flows,
    $23,017 and $10,462 is attributable to consolidated subsidiaries
    in which there is an average minority interest of 25% and 34%,
    respectively.
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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 registration statement 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 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 therefrom, 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 Consultants, 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 registration statement. 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 June 30, 2004:
Natural Gas
Oil
Total
Gross
Net
Gross
Net
Gross
Net
California
0.0
0.0
31.0
14.6
31.0
14.6
New Mexico
19.0
0.6
5.0
0.3
24.0
0.9
Texas
6.0
1.5
0.0
0.0
6.0
1.5
Wyoming
138.0
58.1
3.0
3.0
141.0
61.1
Other
1.0
0.8
2.0
0.1
3.0
0.9
Total
164.0
61.0
41.0
18.0
205.0
79.0
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.
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Drilling Activity
The following table sets forth our drilling
activity for the periods indicated:
Year Ended December 31,
Six Months
Ended
June 30,
2003
2002
2001
2004
Gross
Net
Gross
Net
Gross
Net
Gross
Net
Exploratory Wells(1)
Productive(2)
16.0
2.8
15.0
1.9
18.0
3.1
8.0
1.6
Nonproductive(3)
—
—
—
—
3.0
0.8
—
—
Development Wells(1)
Productive(2)
19.0
3.3
12.0
2.3
10.0
1.6
1.0
0.2
Nonproductive(3)
1.0
0.1
—
—
—
—
—
—
Total
36.0
6.2
27.0
4.2
31.0
5.5
9.0
1.8
(1)
An exploratory well is a well drilled either in
    search of a new, as yet undiscovered oil or gas reservoir or to
    greatly extend the known limits of a previously discovered
    reservoir. A development well is a well drilled within the
    presently proved productive area of an oil or gas reservoir, as
    indicated by reasonable interpretation of available data, with
    the objective of completing in that reservoir.
(2)
A productive well is an exploratory or
    development well found to be capable of producing either oil or
    gas in sufficient quantities to justify completion as an oil or
    gas well.
(3)
A nonproductive well is an exploratory or
    development well that is not a producing well.
Natural Gas and Oil Acreage
The following table sets forth our acreage
position as of June 30, 2004:
Developed
Undeveloped
Total
Gross
Net
Gross
Net
Gross
Net
California
388
334
1,052
908
1,440
1,243
New Mexico
1,386
105
3,602
398
4,988
503
Texas
704
176
—
—
704
176
Wyoming
12,470
6,708
240,170
136,610
252,640
143,318
Other(1)
948
418
1,160
893
2,108
1,310
Total
15,896
7,741
245,984
138,809
261,880
146,550
(1)
Includes our natural gas and oil acreage
    positions primarily in Utah, Colorado and North Dakota.
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 volumes are attributable
to our direct interests in producing properties and the
production we are allocated from our 1999 and subsequent
drilling programs where we typically receive 25% of the
production from such programs. For these purposes, our net
production will be
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production that is owned by us either directly or
indirectly through our drilling programs, after deducting
royalty, limited partner and other similar interests. The lease
operating expenses shown are related only to our net production.
Six
Months
Year Ended December 31,
Ended
June 30,
2003
2002
2001
2004
Production:
Natural gas (MMcf)
785.8
54.8
32.6
359.3
Oil (MBbls)
87.4
4.3
2.3
33.4
Total equivalents (MMcfe)
1,310.1
80.3
46.7
559.7
Average Sales Price Per Unit:
Natural gas (per Mcf)
$ 3.70
$
1.90
$
2.83
(1)
$
4.58
Oil (per Bbl)
25.42
20.84
16.74
30.97
Weighted average (per Mcfe)
3.92
2.40
2.82
4.79
Expenses (per Mcfe):
Lease operating expense(2)(3)(4)
$2.94
$1.50
$1.50
$3.65
(1)
Average sales price for natural gas in 2001
    includes $0.24 per Mcf hedging loss.
(2)
Lease operating expenses for 2002 and 2001
    exclude operating expenses incurred by the drilling programs and
    paid for by us of approximately $1,200,000 and $497,000,
    respectively.
(3)
The lease operating expenses for the Wilmington
    unit that were utilized for this calculation include direct
    labor that was improperly charged to us by the operator of the
    Wilmington unit. We have received an arbitration award that
    requires the operator to refund these improperly charged
    expenses to us. The arbitration award also orders the operator
    to refrain from charging these unauthorized operating expenses
    currently and in the future.
(4)
Lease operating expenses related to our CBM
    operations include costs for operating our commercially
    productive CBM wells, together with the costs for operating our
    CBM wells that are still in the dewatering phase and are not
    commercially productive.
Purchasers and Marketing
We sell our natural gas and oil production and
that of our drilling programs 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. We are currently able to
sell all of the natural gas and oil produced on our behalf and
that of our drilling programs. 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.
In addition, approximately 65% of our natural gas
production was subject to a firm commitment contract for
transportation space, but not sales, with Williston Basin
Interstate relating to its LX-Bar lease for 6,000 Mcf/d,
which will terminate in October 2006. We sell our natural gas at
market price. Further, we have a firm commitment contract
relating to our Piper Federal lease covering requirements for us
to deliver 2,500 Mcf/d. The maximum penalty for any
deficiency below 90% of cumulative contracted volumes would be
$0.47 per Mcf. This contract terminates on
December 31, 2004. 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
"Management's Discussion and Analysis of Financial
Condition and Results of Operation" and "Risk
Factors — Risks Related to Our Business —
Market conditions or operation impediments may hinder our access
to natural gas and oil markets or delay our production".
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For the six months ended June 30, 2004, the
largest purchasers for our production and that of our drilling
programs primarily included Tenaska Marketing Ventures, Anadarko
Energy Services and Lunday-Thagard Company, which accounted for
49%, 17% and 22%, respectively, of the total natural gas and oil
sold by us and our drilling programs. 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. After a long-term joint venture
relationship that began in 1990, we acquired Warren E&P on
September 1, 2000. See "Certain Relationships and
Related Transactions". Through Warren E&P, we employ
petroleum engineers, drilling supervisors, landmen and field
supervisors. Warren E&P also employs geologists on a
contract basis. As of June 30, 2004, Warren E&P was the
operator of approximately 55% of the wells in which we and our
drilling programs had interests.
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 or
that we can sell natural gas and oil leases or obtain financing
for, or participants to join in, the development of prospects.
Regulations
General
Our business is affected by numerous laws and
regulations, including energy, environmental, conservation, tax
and other laws and regulations relating to the energy industry.
Most of our drilling operations require permits or
authorizations from federal, state or local agencies,
respectively, for both the drilling of the well and the
production of the CBM and the disposal of associated wastes,
principally water. Changes in any of these laws and regulations
or the denial or vacation of permits could have a material
adverse effect on our business. In view of the many
uncertainties with respect to current and future laws and
regulations, including their applicability to us, we cannot
predict the overall effect of such laws and regulations on our
future operations.
We believe that our operations comply in all
material respects with applicable laws and regulations. There
are no pending or threatened enforcement actions related to any
such laws or 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.
Proposals and proceedings that might affect the
oil and gas industry are pending before Congress, the BLM, the
Federal Energy Regulatory Commission, or FERC, the Minerals
Management Service, or 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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Federal Regulation of Sales and
    Transportation of Natural Gas
Historically, the transportation and sale of
natural gas and its component parts in interstate commerce has
been regulated under several laws enacted by Congress and the
regulations passed under these laws by FERC. Our sales of
natural gas, including condensate and liquids, are affected by
the availability, terms and cost of transportation. The price
and terms of access to pipeline transportation are subject to
extensive federal and state regulation. From 1985 to the
present, several major regulatory changes have been implemented
by Congress and FERC that affect the economics of natural gas
production, transportation and sales. In addition, FERC is
continually proposing and implementing new rules and regulations
affecting those segments of the natural gas industry, most
notably interstate natural gas transmission companies that
remain subject to FERC's jurisdiction. These initiatives
may also affect the intrastate transportation of gas under
certain circumstances. The stated purpose of many of these
regulatory changes is to promote competition among the various
sectors of the natural gas industry.
The ultimate impact of the complex rules and
regulations issued by FERC cannot be predicted. In addition,
many aspects of these regulatory developments have not become
final but are still pending judicial and final FERC decisions.
We cannot predict what further action FERC will take on these
matters. Some of FERC's more recent proposals may, however,
adversely affect the availability and reliability of
interruptible transportation service on interstate pipelines. We
do not believe that we will be affected by any action taken
materially differently than other natural gas producers,
gatherers and marketers with whom we compete.
Operations on Federal Oil and Gas
    Leases
We conduct a sizeable portion of our operations
on federal oil and natural gas leases which are administered by
the BLM and the 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 new 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. The
lawfulness of the new rule has been challenged in federal court.
We cannot predict whether this new rule will be upheld in
federal court, nor can we predict whether the MMS will take
further action on this matter. However, we do not believe that
this new rule will affect us any differently than other
producers and marketers of oil and gas.
State Regulation
Our operations are also subject to regulation at
the state and in some cases, county, municipal and local
governmental levels. Such regulation includes requiring permits
for the drilling of wells, maintaining bonding requirements in
order to drill or operate wells and regulating 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 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 and spacing units or
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 profitability, but we are unable to predict
the future cost or impact of complying with such regulations.
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Environmental Matters
General
We are subject to extensive federal, state and
local environmental laws and regulations relating to water, air,
hazardous substances and wastes, and threatened or endangered
species that restrict or limit our business activities for
purposes of protecting human health and the environment.
Compliance with the multitude of regulations issued by federal,
state, and local administrative agencies can be burdensome and
costly. State environmental regulatory programs are generally
very similar to the corresponding federal environmental
regulatory programs, and federal environmental regulatory
programs are often delegated to the states.
Our oil and gas exploration and production
operations are subject to state and/or federal solid waste
regulations that govern the storage, treatment and disposal of
solid and hazardous wastes. However, much of the solid waste
generated by our oil and gas exploration and production
activities is exempt from regulation under federal, and many
state, regulatory programs. To the extent our operations
generate solid waste, such waste is generally subject to state
regulations. We have complied with solid waste regulations in
the normal course of business.
In addition to solid and hazardous waste, our
production operations generate produced water as a waste
material. This water can sometimes be disposed of by discharging
it to surface waters under discharge permits issued pursuant to
the Clean Water Act, or an equivalent state program. We have
obtained surface discharge permits from the Wyoming DEQ for our
operations in some areas, such as the Powder River Basin.
Another common method of produced water disposal is subsurface
injection in disposal wells. Such disposal wells are permitted
under the Safe Drinking Water Act, or an equivalent state
regulatory program. The drilling, completion, and operation of
produced water disposal wells are integral to oil and gas
operations. We already operate produced water disposal wells,
particularly in association with our coalbed methane production
operations. We are experienced in these activities and are able
to perform these activities in a cost-effective manner.
Air emissions and exhaust from gas-fired
generators and from some of our equipment, such as gas
compressors, are potentially subject to regulations under the
Clean Air Act, or equivalent state regulatory programs. To the
extent that our air emissions are regulated, they are generally
regulated by permits issued by state regulatory agencies. We
have obtained air permits, where needed, in the normal course of
business.
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 BLM after preparation of 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.
In the event that spills or releases of crude oil
or produced water occur, we would be subject to spill
notification and response regulations under the Clean Water Act,
or equivalent state regulatory programs. Depending on the nature
and location of our operations, we may also be required to
prepare spill prevention, control and countermeasure response
plans under the Clean Water Act, or equivalent state regulatory
programs. Response costs could be high and may have a material
adverse effect on our operations. We may not be fully insured
for these costs.
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 that we are in compliance with current
applicable environmental laws and regulations. Costs associated
with responding to a major spill of crude oil or produced water,
or costs associated with
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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 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.
We anticipate no material estimated capital
expenditures to comply with federal and state environmental
requirements. In addition, state-wide reclamation bonds and our
$50.0 million casualty and environmental insurance have
been adequate to meet the applicable Wyoming bonding and
insurance requirements to date. Finally, we have posted a
$3.0 million U.S. treasury bond as collateral for a
$4.0 million reclamation bond for the Wilmington unit.
Coalbed Methane Operations
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 production
operations. This produced water is disposed of by re-injection
into the subsurface through disposal wells, 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.
Atlantic Rim
The eastern Washakie Basin is currently the
subject of the Atlantic Rim EIS being developed by the BLM under
the jurisdiction of the Rawlins, Wyoming regional office. The
initial, or scoping, phase of the Atlantic Rim EIS covering our
coalbed methane leases in the Washakie Basin is under way.
Completion of the environmental impact statement and issuance of
a record of decision is expected during the fourth quarter of
2005.
The BLM has issued an interim drilling policy
allowing limited CBM drilling and production activity in the
Atlantic Rim project pending completion of the EIS. The interim
drilling policy authorizes drilling,
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completing, and producing no more than
200 wells until completion of the Atlantic Rim EIS. We and
our drilling partners have been allocated approximately
165 gross wells of the 200 authorized wells. The interim
policy requires the wells to be drilled in nine pods of no more
than 24 wells per pod. A pod is defined as two or more
production wells with supporting infrastructure, such as access
roads, injection wells, product pipelines, water pipelines,
power lines and other necessary or ancillary facilities. The
Atlantic Rim project contains federally designated threatened
and endangered species and two wildlife habitat areas that have
been designated as areas of critical environmental concern.
Sensitive areas such as critical habitat and archeological sites
must be avoided in constructing the pods. Federal and
non-federal leases in the Atlantic Rim project are subject to
the 200 well limit. To date, we have received BLM and state
approval of drilling permits for 72 producing wells, and
approval of right-of-ways for four pods.
The BLM may modify the interim drilling policy at
any time and the policy, as with any agency decision, is subject
to legal challenges by interested parties. The interim policy
requires an environmental assessment for each of the nine pods.
Public comment is allowed on each environmental assessment, and
BLM approval of each environmental assessment must be obtained
before pod construction can commence. Several of the
environmental assessments have been challenged by environmental
groups and individuals. In addition, many of the restrictions,
conditions and limitations on our drilling, production and
construction activities in the Washakie Basin will be specified
by the BLM in the final Atlantic Rim EIS record of decision.
Finally, conditions and restrictions on drilling, production and
construction activities may be imposed through site-specific BLM
approvals required for applications for permits to drill and
plans of development. As a result, such development activities
will remain contingent on BLM approval for several years.
Our eastern 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. Produced water disposal 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.
Pacific Rim
The western Washakie Basin is currently the
subject to the 1997 updated resource management plan, or RMP,
under the jurisdiction of the Rock Springs, Wyoming regional
office of the BLM. The Rock Springs RMP currently allows the
drilling of up to 250 CBM wells that are not contemplated by a
separate EIS. In October 2003, at our request, the BLM began the
scoping process for an EA that covers approximately
42,721 acres, including the majority of the
35,192 gross (27,534 net) acres comprising our Pacific
Rim project area. The Pacific Rim EA contemplates the drilling
of 120 CBM wells in the study area. We anticipate receiving a
record of decision on this EA by the end of 2004. Based on
information currently available, we anticipate being allocated
approximately 80 of the 120 wells in the EA study area.
Upon the completion of the 120 authorized wells, a more
comprehensive EIS may be required for additional development in
the project. We do not believe that an EIS for the Pacific Rim
project will be necessary before 2006.
Powder River Basin
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 the
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construction of rights-of-way, before it approves
required applications for permits to drill and plans of
development. We believe that 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.
Wilmington Unit
The Wilmington unit is located in a mixed light
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 unit 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 urban
environment could be significant. This potential liability is
accentuated by the location of our Wilmington unit leases near
residential areas. To date and to our knowledge, there are no
environmentally related lawsuits or other third-party claims or
complaints pending against us relating to our interests or
activities in the Wilmington unit.
Operating Hazards And Insurance
The oil and natural gas business involves a
variety of operating risks, including fires, explosions,
blowouts, environmental hazards, including 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
properties.
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. 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.
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Employees
At June 30, 2004, we had 29 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. Independent contractors often
perform well drilling and production operations, including
pumping, maintenance, dispatching, inspection and testing.
Facilities
Our principal executive offices are located at
489 Fifth Avenue, 32nd Floor, New York, NY 10017,
and our telephone number is (212) 697-9660. We lease
approximately 4,097 square feet of office space for our New
York office under a lease that expires in 2008. Our oil and gas
administrative office in Casper, Wyoming occupies
3,750 square feet under a lease currently being negotiated.
In June 2003, we entered into an office lease in Roswell, New
Mexico, which expires in May 2005. We believe that suitable
additional space to accommodate our anticipated growth will be
available in the future on commercially reasonable terms.
Legal Proceedings
Arbitrations vs. Magness Petroleum
Company.
On September 28, 1999,
Magness Petroleum Company, our joint venture partner in the
Wilmington field, filed a complaint against us, Warren E&P,
Inc., our principal operating subsidiary, and certain of our
other subsidiaries in the Superior Court of Los Angeles County,
California, alleging that we had breached our joint venture
agreement with Magness Petroleum, as well as an alleged oral
agreement regarding advance payment of expenses for drilling and
completion operations. Magness Petroleum sought dissolution of
the joint venture, an accounting and a declaratory judgment as
to the rights of the parties under the joint venture agreement.
We successfully enforced the arbitration provision contained in
the joint venture agreement and entered into a written
stipulation with Magness Petroleum to submit the matter for
arbitration by the Judicial Arbitration and Mediation Services,
or JAMS, before the Honorable Keith J. Wisot, a retired Los
Angeles Superior Court Judge. Judge Wisot, as the arbitrator,
ruled that the joint venture agreement is a valid enforceable
agreement, declined to dissolve the joint venture, denied
Magness Petroleum's claims for breach of contract,
determined that Magness Petroleum was not entitled to
reimbursement of direct labor charges to the field and tangible
well costs, and held that he and JAMS would retain jurisdiction
to enforce the final award. In addition, the parties stipulated
on the record that Judge Wisot retain jurisdiction to adjudicate
any future disputes among the parties. The Superior Court case
was dismissed in January 2000.
On August 8, 2001, Magness Petroleum filed a
demand with the American Arbitration Association, or AAA,
reasserting its claims for dissolution of the joint venture
under a new dissolution theory and breach of contract. The
dissolution theory was based on Magness Petroleum's claim
that voting rights within the joint venture should be based on
ownership of working interests in the Wilmington unit, which
includes property never contributed to the joint venture,
instead of ownership of joint venture working interests. We then
brought suit in the California Superior Court seeking to enforce
the original final award issued by Judge Wisot in the JAMS
arbitration and to enforce the oral stipulation among the
parties to have JAMS retain jurisdiction to adjudicate any
future disputes. On September 24, 2003, after a number of
court proceedings, the California Superior Court ordered JAMS to
hear our motion to enforce the final award covering unauthorized
direct labor charges and tangible costs and for the AAA to hear
Magness Petroleum's new theory of dissolution of the joint
venture, to make a determination as to whether Magness Petroleum
can independently drill new wells in the Wilmington unit without
our consent if the joint venture is not dissolved, and whether
we were entitled to damages as a result of Magness Petroleum
preventing the resumption of drilling activities by us as set
forth in the final award issued by Judge Wisot in the JAMS
arbitration.
On January 14, 2004, we filed an amended
answer in the AAA arbitration denying Magness Petroleum's
request to dissolve the joint venture, together with
counterclaims seeking damages against Magness Petroleum
initially in the amount of $15 million, which was
subsequently increased to in excess of $40 million, on a
number of grounds, including breach of contract. We also
requested that Magness Petroleum be removed as
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operator for the joint venture wells in the
Wilmington Field due to a breach of its duties and that an
independent operator be appointed in its place. We asserted a
further claim against Magness Petroleum that in the event the
joint venture is dissolved prior to completion of the venture,
we would be entitled to damages in the amount of
$26 million. The AAA arbitration was held from May 3,
2004 through May 14, 2004 and further expert oral testimony
is scheduled in Los Angeles on September 29, 2004. A ruling
is expected in the AAA arbitration by the end of 2004. The JAMS
arbitration hearing on the motion to enforce the final award was
held from May 19, 2004 through May 21, 2004. On
August 16, 2004, Judge Wisot issued an order granting our
motion to enforce the final award covering unauthorized direct
labor charges, ruling that these charges are recoverable by us
as improperly billed to the joint venture.
We believe that we have meritorious defenses to
Magness Petroleum's claims, as well as valid claims and
counterclaims against Magness Petroleum. We believe that we will
prevail in upholding the validity and enforceability of the
joint venture agreement. However, this is not certain, and
although the consequences of Magness Petroleum prevailing in a
dissolution of the joint venture are not entirely predictable,
if Magness Petroleum does prevail in dissolving the joint
venture, we believe that we would retain a 47% working interest
in the undeveloped properties and our existing working interest
in the joint venture wells. If that were to occur, our estimated
proved natural gas and oil reserves, as
of                     ,
2004, would decrease from 106.2 Bcfe to
approximately       Bcfe and the
estimated discounted future net revenues from our estimated
proved reserves would decrease from $183.0 million to
approximately
$           million.
Gotham Insurance Company v.
Warren.
In 1998, we and our
subsidiary, Warren E&P, Inc., were sued in the
81st Judicial District Court of Frio County, Texas by
Stricker Drilling Company, Inc. and Manning Safety Systems to
recover the value of lost equipment based on a well blow-out. As
a result of the lawsuit, Gotham Insurance Company, Warren
E&P's well blow-out insurer, intervened. The suit was
settled in 1999 with all parties except Gotham. Gotham paid over
$1.7 million under the insurance policy and now seeks a
refund of approximately $1.5 million of monies paid,
denying coverage, and alleging fraud and misrepresentation and a
failure of Warren E&P to act with due diligence and pursuant
to safety regulations. Warren E&P countersued for the
remaining proceeds under the policy coverage. In the summer and
fall of 2000, summary judgments were entered for Warren E&P
on essentially all claims except its bad faith claims against
Gotham. Gotham's claims against Warren E&P and us were
rejected. Final judgment was rendered by the District Court on
May 14, 2001 in Warren E&P's favor for the
remaining policy proceeds, interest and attorneys' fees.
Gotham appealed the final judgment to the San Antonio Court
of Appeals seeking a refund of approximately $1.5 million.
On July 23, 2003, the San Antonio Court of Appeals
reversed the trial court's earlier summary judgment for
Warren E&P and remanded the case to the trial court. In
November 2003, Warren E&P appealed the San Antonio
Court of Appeals' panel decision to the Texas Supreme
Court, and in July 2004, the Court denied appellate review. If
we elect not to appeal, the matter will be remanded to the trial
court in the 81st Judicial District Court of Frio County,
Texas, for further proceedings consistent with the
San Antonio Court of Appeals' decision.
We are also a party to legal actions arising in
the ordinary course of our business. In the opinion of our
management, based in part on consultation with legal counsel,
the liability, if any, under these claims is either adequately
covered by insurance or would not have a material adverse effect
on us.
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MANAGEMENT
The following table sets forth information
regarding our executive officers and directors as of
June 30, 2004:
Name
Age
Position
Norman F. Swanton
65
President, Chairman of the Board and Chief
    Executive Officer
Timothy A. Larkin
41
Executive Vice President and Chief Financial
    Officer
Lloyd G. Davies
68
Executive Vice President and Director of Warren
    Resources, Inc. and Chairman of the Board and Chief Executive
    Officer of Warren E&P, Inc., our principal operating
    subsidiary
David E. Fleming
49
Senior Vice President, General Counsel and
    Corporate Secretary
Kenneth A. Gobble
45
Senior Vice President of Warren Resources, Inc.
    and President and Chief Operating Officer of Warren E&P, Inc.
Ellis G. Vickers
47
Senior Vice President — Land
    Management & Regulatory Affairs and Associate General
    Counsel
Stewart P. Skelly
29
Vice President and Controller
Chet Borgida(2)
59
Director
Anthony L. Coelho(1)(3)
62
Director
Dominick D'Alleva(1)(2)(3)
52
Director
Marshall Miller(1)(2)
53
Director
Thomas G. Noonan
66
Director
Michael R. Quinlan(3)
59
Director
(1)
Member of the compensation committee.
(2)
Member of the audit committee.
(3)
Member of the corporate governance committee.
Norman F.
Swanton.
Mr. Swanton has
served as our President, Chairman of the Board and Chief
Executive Officer since Warren Resources, Inc. was founded in
June 1990. From October 1986 to 1990, he served as an
independent financial advisor, arranging debt restructuring,
credit facilities, leveraged buy-out financing, debt-for-equity
exchanges, equity financing and providing other financial
services. From 1972 to 1985, he served as Chairman of the Board,
President and Chief Executive Officer of Swanton Corporation, a
publicly held company engaged in financial services and energy
operations, and President and founder of Low Sulphur Fuel
Company, a marine terminal residual fuel oil blending operation.
From 1970 to 1972, he served as a principal consultant to the
Trust Fund of the New York Stock Exchange serving as its
representative in the liquidation of several former New York
Stock Exchange member firms. From 1961 to 1970, he served as an
executive officer of Glore, Forgan, Staats, Inc. and a
divisional controller for Hayden Stone, Inc., which were New
York Stock Exchange member securities and underwriting firms.
Mr. Swanton received his Bachelor of Arts degree in History
and Political Science from Long Island University in 1962 and
attended Bernard Baruch Graduate School of Business in a
graduate degree program in Accountancy and Finance from 1963 to
1966. He is the brother-in-law of Thomas G. Noonan, one of our
directors.
Timothy A.
Larkin.
Mr. Larkin has served
as our Senior Vice President and Chief Financial Officer since
January 1995. On March 17, 2004, Mr. Larkin was
appointed as our Executive Vice President. From 1991 to 1994, he
served as Accounting Manager of Palmeri Fund Administrators,
Inc., an administrative services company providing accounting,
administrative and investment advisory support to over 50,000
limited partners in investment funds primarily sponsored by
Merrill Lynch and Oppenheimer & Co. Inc. From 1985 to
1991, he was employed in the audit department of
Deloitte & Touche, LLP, an international public
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accounting firm, attaining the level of audit
manager. Mr. Larkin received his Bachelor of Science degree
in Accounting from Villanova University in 1985.
Lloyd G.
Davies.
Mr. Davies joined the
board of directors in July 2001 and until March 16, 2004,
he served on the audit committee of the Board. On March 17,
2004, Mr. Davies was appointed our Executive Vice President
and Chairman and Chief Executive Officer of Warren E&P,
Inc., our principal operating subsidiary, Warren E&P, Inc.,
based in Casper, Wyoming. Mr. Davies retired in 1995, after
35 years with Texaco, Inc. From 1992 through 1994,
Mr. Davies was the Assistant Division Manager for the
Western U.S. area for Texaco. Prior to that, from 1990
through 1992, Mr. Davies was the Manager and Director of
Operations for Texaco's Far East Operations Division.
During his years with Texaco, Mr. Davies also served on
several of Texaco's subsidiaries' board of directors
and management committees in the Far East, Mid East and South
America. Mr. Davies received a Bachelor of Science degree
in Petroleum Engineering from the University of Oklahoma in
1958. In 1966, he received a Master of Science degree in
Petroleum Engineering with a Minor in Math from the University
of Texas.
David E.
Fleming.
Mr. Fleming joined
us in July 2001 as a Senior Vice President and General Counsel.
In September 2002, Mr. Fleming was also elected our
Corporate Secretary. From January 1999 to June 2001, he was a
partner with the law firm of Cummings & Lockwood, where
he practiced corporate and securities law. For the five years
prior thereto, he practiced corporate law at Epstein,
Becker & Green, P.C., New York, New York, where he
was a member of the firm and currently maintains Of Counsel
status. Mr. Fleming does not provide any legal services to
the Company on behalf of Epstein, Becker &
Green, P.C. Mr. Fleming received a Bachelor of Arts
degree from Cornell University in 1976 and a Juris Doctor,
cum laude,
from the University of Maryland School of Law
in 1980. He is admitted to practice law in the states of New
York, Connecticut and Maryland.
Kenneth A.
Gobble.
Mr. Gobble became our
Senior Vice President in January 2003. On March 17, 2004,
Mr. Gobble was appointed President and Chief Operating
Officer of Warren E&P, Inc., our principal operating
subsidiary, based in Casper, Wyoming. From 1996 to December
2002, he was Vice President — Rocky Mountain Region
for Warren E&P. Prior to joining Warren E&P in 1996,
Mr. Gobble had extensive experience with major service
companies including Schlumberger Well Services. Additionally,
Mr. Gobble has extensive experience in numerous advanced
applications for natural gas and oil drilling operations
including logging-while-drilling, formation evaluation, 3-D
seismic vertical seismic profiling, horizontal drilling and
coalbed methane development. Mr. Gobble received his
Bachelor of Science degree in Petroleum Engineering and a
Bachelor of Science degree in Mathematics from New Mexico
Institute of Mining and Technology in 1986.
Ellis G.
Vickers.
Mr. Vickers became
our Senior Vice President — Land Management &
Regulatory Affairs in January 2003. From September 2001 through
December 2002, he was Vice President and Associate General
Counsel and Senior Vice President and General Counsel of Warren
E&P, Inc. From 1995 through December 2001, Mr. Vickers
practiced law with the New Mexico based law firm of
Bozarth & Vickers. He focused his practice on
corporate, securities, oil and gas, real estate and partnership
law and is a New Mexico Board of Legal Specialization Recognized
Specialist in Oil and Gas Natural Resources. Mr. Vickers
received his Bachelor of Science degree in Political Science,
summa cum laude,
from Eastern New Mexico University in
1979 and a Juris Doctor from the University of New Mexico in
1982. He is admitted to practice law in the states of New Mexico
and Texas.
Stewart P.
Skelly.
Mr. Skelly has served
as our Corporate Controller since 2002 and as a Vice President
since March 2004. From 2000 to 2002, he served as our Assistant
Controller. From 1997 to 2000, Mr. Skelly was employed by
News Corp., a global media conglomerate, attaining the level of
Accounting Manager. From 1992 to 1997, Mr. Skelly was
employed by Kearney McArdle, a midsize public accounting firm in
Ireland, attaining the level of audit senior. Mr. Skelly is
a graduate of Griffith College Dublin and is a Chartered
Certified Accountant.
Chet Borgida.
Mr. Borgida was elected to the Board of Directors in
November 2003 and also serves as Chairman of our audit
committee. Mr. Borgida was a partner at Grant Thornton LLP,
our independent auditors, from 1977 to 2001. While at Grant
Thornton LLP, Mr. Borgida had no involvement in the review
or
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preparation of our audited financial statements.
Since March 2004, Mr. Borgida has been a partner in Drager
and Fenton LLP (Florida). From 2001 to 2003, Mr. Borgida
was Senior Vice President Finance and Chief Financial Officer of
Cross Media Marketing Corporation. From March 2003 to October
2003, Mr. Borgida was also a director and Chairman of the
audit committee of Brand Partners Group, Inc., and since
November 2001 has been a director and Chairman of the audit
committee of Correctional Services Corporation, an owner and
operator of prison facilities. He graduated from Hunter College
with a Bachelor Degree in Accounting in 1967. He is a member of
the American Institute of Certified Public Accountants, the New
York State Society of Certified Public Accountants and the
Florida Institute of Certified Public Accountants.
Anthony L.
Coelho.
Congressman Coelho joined
our Board as an independent director in May 2001 and serves on
the compensation and corporate governance committees of the
Board. From December 2000 to the present, Congressman Coelho has
devoted his time to serving on the boards of directors listed
below and as an independent consultant and adviser. From 1998
through November 2000, he served as the General Chairman for the
U.S. Presidential campaign of Vice President Al Gore. From
1995 to 1998, he was Chairman and Chief Executive Officer of ETC
w/tci, Inc, an education and training technology company in
Washington, D.C. and from 1990 to 1995, he served as
President and CEO of Wertheim Schroeder Investment Services,
Inc. From 1978 to 1989, he served five terms in the
U.S. Congress, representing the State of California as a
member of the U.S. House of Representatives. During his
congressional terms, he served as Democratic Majority Whip from
1987 to 1989 and authored the Americans with Disabilities Act.
Congressman Coelho was also appointed chairman of the
President's Committee on the Employment of People with
Disabilities by President Clinton. Congressman Coelho has served
on a number of corporate boards and currently serves on the
boards of Cyberonics, Inc., DeFrancesco & Sons, Inc.,
Ripplewood Holdings, LLC and Service Corporation International,
a funeral services company. Congressman Coelho earned a Bachelor
of Arts degree in Political Science from Loyola Marymount
University in 1964.
Dominick
D'Alleva.
Mr. D'Alleva was our Secretary until September 2002
and has been a director since June 1992. He serves on the
compensation, audit and corporate governance committees of the
Board. Additionally, from 1995 to the present, he has been a
principal with D and D Realty Company, LLC, a privately owned
New York limited liability company involved in the acquisition
and financing of real estate. From 1986 to 1995, he was engaged
in residential New York City real estate for his own account and
as general counsel to various real estate acquisition firms,
where he negotiated contracts for the acquisition and financing
of commercial real estate. From 1983 to 1985, he served as
Executive Vice President, Director and General Counsel of
Swanton Corporation, which engaged in financial services and
energy operations. From 1980 to 1983 he was Associate Counsel of
Damson Oil Corporation. From 1977 to 1980 he was an associate
with Simpson, Thatcher & Bartlett specializing in
securities and corporate law. Mr. D'Alleva received a
Bachelor of Arts degree,
summa cum laude
from Fordham
University in 1974 and earned his Juris Doctor degree with
honors from Yale University in 1977.
Marshall
Miller.
Mr. Miller joined the
Board as an independent director in February 1998 and serves on
the audit committee and as chairman of the compensation
committee of the Board. Since 1988, Mr. Miller served in
various senior management capacities at financial institutions
including Fair, Isaac Companies and Providian Financial
Corporation and specialized in advanced computer systems for
credit risk management. Until retiring in 2000, Mr. Miller
was Executive Vice President of Strategic Risk Management at
Wells Fargo Bank in San Francisco. Mr. Miller received
a Bachelor of Arts degree in Mathematics from the University of
California at Los Angeles, a Master of Arts degree in
Mathematics from the University of California at Berkley and a
Masters of Science Degree in Operations Research from Stanford
University in 1976.
Thomas G.
Noonan.
Mr. Noonan joined the
Board as a director in November 1997 and served as Chairman of
the compensation committee until March 2004. For the past
17 years, he has served as Manager of Quality Assurance for
Mars Inc., an international food and candy company. From 1961 to
1979, he was a microbiologist for the New York State Department
of Health. Mr. Noonan received a Bachelor of Science degree
from Fordham University in New York in 1959. He is the
brother-in-law of Mr. Swanton.
Michael R.
Quinlan.
Mr. Quinlan joined
the Board as a director in January 2002 and serves as Chairman
of the corporate governance committee and presiding director of
the executive sessions of the
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independent directors of the Board. From 1963 to
the present Mr. Quinlan has been employed by the
McDonald's Corporation. In 1979, Mr. Quinlan was
appointed to the board of directors of McDonald's and
served as the Chairman of the Board and Chief Executive Officer
from 1990 to 1998. From 1998 to 1999, he served as Chairman of
the Board of McDonald's Corporation. From 1987 to 1990, he
served as the President and Chief Executive Officer. Currently
he serves as the Chairman of the Executive Committee.
Mr. Quinlan is Chairman of the board of trustees of both
Ronald McDonald House Charities and Loyola University Chicago.
Additionally, he is a member of the board of trustees of Loyola
University Health System. He is also on the board of directors
of Dun and Bradstreet Corporation, a financial services company,
and the May Department Stores Company, a retailer.
Mr. Quinlan earned a Bachelor of Science degree in 1967 and
a Master's of Business Administration from Loyola
University Chicago in 1970. He has been awarded Honorary Doctors
of Law Degrees from Loyola University Chicago, Elmhurst College
and Illinois Benedictine College.
Committees of the Board of Directors
Our Board is comprised of a majority of
independent directors. The Board has established the following
standing committees: audit, compensation and corporate
governance that are comprised entirely of independent directors.
Audit Committee
The audit committee is comprised entirely of
independent, non-employee directors. We intend to maintain an
audit committee consisting solely of at least three independent
directors. Independent directors are persons who are, among
other things, neither officers nor employees of Warren or its
subsidiaries or any other person who has a relationship with any
person or entity which, in the opinion of the board of
directors, would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director. The
audit committee held four meetings in 2003. The audit committee
has direct access to the independent auditors and counsel to us
and currently consists of Messrs. Borgida, D'Alleva
and Miller. Mr. Borgida currently acts as chairman of the
audit committee and is deemed by us to be an "audit
committee financial expert". The purposes of the audit
committee include without limitation to:
•
review the preparation and scope of the audit of
    our annual consolidated financial statements;
•
review and approve drafts of these financial
    statements;
•
make recommendations as to the engagement and
    fees of the independent auditors;
•
monitor the functioning of our accounting and
    internal control systems by meeting with representatives of
    management and the independent auditors; and
•
perform any other duties relating to the
    maintenance of our proper books of account and records and other
    matters as the Board may assign from time to time.
Compensation Committee
The compensation committee is responsible for
establishing the compensation and evaluating annual and
long-term performance goals of our elected officers. The
compensation committee currently consists of
Messrs. Coelho, D'Alleva and Miller. Mr. Miller
currently serves as chairman of the compensation committee. The
purposes of the compensation committee include without
limitation to:
•
administer and grant options under our equity
    compensation plans;
•
make decisions regarding compensation of our
    executive officers; and
•
publish an annual compensation report for our
    stockholders.
Corporate Governance
    Committee
The corporate governance committee has adopted
written charters for all three of our independent committees
that provide, among other things, for an annual self-evaluation.
In addition, the Board has adopted
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a Code of Business Conduct and a Code of Ethics
for the Senior Financial Officers. The corporate governance
committee currently consists of Messrs. Coelho,
D'Alleva and Quinlan, with Mr. Quinlan serving as
chairman. The purposes of the corporate governance committee
include without limitation to:
•
determine compensation for the Board;
•
assist the Board in identifying qualified
    individuals to become directors;
•
recommend to the Board qualified director
    nominees for election at the stockholders' annual meeting;
•
determine membership on the Board committees;
•
recommend corporate governance guidelines;
•
conduct annual self-evaluations of the Board and
    the corporate governance committee; and
•
report annually to the Board on the Chief
    Executive Officer succession plan.
Code of Business Conduct for All Directors,
Officers and Employees
The Board has adopted a Code of Business Conduct
for all directors, officers and employees. It is the
responsibility of each of our directors, officers and employees
to maintain a commitment to high standards of conduct and
ethics. It is the intent of the Code of Business Conduct to
inspire continuing dedication to the fundamental principles of
honesty, loyalty, fairness and forthrightness. No waiver of any
part of this Code may be granted for any director or officer
except by a vote of the Board of Directors or a designated Board
committee that ascertains whether a waiver is appropriate under
all the circumstances.
Code of Ethics for Senior Financial
Officers
The Board has also adopted a separate Code of
Ethics for our Chief Executive Officer, Chief Financial Officer
and Chief Accounting Officer. Each of the covered officers has
to certify on an annual basis that the officer shall:
•
act with honesty and integrity, avoiding actual
    or apparent conflicts of interest in personal and professional
    relationships;
•
provide constituents with information that is
    accurate, complete, objective, relevant, timely and
    understandable;
•
comply with all applicable laws, rules and
    regulations of federal, state and local governments, and other
    appropriate private and public regulatory agencies;
•
act in good faith, responsibly, with due care,
    competence and diligence, without misrepresenting material facts
    or allowing the officer's independent judgment to be
    subordinated;
•
respect the confidentiality of information
    acquired in the course of business except when authorized or
    otherwise legally obligated to disclose the information,
    acknowledging that confidential information acquired in the
    course of business is not to be used for personal advantage;
•
proactively promote ethical behavior among our
    employees and as a responsible partner with industry peers and
    associates;
•
maintain control over and responsibly manage all
    assets and resources employed or entrusted to the officer by
    us; and
•
report illegal or unethical conduct by any
    director, officer or employee that has occurred, is occurring or
    may occur, including any potential violations of the Code of
    Ethics or the Code of Business Conduct.
No waiver of any part of the Code of Ethics may
be granted except by a vote of the Board of Directors or a
designated Board committee that ascertains whether a waiver is
appropriate under all the circumstances. In case a waiver of the
Code of Ethics is granted, the notice of such waiver will be
posted on our website at
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www.warrenresources.com. A copy of the Code of
Ethics that has been adopted by the Board of Directors is
available on our website at www.warrenresources.com.
Compensation of Directors
Directors who are also our employees receive no
additional compensation for their services as directors.
Non-employee directors currently receive $1,000 for each meeting
of the Board of Directors or committees of the Board of
Directors that they attend and are reimbursed for travel
expenses and other out-of-pocket costs incurred in connection
with their attendance at these meetings. In addition, prior to
the completion of this offering, each non-employee director is
entitled to receive:
•
upon becoming a member of the Board, options to
    purchase 25,000 shares of our common stock exercisable
    at the then current fair market price for a period of five
    years; and
•
an annual grant of options to
    purchase 10,000 shares of our common stock exercisable
    at the then current fair market price for a period of five years.
Upon completion of this offering, each
non-employee director will be entitled to receive in lieu of the
above:
•
upon becoming a member of the Board, options to
    purchase 10,000 shares of our common stock exercisable
    at the then current fair market price for a period of five years;
•
an annual grant of options to
    purchase 5,000 shares of our common stock exercisable
    at the then current fair market price for a period of five years;
•
annual retainer fee of $20,000 and reimbursement
    for travel expenses and other out-of-pocket costs incurred in
    connection with attending Board and committee meetings;
•
annual retainer fee of $7,500 for the chairman of
    the audit committee and $5,000 for the chairman of the corporate
    governance and compensation committee; and
•
$2,000 for each Board meeting attended, $1,500
    for each audit committee meeting attended and $1,000 for each
    corporate governance and compensation committee meeting attended.
Indemnification Agreements
We have entered into an indemnification agreement
with each of our directors and officers against liabilities that
may arise by reason of their status or service as directors or
officers and to advance their expenses incurred as a result of a
proceeding as to which they may be indemnified. These
indemnification agreements are intended to be in addition to any
other rights that the indemnitee may have under our certificate
of incorporation, bylaws and applicable law.
Compensation Committee Interlocks and Insider
Participation
None of the members of our compensation committee
is currently or has been at any time since our founding, our
officer or employee. No member of our compensation committee
serves as a member of the board of directors or compensation
committee of any entity that has one or more executive officers
serving as a member of our Board of Directors or compensation
committee.
Executive Compensation
The following table sets forth the total
compensation earned by our Chief Executive Officer and each of
the four most highly compensated other officers who received
annual compensation in excess of $100,000 for the year ended
December 31, 2003. The compensation set forth in the table
below for the fiscal years ended December 31, 2003, 2002
and 2001 does not include medical, group life or other benefits
which are available to all of our salaried employees, and
perquisites and other benefits, securities or property which do
not exceed the lesser of $50,000 or 10% of the person's
salary and bonus shown in the table.
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Summary Compensation Table
Long-Term Compensation
Awards
Annual Compensation
Securities
Other Annual
Underlying
All Other
Name and Principal Position
Year
Salary
Bonus(1)
Compensation(2)
Options
Compensation
Norman F. Swanton
2003
$
385,000
$
250,000
$
16,274
300,000
0
Chief Executive Officer
2002
375,000
187,500
16,274
0
0
and Chairman of the Board
2001
375,000
220,000
18,814
600,000
(3)
0
Timothy A. Larkin
2003
$
205,400
$
125,000
$
413
310,750
0
Executive Vice President
2002
200,000
100,000
819
0
0
and Chief Financial Officer
2001
185,000
92,500
819
676,875
(3)
0
David E. Fleming
2003
$
210,000
$
105,000
0
66,000
0
Senior Vice President,
2002
210,000
105,000
0
0
0
General Counsel and
2001
105,000
26,250
0
150,000
(3)
0
Secretary
Ellis G. Vickers
2003
$
215,670
$
107,835
0
66,000
0
Senior Vice President —
2002
210,000
105,000
0
0
0
Land Management &
2001
105,000
26,250
0
150,000
(3)
0
Regulatory Affairs and Associate General Counsel
Jack B. King
2003
$
120,000
$
187,817
0
157,250
0
Vice President and Director
2002
200,000
13,500
0
0
0
of National Sales And
2001
200,000
348,261
0
380,630
(3)
0
Marketing
(1)
Bonus amounts reported for 2003, 2002 and 2001
    include bonuses earned in the reported year and actually paid in
    the subsequent year.
(2)
Amounts reflect insurance premiums paid by the
    company during the covered fiscal year with respect to life
    insurance for the benefit of the named executive officer or his
    designee.
(3)
On October 1, 2002, in order to improve our
    capital structure, senior management and other employees
    voluntarily surrendered to us and we terminated 2,255,783 stock
    options issued in 2001, including all of the 2001 stock options
    granted to the named executive officers in the above table.
Option Grants in Last Fiscal Year
The following stock options to purchase shares of
our common stock were granted to the named executive officers
during the fiscal year ended December 31, 2003.
Individual Grants
Potential Realizable
Percent of
Value at Assumed
Number of
Total
Annual Rate of Stock
Securities
Options
Price Appreciation for
Underlying
Granted to
Option Term(2)
Options
Employees in
Exercise
Expiration
Granted
Fiscal Year
Price(1)
Date
5%
10%
Norman F. Swanton
300,000
22
%
$
4.00
04/30/08
$
331,538
$
732,612
Timothy A. Larkin
310,750
23
%
$
4.00
04/30/08
$
343,418
$
758,864
David E. Fleming
66,000
5
%
$
4.00
04/30/08
$
72,938
$
161,175
Ellis G. Vickers
66,000
5
%
$
4.00
04/30/08
$
72,938
$
161,175
Jack B. King
157,252
11
%
$
4.00
04/30/08
$
173,783
$
384,016
(1)
The exercise price per share of each option was
    determined to be equal to the fair market value per share of the
    underlying stock on the date of grant, as determined by the
    Board.
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(2)
The potential realizable value shown is
    calculated based on the term of the option at the time of grant.
    Stock price appreciation of 5% and 10% is assumed pursuant to
    the rules and regulations of the SEC and does not represent our
    prediction of our stock price performance. The potential
    realizable values at 5% and 10% appreciation are calculated by
    assuming that the exercise price on the date of grant
    appreciates at the indicated rate for the entire term of the
    option and that the option is exercised at the exercise price
    and sold on the last day of its term at the appreciated price.
Employment Agreements
We have entered into employment agreements with
Messrs. Swanton, Larkin, Davies, Fleming and Vickers. In
addition to the specific provisions of each employment agreement
as described below, each of these employment agreements provides
that if the executive's employment is terminated without
cause, due to death or disability or for "good
reason", including a change of control, all unvested stock
options granted to the executive shall be kept in effect and not
terminated.
Norman F.
Swanton.
We entered into an
employment agreement effective January 1, 2001, as amended
effective January 1, 2004 with Norman F. Swanton, our
President, Chief Executive Officer and Chairman, that provides
for a salary of $375,000 per year, participation in our
standard insurance plans for our executives and participation in
our other incentive compensation programs at the discretion of
the Board of Directors. Under his employment agreement,
Mr. Swanton received stock options to purchase 600,000
shares of common stock at an exercise price of $10.00 per
share for a period expiring five years from date of grant. On
October 1, 2002, in order to improve our capital structure,
Mr. Swanton voluntarily surrendered and terminated his
600,000 stock options. Under his agreement, if
Mr. Swanton's employment is terminated without cause
and he executes a full and general release in favor of, and
satisfactory to, us, Mr. Swanton will be entitled to
termination compensation equal to the greater of two years'
annual base salary, or all of the base salary for the remainder
of the employment term. Mr. Swanton's employment
agreement automatically renews on each anniversary of the
effective date after the initial three-year employment term, for
an additional year unless we notify Mr. Swanton in writing
90 days prior to such anniversary that we will not be
renewing his employment agreement. During the initial three
years of the employment agreement, Mr. Swanton was entitled
to a 50% minimum bonus, but he voluntarily agreed to waive this
provision in connection with the January 1, 2004 amendment.
Timothy A.
Larkin.
We entered into an
employment agreement effective January 1, 2001, as amended
effective January 1, 2004, with Timothy A. Larkin, our
Executive Vice President and Chief Financial Officer, that
provides for a salary of $185,000 per year, participation
in our standard insurance plans for our executives and
participation in our other incentive compensation programs at
the discretion of the Board of Directors. Under his employment
agreement, Mr. Larkin received stock options to
purchase 676,875 shares of common stock at an exercise
price of $10.00 per share for a period expiring five years
from date of grant. On October 1, 2002, in order to improve
our capital structure, Mr. Larkin voluntarily surrendered
and terminated his 676,875 stock options. Under his agreement,
if Mr. Larkin's employment is terminated without cause
and he executes a full and general release in favor of, and
satisfactory to, us, Mr. Larkin will be entitled to
termination compensation equal to the greater of two years'
annual base salary, or all of the base salary for the remainder
of the employment term. Mr. Larkin's employment
agreement automatically renews on each anniversary of the
effective date after the initial three-year employment term, for
an additional year unless we notify Mr. Larkin in writing
90 days prior to such anniversary that we will not be
renewing his employment agreement. During the initial three
years of the employment agreement, Mr. Larkin was entitled
to a 50% minimum bonus, but he voluntarily agreed to waive this
provision in connection with the January 1, 2004 amendment.
Lloyd G.
Davies.
We entered into an
employment agreement effective March 1, 2004 with Lloyd G.
Davies, our Executive Vice President and the Chairman and Chief
Executive Officer of Warren E&P, Inc. that provides for a
base salary of $200,000 per year, participation in our
standard insurance plans for our executives and participation in
our other incentive compensation programs at the discretion of
the Board of Directors. Under his employment agreement,
Mr. Davies received stock options to
purchase 60,000 shares of common stock at an exercise
price of $7.00 per share for a period expiring five years
from date of grant.
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Mr. Davies is obligated to devote 60%
percent of his business time to the performance of his duties
and responsibilities to us. Under his agreement, if
Mr. Davies' employment is terminated without cause and
he executes a full and general release in favor of, and
satisfactory to, us, Mr. Davies will be entitled to
termination compensation equal to the greater of three
month's base salary or all of the base salary for the
remainder of the employment term. Mr. Davies'
employment agreement expires on December 31, 2004, but will
automatically renew on each anniversary of the effective date
for an additional year unless we notify Mr. Davies or he
notifies us in writing 90 days prior to such anniversary
that we, or he, will not be renewing his employment agreement.
David E.
Fleming.
We entered into an
employment agreement effective January 1, 2004 with David
E. Fleming, our Senior Vice President, General Counsel and
Corporate Secretary, that provides for a base salary of
$223,438 per year, participation in our standard insurance
plans for our executives and participation in our other
incentive compensation programs at the discretion of the Board
of Directors. Under his employment agreement, Mr. Fleming
is obligated to devote 60% percent of his business time to
the performance of his duties and responsibilities to us. Under
his agreement, if Mr. Fleming's employment is
terminated without cause and he executes a full and general
release in favor of, and satisfactory to, us, Mr. Fleming
will be entitled to termination compensation equal to the
greater of three month's base salary or all of the base
salary for the remainder of the employment term.
Mr. Fleming's employment agreement expires on
December 31, 2004, but will automatically renew on each
anniversary of the effective date for an additional year unless
we notify Mr. Fleming or he notifies us in writing
90 days prior to such anniversary that we, or he, will not
be renewing his employment agreement.
Ellis G.
Vickers.
We entered into an
employment agreement effective January 1, 2004 with Ellis
G. Vickers, our Senior Vice President and Associate General
Counsel and Senior Vice President and General Counsel of Warren
E&P, Inc., that provides for a salary of $218,905 per
year, participation in our standard insurance plans for our
executives and participation in our other incentive compensation
programs at the discretion of the Board of Directors. Under his
employment agreement, Mr. Vickers received stock options to
purchase 20,000 shares of common stock at the exercise
price of $7.00 per share for a period expiring five years
from date of grant. Under his agreement, if
Mr. Vickers' employment is terminated without cause
and he executes a full and general release in favor of, and
satisfactory to, us, Mr. Vickers is entitled to termination
compensation equal to the greater of 90 days' base
salary or all of his base salary for the employment term.
Mr. Vickers' employment agreement expires on
December 31, 2004, but will automatically renew on each
anniversary of the effective date for an additional one year
unless we notify Mr. Vickers or he notifies us in writing
90 days prior to such anniversary that we, or he, will not
be renewing his employment agreement.
Employee Benefit Plans
2000 Equity Incentive Plan for Employees of
    Warren E&P, Inc.
Our 2000 Equity Incentive Plan for Employees of
Warren E&P, Inc. was adopted by the Board in September 2000,
amended by the board in September 2001 and approved by our
stockholders on September 5, 2002. Any awards granted
before stockholder approval of the plan are subject to, and may
not be exercised or realized before, approval of the plan by the
stockholders. The plan is administered by our compensation
committee.
Share Reserve.
A
total of 1,975,000 shares of common stock have been
authorized for issuance under the plan. In addition, no
participant in the plan may be granted stock options and direct
stock issuances for more than 750,000 shares of common
stock in total per calendar year.
Awards.
The plan
provides for the following types of awards:
•
eligible individuals in the employ of, or
    rendering services to, Warren E&P and its subsidiaries may
    be granted options to purchase shares of common stock at an
    exercise price determined by the compensation committee;
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•
eligible individuals may be issued shares of
    common stock that may be subject to certain restrictions and
    conditions directly through the purchase of shares at a price
    determined by the compensation committee.
Plan Features.
The
plan will include the following features:
•
eligible participants under the plan are
    employees, consultants and directors of Warren E&P and its
    subsidiaries;
•
the plan sets forth various restrictions upon the
    exercise of awards. The compensation committee has the
    discretion to alter any restrictions or conditions upon any
    awards;
•
the exercise price for any options granted under
    the plan may be paid in cash, by certified or cashier's
    check or, if acceptable to the compensation committee, in
    property valued at fair market value, by delivery of a
    promissory note, or in currently owned shares of common stock
    valued at fair market value on the last business day prior to
    the date of exercise. An option may, in the discretion of the
    compensation committee, be exercised through a sale or loan
    program with a broker acceptable to the compensation committee
    without any cash outlay by the optionee;
•
grants of restricted stock awards can be made to
    participants. Restricted stock awards may be subject to certain
    restrictions, vesting requirements or other conditions,
    including the attainment of performance goals; and
•
if a participant's employment is terminated
    for any reason other than cause, including death or disability,
    any vested options held by the participant will remain
    exercisable for a specified period of time after the
    termination. If a participant's employment is terminated
    for cause, all outstanding options held by the participant will
    expire immediately. If a participant's employment is
    terminated for any reason other than cause, any unvested
    restricted stock awards will generally be forfeited unless the
    compensation committee provides otherwise. If a
    participant's employment is terminated for cause, all
    restricted stock awards will be forfeited. Warren may require
    the return of any dividends previously paid on the restricted
    stock and, in all events, will repay to the participant (or the
    participant's estate) any amounts paid for the restricted
    stock awards.
Change in Control.
In the event that Warren or Warren E&P is acquired by
merger, consolidation, asset sale or equity sale, outstanding
options will be assumed, or equivalent options will be issued by
the successor corporation. If the successor corporation refuses
to assume or substitute the options, the compensation committee
may accelerate the participants' rights to exercise for a
limited period of time after which the options would terminate.
With respect to restricted stock awards, the compensation
committee could also elect to terminate any vested awards in
exchange for cash payments.
Recapitalization or
Reorganization.
In the event of a
recapitalization or reorganization of Warren or of Warren
E&P that does not constitute a change-in-control as
described above, a participant will be entitled to receive, upon
exercising an option, that which the participant would have
received had the participant exercised prior to the
recapitalization or reorganization.
Amendment.
The board
may amend or modify the 2000 plan at any time, pending any
required stockholder approval. The 2000 Plan will terminate no
later than September 1, 2010.
As of June 30, 2004, nonqualified stock
options to purchase 710,500 shares of our common stock
were granted to eligible persons pursuant to this plan at an
exercise price of $4.00 and $7.00 per share. None of these
options has been exercised. The shares that may be issued
pursuant to the exercise of an option awarded under this plan
have not been registered under the Securities Act of 1933.
2001 Stock Incentive Plan
Our 2001 Stock Incentive Plan was adopted by the
Board in September 2001 and approved by our stockholders on
September 5, 2002. Any awards granted before stockholder
approval of the plan are subject
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to, and may not be exercised or realized, before
approval of the plan by the stockholders. The plan will be
administered by our compensation committee.
Share Reserve.
A
total of 2,500,000 shares of our common stock have been
authorized for issuance of options under the plan. In addition,
no participant in the plan may be granted stock options,
separately exercisable stock appreciation rights, direct stock
issuances and stock units for more than 750,000 shares of
our common stock in total per calendar year.
Programs.
The plan
is divided into three separate programs:
•
an option grant program under which eligible
    individuals may be granted options to purchase shares of common
    stock at an exercise price determined by the compensation
    committee;
•
a stock appreciation rights program under which
    eligible individuals may be granted rights to receive payments
    equal to the fair market value of shares of common stock to
    which the right is subject on the date of exercise over the fair
    market value of such shares of common stock on the date of
    grant; and
•
a stock issuance program under which eligible
    individuals may be issued shares of common stock directly
    through the purchase of shares at a price determined by the
    compensation committee, or units representing such shares.
Plan Features.
The
plan includes the following features:
•
eligible individuals under the plan are
    employees, consultants and directors of Warren and our
    subsidiaries.
•
the plan sets forth various restrictions upon the
    exercise of awards. Our compensation committee has the
    discretion to accelerate the vesting or exercisability of
    options under certain events.
•
the exercise price for any options granted under
    the plan may be paid in cash or, if acceptable to the
    compensation committee, in currently owned shares of common
    stock valued at fair market value on the exercise date. The
    option may, in the discretion of the compensation committee, be
    exercised through a sale or loan program with a broker
    acceptable to the compensation committee without any cash
    payment by the option holder.
•
deferred compensation stock options may be issued
    under the stock option program. These options will provide a
    means by which compensation payments can be deferred to future
    dates, with the number of shares of common stock subject to a
    deferred compensation stock option being determined by the
    compensation committee in accordance with a formula where the
    number of shares subject to the option is equal to the amount of
    compensation to be deferred divided by the excess of the fair
    market value of the common stock at the time of exercise over
    the exercise price of the option.
•
stock appreciation rights may be separately
    issued entitling a participant to receive an amount equal to the
    excess of the fair market value of the shares of common stock
    subject to such right on the date of exercise over the fair
    market value of such shares on the date of grant. Payment to a
    participant may be made in: cash, shares of common stock, a
    deferred compensation option, or any combination of the above,
    as the compensation committee shall determine.
•
outright grants of stock awards, as well as
    grants of restricted stock awards and restricted stock units can
    be made to participants. In order for a participant to vest in
    an award of either restricted stock or a restricted stock unit,
    the participant must generally provide services for a continuous
    period of not less than two years. A participant shall be
    entitled to receive payment for a restricted stock unit in an
    amount equal to aggregate fair market value of the units covered
    by the award at the end of the applicable vesting restriction
    period, which payment can be made in cash, shares of common
    stock, deferred compensation stock options, or any combination
    of the above, as the compensation committee shall determine.
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•
if a participant's employment is terminated
    for any reason, including death and disability, any vested
    awards held by the participant will remain exercisable for a
    specified period of time after the termination. If a participant
    retires, but continues or begins to serve as a director, the
    participant may continue to hold any awards granted under the
    original terms thereof.
Change in Control.
The plan includes change in control provisions which may result
in the accelerated vesting of outstanding option grants and
stock issuances:
•
In the event that Warren is acquired by merger or
    asset sale or there is an acquisition of more than fifty percent
    of the capital stock of Warren by an individual, entity or
    group, the vesting schedule of each outstanding award will be,
    except to the extent specifically provided to the contrary in
    the instrument evidencing the award, or any other agreement
    between a participant and us, accelerated in part so that
    one-half of the number of shares subject to such award shall
    become immediately exercisable or realizable and the remaining
    one-half of such number of shares shall continue to be
    exercisable or realizable in accordance with the original
    vesting schedule.
•
In the event there is a merger of Warren, or an
    exchange of shares for cash, securities or other property in
    connection with an exchange transaction, which does not
    constitute a change-in-control as described above, the board
    shall provide that all outstanding options will be assumed or
    equivalent options substituted by the acquiring or succeeding
    corporation. With respect to all other awards, the board will
    determine the effect the transaction will have on such awards at
    the time the transaction takes place.
Amendment.
The board
may amend or modify the 2001 plan at any time, pending any
required stockholder approval. The 2001 Plan will terminate no
later than September 5, 2011.
As of June 30, 2004, non-qualified stock
options to purchase 398,199 shares of our common stock
at the exercise price of $10.00 per share have been granted
to eligible persons pursuant to this plan, non-qualified stock
options to purchase 479,563 shares of our common stock
at the exercise price of $4.00 per share have been granted
to eligible persons pursuant to this plan and non-qualified
stock options to purchase 96,250 shares of our common stock
at the exercise price of $7.00 per share have been granted
to eligible persons pursuant to this plan. On October 1,
2002, in order to improve our capital structure, senior
management and other employees voluntarily surrendered to the
company and terminated stock options issued in 2001 that were
exercisable at $10.00 per share through September 4,
2006. The shares that may be issued pursuant to the exercise of
an option awarded under this plan have not been registered under
the Securities Act of 1933.
2001 Key Employee Stock Incentive
    Plan
Our 2001 Key Employee Stock Incentive Plan was
adopted by the Board on September 6, 2001 and approved by
our stockholders on September 5, 2002. A total of
2,500,000 shares of our common stock have been authorized
for issuance under this plan. In addition, no participant in the
plan may be granted stock options, separately exercisable stock
appreciated rights or direct stock issuances for more than
750,000 shares of common stock in total per calendar year.
This plan will be administered by our compensation committee.
The plan is modeled after the 2001 Employee Stock Incentive Plan
and its terms are substantially similar except that participants
eligible to be granted awards under the plan will be limited to
our key employees.
As of June 30, 2004, there were 742,750
outstanding non-qualified stock options to purchase shares of
our common stock pursuant to this plan exercisable at
$4.00 per share through April 30, 2008 and 324,000
outstanding non-qualified stock options to purchase shares of
our common stock at $7.00 per share. On October 1,
2002, in order to improve our capital structure, senior
management and other employees voluntarily surrendered to the
company and terminated stock options issued in 2001 that were
exercisable at $10.00 per share through September 4,
2006. The shares that may be issued pursuant to the exercise of
any option awarded by this plan have not been registered under
the Securities Act of 1933.
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Equity Compensation Plan Information
The following table provides information as of
June 30, 2004, with respect to shares of our common stock
that may be issued under our existing equity compensation plans,
all of which have been approved by our stockholders.
Number of
Securities to be
Weighted-
Issued Upon
Average
Number of
Number of
Exercise of
Exercise Price of
Securities
Shares
Outstanding
Outstanding
Remaining Available
Authorized
Options,
Options,
for Future Issuance
for Issuance
Warrants and
Warrants and
Under Equity
Under Plan
Rights
Rights
Compensation Plans
2000 Equity Incentive Plan
1,975,000
710,500
$
4.49
1,264,500
2001 Stock Incentive Plan
2,500,000
974,012
$
6.75
1,525,988
2001 Key Employee Stock Incentive Plan
2,500,000
1,066,750
$
4.91
1,433,250
Total
6,975,000
2,751,262
4,223,738
Related Matters
A private investigation by the SEC involving
events which occurred in the mid to late 1970's was
concluded by settlement between Swanton Corporation and certain
affiliates, including Mr. Swanton, and the SEC in 1981. As
a result of the settlement, Mr. Swanton and Swanton
Corporation, without admitting or denying any of the
allegations, consented to the entry of a final judgment
enjoining them from violations of anti-fraud, periodic reporting
and beneficial ownership provisions of the Exchange Act of 1934
and agreed to engage a Special Review Person to determine
whether there had been any improper use of corporate funds. The
Special Review Person found that, although there was no
wrongdoing on the part of Mr. Swanton, $20,400 received by
him from an unaffiliated debtor should have been paid to Swanton
Corporation. Mr. Swanton thereafter paid the $20,400 to
Swanton Corporation.
Section 16(a) Beneficial Ownership
Reporting Compliance
Section 16(a) of the Exchange Act requires
our directors and executive officers, and persons who
beneficially own more than 10% of our common stock, to file with
the SEC initial reports of beneficial ownership on Forms 3 and
reports of changes in beneficial ownership of our common stock
and other equity securities on Forms 4. Our executive officers,
directors and greater than 10% stockholders are required by SEC
rules to furnish to us copies of all Section 16(a) reports
that they file. To our knowledge, based solely on a review of
the copies of such reports furnished to us and written
representations that no other reports were required, all
Section 16(a) filing requirements applicable to our
executive officers, directors and greater than 10% beneficial
owners were complied with for fiscal 2003.
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CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
Our officers and directors own, in the aggregate,
limited partnership interests valued at $2,738,333 at the time
of purchase in 14 of our drilling programs. Mr. Swanton
owns $628,333 of interests in thirteen programs. Mr. King
owns $310,000 of interests in three programs. Mr. Quinlan
owns $1,800,000 of interests in four programs. including a 28.6%
interest in one program. Other than Mr. Quinlan's
interest in one drilling program, no officer or director owns
greater than a 10% interest in any particular drilling program.
Gregory S. Johnson, who had been the Executive
Vice President of Warren E&P, Inc. and was a Senior Vice
President — Oil and Gas Operations for Warren, died in
June 2002. Effective as of August 1, 2002, we entered into
a Stock Redemption and Purchase Agreement with the Estate of
Gregory S. Johnson to acquire 702,500 shares of our common
stock owned by the estate for the price of $2.28 per share.
The purchase price is payable over ten years in equal monthly
installments of $13,333.34, $160,000 per annum. Gregory S.
Johnson originally obtained his common shares when we acquired
Warren E&P of which he was a 50% stockholder in September
2000. The shares being acquired are subject to a collateral
escrow agreement wherein 70,250 shares will be delivered to
us on each anniversary date until the purchase price is paid in
full on July 31, 2012. Additionally, as part of the
transaction stock options held by Mr. Johnson to acquire
400,000 shares of our common stock for a price of
$4.00 per share were terminated and cancelled.
In July 2004, we completed a follow-on private
placement of common stock and warrants to certain institutional
investors managed by Wellington Management Company LLP that were
major stockholders of us. Together with the initial private
placement of common stock and warrants to these investors in
February 2004, we raised a total of $20 million. The
February and July private placements consisted of a total of
2,850,000 shares of our common stock, together with
class A warrants to purchase 712,500 shares of
common stock at an exercise price of $10.00 per share and
class B warrants to purchase 712,500 shares of
common stock at an exercise price of $12.50 per share. The
warrants are exercisable one year from the date of grant. We
also agreed to provide registration rights to these investors,
which are described in "Description of Capital
Stock — Registration Rights" below.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information
regarding the beneficial ownership of our common stock as of
August 18, 2004 by:
•
each person known to us to beneficially owned
    more than 5% of the outstanding shares of our common stock;
•
each of our directors;
•
our chief executive officer and four most highly
    compensated executive officers; and
•
all directors and executive officers as a group.
Beneficial ownership is determined in accordance
with the rules of the SEC and includes voting or investment
power with respect to the securities. Common stock subject to
options or warrants that are currently exercisable or
exercisable within 60 days of August 18, 2004 are
deemed to be outstanding and beneficially owned by the person
holding such options or warrants. Such shares, however, are not
deemed outstanding for the purposes of computing the percentage
ownership of any other person. Percentage of beneficial
ownership is based on 20,322,820 shares of common stock
outstanding as of August 18, 2004,
and                      shares
of common stock to be outstanding after the offering.
Unless otherwise indicated, each person named in
the table has sole voting power and investment power, or shares
this power with his or her spouse, with respect to the shares of
our common stock listed as beneficially owned by such person and
has the same address as Warren. Our address is 489 Fifth Avenue,
32nd Floor, New York, NY 10017.
The table includes all shares beneficially owned
by each stockholder, which includes any shares as to which the
individual has sole or shared voting power or investment power
and any shares which the individual has the right to acquire
within 60 days of August 18, 2004, through the
exercise of any stock option or other right.
Percent
Shares of Common
Beneficially
Stock Beneficially
Owned Before
Percent Beneficially
Name of Beneficial Owner
Owned
Offering
Owned After Offering
5% Stockholders:
Wellington Management Company, LLP(1)
2,850,000
14.0%
75 State Street
Boston, MA 02109
Officers and Directors:
Norman F. Swanton(2)(3)(6)
2,766,893
13.4%
Timothy A. Larkin(3)(6)
410,750
2.0%
Lloyd G. Davies(3)(6)
65,000
*
David E. Fleming(3)(6)
88,000
*
Ellis G. Vickers(3)(6)
76,000
*
Jack B. King(3)(6)
181,804
*
Chet Borgida(4)
30,000
*
Anthony L. Coelho(4)
50,000
*
Dominick D'Alleva(4)
80,521
*
Marshall Miller(4)
774,000
3.8%
Thomas G. Noonan(4)(5)
764,533
3.8%
Michael R. Quinlan(4)
128,000
*
All directors and executive officers as a group
    (14 persons)
5,610,544
25.7%
*
Less than 1% of the outstanding common stock.
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(1)
These shares are deemed beneficially owned by
    Wellington Management Company, LLP, in its capacity as
    investment advisor to Spindrift Partners, L.P., Spindrift
    Investors (Bermuda) L.P., Placer Creek Partners, L.P., Placer
    Creek Investors (Bermuda) L.P. and Global Natural
    Resources III. Includes 939,400 shares held by Spindrift
    Partners, L.P., 1,099,700 shares held by Spindrift Investors
    (Bermuda) L.P., 234,900 shares held by Placer Creek Partners,
    L.P., 100,000 shares held by Placer Creek Investors (Bermuda)
    L.P., and 476,000 shares held by Global Resources
    Group III. Does not include unvested (i) class A
    warrants to purchase 234,850 shares and
    274,925 shares held by Spindrift Partners, L.P. and
    Spindrift Investors (Bermuda) L.P., respectively, at
    $10.00 per share; (ii) class B warrants to
    purchase 234,850 shares and 274,925 shares held
    by Spindrift Partners, L.P. and Spindrift Investors (Bermuda)
    L.P., respectively, at $12.50 per share;
    (iii) class A warrants to
    purchase 58,725 shares and 25,000 shares held by
    Placer Creek Partners, L.P. and Placer Creek Investors (Bermuda)
    L.P., respectively, at $10.00 per share;
    (iv) class B warrants to
    purchase 58,725 shares and 25,000 shares held by
    Placer Creek Partners, L.P. and Placer Creek Investors (Bermuda)
    L.P., respectively, at $12.50 per share;
    (v) class A warrants to
    purchase 119,000 shares at $10.00 per share; and
    (vi) class B warrants to
    purchase 119,000 shares at $12.50 per share held
    by Global Resources Group III.
(2)
Does not include 361,000 shares of common
    stock owned by the Swanton Family Trust and 360,200 shares
    of common stock owned by the Virginia Trust of Eire, as to which
    Mr. Noonan and his wife are the trustees. Mrs. Noonan
    is Mr. Swanton's sister, and the nieces and nephews of
    Mr. Swanton are the sole beneficiaries of these trusts.
    Does not include 53,500 shares owned by a charitable
    foundation or 62,840 shares owned by the Ingalls Family
    Trust, for which Mr. Swanton and his wife are trustees.
    Mr. Swanton disclaims all beneficial ownership of these
    shares.
(3)
Includes stock options currently exercisable as
    follows: 300,000 at $4.00 per share and 100,000 at
    $7.00 per share for Mr. Swanton; 310,750 at
    $4.00 per share and 50,000 at $7.00 per share for
    Mr. Larkin; 66,000 at $4.00 per share and 12,000 at
    $7.00 per share for Mr. Fleming; 66,000 at
    $4.00 per share and 10,000 at $7.00 per share for
    Mr. Vickers; 58,502 at $4.00 per share and 5,000 at
    $7.00 per share for Mr. King; and 45,000 at
    $10.00 per share and 20,000 at $7.00 per share for
    Mr. Davies.
(4)
Includes stock options currently exercisable at
    between $4.00 and $10.00 per share as follows: 30,000 for
    Mr. Borgida; 50,000 for Mr. Coelho; 35,000 for
    Mr. D'Alleva; 35,000 for Mr. Miller; 35,000 for
    Mr. Noonan; and 50,000 for Mr. Quinlan.
(5)
Includes 361,000 shares of common stock
    owned by the Swanton Family Trust and 360,200 shares of
    common stock owned by the Virginia Trust of Eire, as to which
    Mr. Noonan and his wife are the trustees. Mrs. Noonan
    is Mr. Swanton's sister, and the nieces and nephews of
    Mr. Swanton are the sole beneficiaries of these trusts.
    Mr. Swanton and Mr. Noonan disclaim beneficial
    ownership of the shares of common stock held by the Swanton
    Family Trust and the Virginia Trust of Eire.
(6)
Does not include unvested stock options
    exercisable at $7.00 per share as follows: 100,000 for
    Mr. Swanton; 50,000 for Mr. Larkin; 12,000 for
    Mr. Fleming; 40,000 for Mr. Davies; 10,000 for
    Mr. Vickers; 5,000 for Mr. King; 5,000 for
    Mr. Borgida; 5,000 for Mr. Coelho; 5,000 for
    Mr. D'Alleva; 5,000 for Mr. Miller; 5,000 for
    Mr. Noonan; and 5,000 for Mr. Quinlan.
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DESCRIPTION OF CAPITAL STOCK
The description of our capital stock below is
only a summary and is not intended to be complete. For a
complete description, please read our certificate of
incorporation and bylaws, which have been filed as exhibits to
the registration statement of which this prospectus is a part.
General
Our authorized capital stock consists of
100,000,000 shares of common stock, par value
$.0001 per share, and 10,000,000 shares of preferred
stock, $.0001 par value per share. As of August 18,
2004, there were outstanding:
•
19,690,570 shares of common stock, net of
    632,250 shares held in treasury;
•
6,552,674 shares of preferred stock;
•
options to purchase a total of
    2,712,512 shares of common stock, of which options to
    purchase 2,373,887 shares were exercisable; and
•
warrants to purchase a total of
    1,618,125 shares of common stock.
There will
be            shares
of common stock outstanding after giving effect to the sale of
the shares of common stock to the public in this offering
assuming:
•
no exercise of the underwriters over-allotment
    option; and
•
no exercise of outstanding stock options.
Common Stock
The holders of our common stock are entitled to
one vote per share on all matters to be voted on by stockholders
and have no cumulative voting rights. Each share of our common
stock has identical rights and privileges in every respect.
Subject to the prior rights and preferences applicable to shares
of the preferred stock, the holders of shares of common stock
are entitled to receive such dividends payable in cash, stock,
or otherwise out of funds legally available, when and if
declared from time to time by the board of directors. In the
event of our liquidation, dissolution or winding up, the holders
of shares of the common stock will be entitled to share ratably
in all assets remaining after the payment of liabilities,
subject to the rights of any then outstanding preferred stock or
any series thereof. The common stock has no preemptive,
subscription or conversion rights and there are no redemption or
sinking fund provisions in our certificate of incorporation. The
rights, preferences and privileges of holders of common stock
are subject to, and may be adversely affected by, the rights of
holders of shares of any preferred stock or series of preferred
stock currently outstanding or that we may designate and/or
issued in the future. The issued and outstanding shares of our
common stock are fully paid and non-assessable.
Preferred Stock
Our board of directors is empowered, without
approval of the stockholders, to cause shares of preferred stock
to be issued from time to time in one or more series, and the
board of directors may determine the numbers of shares of each
series and the designation, powers, privileges, preferences and
rights and the qualifications, limitations and restrictions of
the shares of each series. The specific matters that our board
of directors may determine include:
•
the designation of each series;
•
the number of shares of each series;
•
the rate of any dividends;
•
whether any dividends shall be cumulative or
    non-cumulative;
•
the terms of any redemption;
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•
the amount payable in the event of any voluntary
    or involuntary liquidation, dissolution or winding up of the
    affairs of our company;
•
rights and terms of any conversion or
    exchange; and
•
restrictions on the issuance of shares of the
    same series or any other series.
Pursuant to articles supplementary filed with the
State of Maryland, 6,100,000 shares of our preferred stock
have been designated series A 8% cumulative convertible
preferred stock and 2,100,000 shares of our preferred stock
have been designated series A institutional 8% cumulative
convertible preferred stock.
The series A preferred stock has a dividend
equal to 8% per annum, payable quarter-annually in arrears,
and a liquidation preference of $12.00 per share. Any
accrued but unpaid dividends shall be cumulative and paid upon
liquidation, optional redemption or mandatory repurchase. No
dividends may be paid on the common stock as long as there are
any accrued and unpaid dividends on the preferred stock.
As of June 30, 2004, there were 6,552,674
shares of our 8% convertible preferred stock, including both our
series A 8% cumulative convertible preferred stock and our
series A institutional 8% cumulative convertible preferred
stock. The following describes the conversion rate applicable to
5,504,338 of these preferred shares:
•
At the election of the holder of our convertible
    preferred stock, until June 30, 2005, each share of
    preferred stock is convertible into one share of our common
    stock. Commencing July 1, 2005 and until June 30,
    2006, each share of preferred stock is convertible into
    0.75 shares of common stock, and commencing July 1,
    2006 and thereafter, each share of preferred stock is
    convertible into 0.50 shares of common stock.
With respect to the 1,048,336 shares of
preferred stock that are not subject to the foregoing conversion
rates, all of which consist of series A institutional 8%
cumulative convertible preferred stock, the following conversion
rate applies:
•
At the election of the holder, until the later to
    occur of June 30, 2005 and one year after the effective
    date with the SEC of the registration statement of which this
    prospectus is a part, each share of preferred stock is
    convertible into one share of our common stock. Thereafter,
    until June 30, 2006, each share of preferred stock is
    convertible into 0.75 shares of common stock, and
    commencing July 1, 2006 and thereafter, each share of
    preferred stock is convertible into 0.50 shares of common
    stock.
The conversion rate for our convertible preferred
stock is subject to adjustment in the event of:
•
the issuance of common stock as a dividend or
    distribution on any class of our capital stock;
•
the combination, subdivision or reclassification
    of the common stock; or
•
the distribution to all holders of common stock
    of evidences of indebtedness or assets, including securities,
    but excluding cash dividends or distributions paid out of
    surplus.
Beginning seven years after the date of issuance,
holders of the convertible preferred stock may elect to require
us to redeem their preferred stock at a redemption price equal
to the liquidation value of $12.00 per share, plus accrued
but unpaid dividends, if any. Upon receipt of a redemption
election, we, at our option, shall either:
•
pay the holder cash in an amount equal to
    $12.00 per convertible preferred share, subject to
    adjustment for stock splits, stock dividends or stock exchanges,
    plus accrued and unpaid dividends, to the extent that it has
    funds legally available for redemption, or
•
issue to the holder shares of common stock in an
    amount equal to 125% of the redemption price and any accrued and
    unpaid dividends, based on the average of the closing sale
    prices of our common stock for the 30 trading days immediately
    preceding the date of the receipt of the written redemption
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election by the holder, 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.
If we are not listed on an exchange or our common
stock has no trading volume, 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:
•
redeem the preferred stock in whole or in part,
    at a redemption price of $12.00 per share plus accrued and
    unpaid dividends, or
•
convert the preferred stock, plus any accrued and
    unpaid dividends, into common stock at the then applicable
    conversion rate, based on the average closing sale prices of our
    common stock for the 30 trading days immediately preceding
    the date fixed for redemption.
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 66 2/3% of the then outstanding
preferred stock, voting together as a class.
Class A and B Warrants
We issued class A warrants and class B
warrants to purchase shares of our common stock in connection
with our private offerings in February and July, 2004. The
class A warrants are exercisable at $10.00 per share,
and the class B warrants are exercisable at $12.50 per
share. We also granted registration rights in connection with
the issuance of these warrants. See
"— Registration Rights".
Registration Rights
In February and July 2004, we entered into
subscription and registration rights agreements with the holders
of 2,875,000 shares of our common stock and
1,437,500 shares of our common stock issuable upon exercise
of our class A and class B warrants. Under the terms
of these agreements, commencing February 3, 2005, we are
obligated to file a registration statement covering the resale
of these securities. However, these securities will be subject
to agreements with the underwriters that restrict their ability
to sell or transfer their stock for 180 days from the date
of this prospectus. We have agreed to use our reasonable best
efforts to cause the registration statement to become effective
as soon as possible after filing it with the SEC. We have also
agreed to keep it effective for a period ending on the earlier
of two years, until the registrable shares are eligible for sale
under Rule 144(k) of the Securities Act or until
distribution of all registrable shares covered by the
registration statement has been completed.
In addition, in accordance with the
December 12, 2002 registration rights agreement, the
holders of at least 50% of the 6,552,674 shares of our
preferred stock as of June 30, 2004 have a one-time right
to demand that their shares of common stock issuable upon
conversion of the convertible preferred stock be registered
under the Securities Act, commencing 180 days after
completion of this offering. No securities other than the
converted shares may be included in this registration statement
without the prior written consent of a majority of the preferred
holders that requested the registration statement. In addition,
from the date of filing the registration statement for these
shares and until its withdrawal or abandonment, or until
90 days after the effective date of the registration
statement, we cannot file or cause to be effected any other
registration of any of our equity securities. The registration
rights agreement with the preferred holders also provides that
commencing 180 days after completion of this offering, the
holders of at least 50% of the preferred stock may request
piggyback rights for their converted shares on a registration
statements filed by us, except for demand registrations or
registrations on Form S-8 for employee stock option or
benefit plans or a Form S-4 for stock issued in an
acquisition, subject to the right of the underwriters in an
underwritten secondary offering to limit the number of shares
included in the registration under some circumstances.
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In the event we decide to file a registration
statement with the SEC, other than on Form S-8 or
Form S-4, to register an offering of our common stock, we
must give written notice to the holders of our intention as soon
as reasonably practicable offer to include the holders'
shares of common stock issuable upon conversion of the preferred
stock in such registration. If a holder wants to include his
shares in the registration, he must give notice to us within
20 days of his receipt of notice, and we must then register
those common shares. We may reduce the number of securities each
holder intends to register on a pro rata basis to the greatest
amount that would not adversely affect the distribution of those
securities.
In addition, at any time after consummation of
this offering, holders of shares of our common stock acquired
upon exercise of class A, B, C and D warrants granted in
connection with our secured and sinking fund convertible funds
from 1994 through 1999 are entitled to the following:
•
not less than 121 days after this offering,
    holders of 51% or more of the common stock issued upon exercise
    of these warrants may demand that we file to register these
    shares, which may be reduced or eliminated from registration if
    their inclusion would adversely affect the marketability of our
    securities to be sold; and
•
holders of these shares also have conditional
    piggyback registration rights to participate pro rata in
    eligible registration statements we file, which may be reduced
    or eliminated from registration if their inclusion would
    adversely affect the marketability of our securities to be sold.
Anti-Takeover Effects of Provisions of Our
Articles of Incorporation and Bylaws
Our articles of incorporation and our bylaws
contain provisions that might be characterized as anti-takeover
provisions. These provisions may deter or render more difficult
proposals to acquire control of our company, including proposals
a stockholder might consider to be in his or her best interest,
impede or lengthen a change in membership of the board of
directors and make removal of our management more difficult.
Classified Board
Upon completion of the offering, our articles of
incorporation and bylaws will provide that our board of
directors will be divided into three classes of directors, with
the classes to be as nearly equal in number as possible. As a
result, approximately one-third of our board of directors will
be elected each year. The classification of directors will have
the effect of making it more difficult for stockholders to
change their composition of our board. Upon consummation of this
offering, our articles of incorporation and bylaws provide that
the number of directors will be fixed from time to time
exclusively pursuant to a resolution adopted by the board.
Filling Board of Directors Vacancies;
    Removal
Under our articles of incorporation and bylaws,
prior to completion of this offering any director may be removed
with or without cause at any special meeting of the stockholders
called for that purpose. Vacancies and newly created
directorships resulting from any increase in the authorized
number of directors may be filled only by a majority vote of the
directors then in office, though less than a quorum. Each
director will hold office until his or her successor is elected
and qualified, or until the director's earlier death,
resignation or removal from office. Following this offering, any
director may be removed from office at any time, but only for
cause and only by the affirmative vote of the holders of at
least 66 2/3% of the voting power of the shares entitled to
vote.
Special Meetings of
    Stockholders
Upon consummation of the offering, special
meetings of stockholders may be called only by the Board of
Directors pursuant to a resolution adopted by a majority of the
Board, either upon motion or upon written request by holders of
at least 66 2/3% of the voting power of all shares entitled
to vote, or by our president.
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Unanimous Consent of Stockholders Required
    for Action by Written Consent
Under our articles of incorporation, stockholder
action may be taken without a meeting only by unanimous written
consent of all of our stockholders.
Issuance of Preferred Stock
As described above, our articles of incorporation
authorize the board of directors to issue preferred stock from
time to time, in one or more series, and the board of directors,
without further approval of the stockholders, is authorized to
fix the rights, preferences, privileges and restrictions
applicable to each series of preferred stock. The purpose of
authorizing the board of directors to determine these rights,
preferences, privileges and restrictions is to eliminate delays
associated with a stockholder vote on specific issuances. The
issuance of any class of preferred stock, including the
outstanding shares of preferred stock, while providing
flexibility for many corporate purposes, could, among other
things, adversely affect the voting power of the holders of our
common stock and, under certain circumstances, make it more
difficult for a third party to gain control of us.
No Cumulative Voting
The Maryland General Corporation Law provides
that stockholders are not entitled to cumulative votes in the
election of directors unless the articles of incorporation
provide otherwise. Our articles of incorporation expressly
prohibit cumulative voting.
Maryland Business Statutes
As a Maryland corporation, we are subject to the
provisions of the Maryland General Corporation Law. Maryland law
imposes restrictions on some business combinations and requires
compliance with statutory procedures before some mergers and
acquisitions can occur. These provisions of Maryland law may
have the effect of discouraging offers to acquire us even if the
acquisition would be advantageous to our stockholders. These
provisions include:
•
Unsolicited takeover
    provisions.
Maryland law provides
    that the Board of Directors of a Maryland corporation is not
    subject to higher duties with regard to actions taken in a
    takeover context. These provisions may make it more difficult to
    effect an unsolicited takeover of a Maryland corporation.
    Maryland law also allows publicly held corporations with at
    least three independent directors to elect to be governed by all
    or any part of Maryland law provisions relating to extraordinary
    actions and unsolicited takeovers.
•
Business combination with interested
    stockholders.
The Maryland
    Business Combination Act provides that a Maryland corporation
    may not engage in business combinations with an "interested
    stockholder" or its affiliates, for five years after the
    most recent date on which the interested stockholder became an
    interested stockholder and thereafter unless the board approved
    the transaction the interested stockholder became an interested
    stockholder, or the Maryland corporation has exempted itself
    from the statute in its articles of incorporation. We have
    elected not to exempt the company from this statute. After the
    five-year period has elapsed, a corporation subject to the
    statute may not consummate a business combination with an
    interested stockholder unless:
•
the board of directors recommended the
    transaction, and
•
the transaction was approved by 80% of the
    outstanding shares of voting stock entitled to be cast and by
    66 2/3% of the votes entitled to be cast by holders of
    voting stock other than shares owned by the interested
    stockholder.
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•
Acquisition of control
    shares.
The Maryland Control Share
    Acquisition Act provides, unless the Maryland corporation opts
    out of this statute, where a stockholder acquires issued and
    outstanding shares of a corporation's voting stock within
    one of the following ranges:
•
one-tenth or more but less than one-third,
•
one-third of more but less than a
    majority, or
•
a majority or more,
stockholder approval of the acquisition must be
    obtained before the stockholder may vote the shares. The
    required stockholder vote is two-thirds of all votes entitled to
    be cast is required each time a stockholder acquires control
    shares in an amount sufficient to cross one of the thresholds
    noted above, excluding shares held by the corporation's
    directors.
A person who has made or proposes to make a
control share acquisition, upon satisfaction of the conditions
set forth in the statute, including an acquiring person
statement and an undertaking to pay expenses for a special
meeting, may compel the board of directors of the corporation to
call a special meeting of stockholders to be held within
50 days after the demand to consider the voting rights of
the acquired shares. If no request for a special meeting is
made, the corporation may present the matter at a
stockholders' meeting.
If voting rights are not approved at the meeting
or if the acquiring person does not deliver an acquiring person
statement as required by the statute, then the corporation may
redeem any or all of the control shares for fair value
determined as of the date of the last control share acquisition
by the acquiror or of any meeting of stockholders at which the
voting rights of those shares are considered and not approved.
The corporation may not redeem shares for which voting rights
have previously been approved. Fair value is determined without
regard to the absence of voting rights for the control shares.
If voting rights for control shares are approved at a
stockholders' meeting and the acquiror becomes entitled to
vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of
the shares for purposes of these appraisal rights may not be
less than the highest price per share paid by the acquiror in
the control share acquisition. A control share acquisition does
not include any merger, consolidation or share exchange were we
are a party to such transaction. Our bylaws contain a provision
exempting any and all acquisitions by any person of our shares
of common stock from the control share acquisition statute.
Though not expected, our Board could cause us to become subject
to this statute by amendment of our bylaws to eliminate the
opt-out provision.
Transfer Agent and Registrar
The transfer agent and registrar for our common
stock is American Stock Transfer and Trust Company.
Listing
Our common shares are expected to be listed on
the Nasdaq National Market under the symbol "WRES".
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SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no
public market for our common stock. Future sales of substantial
amounts of common stock in the public market could adversely
affect the market price of our common stock. Upon the completion
of the
offering,                      shares
of common stock will be
outstanding,                      shares
of common stock if the underwriters over-allotment option is
exercised in full. Of those
shares,                      shares
of common stock sold by us in the offering will be freely
tradable without restriction or further registration under the
Securities Act, unless held by our affiliates, as defined under
the Securities Act. Our affiliates include our officers,
directors and major stockholders. Any such affiliate will be
subject to the resale limitations of Rule 144 adopted under
the Securities Act.
In addition, 13,310,571 shares of our common
stock outstanding prior to the offering will immediately be
eligible for sale in the public market. An additional
4,038,499 shares held by our affiliates will immediately be
eligible for sale in the public market subject to the volume and
other limitations of Rule 144. Further, upon conversion by
the holders of our convertible debt and preferred stock into
common stock, an aggregate of 8,456,888 shares will
immediately be eligible for sale in the public market and
3,341,559 shares held by our affiliates will immediately be
eligible for sale subject to the volume and other limitations of
Rule 144. These holders may also have rights, subject to
some conditions including the consent of any underwriter, to
include their shares in any registration statements that we file
to register our shares under the Securities Act for ourselves or
other stockholders.
In general, under Rule 144, a person who is
deemed to be our affiliate is entitled to sell within any
three-month period a number of shares beneficially owned for at
least one year that does not exceed the greater of 1.0% of the
then outstanding shares of common stock or the average weekly
trading volume of the outstanding shares of common stock during
the four calendar weeks preceding such sale. Sales under
Rule 144 are also subject to requirements as to the manner
of sale, notice and the availability of current public
information about us. However, a person who is not deemed to be
an affiliate of Warren at any time during the 90 days
preceding a proposed sale and who has beneficially owned
restricted securities for at least two years is entitled to sell
such shares under Rule 144 without regard to the volume,
manner of sale or notice requirements.
In accordance with the December 12, 2002
registration rights agreement, commencing 180 days after
completion of this offering, holders of at least 50% of the
6,552,674 shares of our convertible preferred stock as of
June 30, 2004 have a one-time right to demand that their
shares of common stock issuable upon conversion of the
convertible preferred stock be registered under the Securities
Act. Also, commencing 180 days after completion of this
offering, these holders may have the right to include their
shares of common stock, subject to the consent of any
underwriter, in registration statements that we may file, if
any, to register shares of our common stock under the Securities
Act for ourselves or other stockholders. Additionally,
commencing February 3, 2005, we are required to file a
registration statement for 2,875,000 shares of outstanding
common stock and 1,437,500 shares of common stock issuable
upon exercise of our class A and class B warrants
under the Securities Act. The holders of these securities have
agreed to certain restrictions on the transfer of their stock
for a period of 180 days after this offering.
We, together with each of our executive officers,
directors and certain of our stockholders, who collectively,
upon completion of the offering, will own an aggregate of
8,322,009 shares of common stock, have agreed not to sell,
pledge, or otherwise dispose of any shares of common stock or
securities convertible into or exercisable for shares of common
stock for a period of 180 days following the date of this
prospectus without the prior written consent of KeyBanc Capital
Markets, as representative for the underwriters. Upon expiration
of the lock-up agreements, these shares will become eligible for
sale subject in most cases to the limitations of Rule 144
under the Securities Act.
We have reserved an aggregate of
6,876,250 shares of common stock for issuance upon exercise
of options granted or to be granted under our various stock
option plans. See "Management — Employee Benefit
Plans" and note E, Stockholders' Equity, to our
consolidated financial statements included elsewhere in this
prospectus. We intend to file a registration statement on
Form S-8 under the Securities Act to register
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all of the shares of common stock reserved for
grant or previously granted under these plans. This registration
statement is expected to be filed as soon as practicable after
the consummation of the offering and will automatically become
effective upon filing. Shares issued under our stock option
plans after such registration statement is filed may thereafter
be sold in the public market, subject, however, to the
limitations imposed by Rule 144 on our affiliates, the
lock-up agreements described above and any transfer or vesting
restrictions imposed on options at the time of grant.
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UNDERWRITING
Subject to the terms and conditions set forth in
an underwriting agreement by and among KeyBanc Capital Markets,
a division of McDonald Investments Inc., Jefferies &
Company, Inc., and Sanders Morris Harris, as representatives for
the underwriters named in the agreement, and us, we have agreed
to sell to each underwriter, and each underwriter has severally
agreed to purchase from us, the number of common shares set
forth opposite its name in the table below.
Underwriter
Number of Shares
KeyBanc Capital Markets, a division of McDonald
    Investments Inc.
Jefferies & Company, Inc.
Sanders Morris Harris, Inc.
Total
Under the terms of the underwriting agreement,
the underwriters are committed to purchase all of these shares
if any shares are purchased. If an underwriter defaults, the
underwriting agreement provides that the purchase commitments of
the nondefaulting underwriters may be increased or the
underwriting agreement may be terminated.
We have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments
the underwriters may be required to make because of any of those
liabilities.
The underwriting agreement provides that the
underwriters' obligations to purchase the common stock
depends on the satisfaction of the conditions contained in the
underwriting agreement. The conditions contained in the
underwriting agreement include the requirement that the
representations and warranties made by us to the underwriters
are true, that there is no material change in the financial
markets and that we deliver to the underwriters customary
closing documents.
The underwriters propose to offer our common
stock directly to the public at
$          per
share and to certain dealers at such price less a concession not
in excess of
$          per
share. The underwriters may allow, and such dealers may reallow,
a concession not in excess of
$          per
share to other dealers. If all of the shares are not sold at the
public offering price, the representatives of the underwriters
may change the public offering price and the other selling terms.
We intend to distribute and deliver this
prospectus by hand or by mail only and not by electronic
delivery. Also, we intend to use printed prospectuses only and
not other forms of prospectuses.
We have granted the underwriters an option to
purchase up
to                     additional
shares at the public offering price less the underwriting
discount. The underwriters may exercise the option for
30 days from the date of this prospectus solely to cover
any over-allotments. If the underwriters exercise this option,
each will be obligated, subject to conditions contained in the
underwriting agreement, to purchase a number of additional
common shares proportionate to that underwriter's initial
amount reflected in the above table.
The following table shows the per share and total
underwriting discount that we will pay to the underwriters.
These amounts are shown assuming both no exercise and full
exercise of the underwriters' option to
purchase                     additional
shares.
Total Without Opinion
Total With Option
Per share
Exercised
Exercised
Public offering price
$
$
$
Underwriting discount(1)
$
$
$
Proceeds (before expenses)
$
$
$
(1)
The underwriting discount
    is           %,
    or
    $          per
    share.
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We estimate that the total expenses related to
this offering payable by us, excluding underwriting discounts
and commissions, will be approximately
$          .
We, our executive officers and directors and
certain major stockholders have agreed with the underwriters,
for a period of 180 days after the date of this prospectus,
subject to certain exceptions, not to offer, sell, hedge or
otherwise dispose of any common shares or any securities
convertible into or exchangeable for common stock, without the
prior written consent of McDonald Investments Inc. As
of                     ,
2004,            shares
of common stock (including shares underlying options exercisable
within 60 days) were beneficially owned by our executive
officers and directors and such stockholders. However, McDonald
Investments Inc. may, in its sole discretion and at any time
without notice, release all or any portion of the securities
subject to these lock-up agreements.
Until the distribution of common shares is
completed, SEC rules may limit the underwriters from bidding for
and purchasing our common stock. However, the underwriters may
engage in transactions that stabilize the price of the common
shares, such as bids or purchases of shares in the open market
while the offering is in progress to peg, fix, or maintain that
price. These transactions also may include short sales and
purchases to cover positions created by short sales. Short sales
involve the sale by the underwriters of a greater number of
shares than they are required to purchase in the offering.
"Covered" short sales are sales made in an amount not
greater than the underwriters' option to purchase
additional shares from us. The underwriters may reduce that
short position by purchasing shares in the open market and/or by
exercising all or part of the over-allotment option described
above. In determining the source of shares to close out the
covered short position, the underwriters will consider, among
other things, the price of shares available for purchase in the
open market as compared to the price at which they may purchase
additional shares pursuant to the option granted to them.
"Naked" short sales are any sales in excess of such
option. The underwriters must close out any naked short position
by purchasing shares in the open market. A naked short position
is more likely to be created if the underwriters are concerned
that there may be downward pressure on the price of the common
shares in the open market after pricing that could adversely
affect investors who purchase in the offering.
The underwriters may also impose a penalty bid.
This occurs when a particular underwriter repays to the
underwriters a portion of the underwriting discount received by
it because the representative has repurchased shares sold by or
for the account of such underwriter in stabilizing or short
covering transactions.
Neither we nor the underwriters makes any
representation or prediction as to the effect the transactions
described above may have on the price of the common stock. Any
of these activities may have the effect of preventing or
retarding a decline in the market price of our common stock.
They may also cause the price of our common stock to be higher
than the price that would otherwise exist on the open market in
the absence of these transactions. The underwriters may conduct
these transactions on the Nasdaq National Market or in the
over-the-counter market, or otherwise. If the underwriters
commence any of these transactions, they may discontinue them
without notice at any time.
KeyBank National Association and other affiliates
of McDonald Investments Inc. have investment discretion over
accounts holding which may include shares of our common stock.
In addition, some of the underwriters and their affiliates have
engaged in, and may in the future engage in, investment banking
and other transactions with us and perform services for us in
the ordinary course of their business. They have received
customary fees and commissions for those transactions. In the
course of their businesses, the underwriters and their
affiliates may actively trade our securities or loans for their
own account or for the accounts of customers, and, accordingly,
the underwriters and their affiliates may at any time hold long
or short positions in such securities or loans.
There is no established trading market for the
share. The offering price for the shares has been determined by
us and the underwriters, based on the following factors:
•
the history and prospects for the industry in
    which we compete;
•
our past and present operations;
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Table of Contents
•
our historical results of operations;
•
our prospects for future business and earning
    potential;
•
our management;
•
the general condition of the securities markets
    at the time of this offering;
•
the recent market prices of securities of
    generally comparable companies;
•
the market capitalization and stages of
    development of other companies which we and the underwriters
    believe to be comparable to us; and
•
other factors deemed to be relevant.
LEGAL MATTERS
The validity of the shares of common stock being
offered by this prospectus and certain other legal matters in
connection with this offering will be passed upon for us by
Patton Boggs LLP. Attorneys at Patton Boggs LLP beneficially own
25,000 shares of our common stock, a class A warrant
to purchase 6,250 shares of our common stock and a
class B warrant to purchase 6,250 shares of our
common stock. Certain legal matters in connection with this
offering will be passed upon for the underwriters by Jones Day.
EXPERTS
The consolidated financial statements as of
December 31, 2003 and 2002 and for each of the years in the
three year period ending December 31, 2003 are included in
this prospectus and in the registration statement have been so
included in reliance upon the report of Grant Thornton LLP,
independent registered public accounting firm, given on the
authority of said firm as experts in auditing and accounting.
Williamson Petroleum Consultants, Inc.,
independent petroleum consultants, estimated our reserves as of
December 31, 2003, 2002 and 2001 and the present value of
the estimated future net revenues from those estimated reserves
included in this prospectus. These estimates are included in
reliance upon their reports given upon their authority as
experts on the matters covered by the summary reserve report.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on
Form S-1 with the SEC in connection with this offering. We
also file our annual report on Form 10-K and quarterly
reports on Form 10-Q, and file or furnish current reports
on Form 8-K pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended. You may also read
and copy the registration statement and any other documents we
have filed at the Securities and Exchange Commission's
Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information on
the Public Reference Room. Our Securities and Exchange
Commission filings are also available to the public at the
Securities and Exchange Commission's Internet site at
http://www.sec.gov. We also make available our periodic reports
and amendments as soon as reasonably practicable after such
documents are electronically filed with, or furnished to, the
SEC. Our Internet address is www.warrenresources.com.
This prospectus is part of the registration
statement and does not contain all of the information included
in the registration statement. Whenever a reference is made in
this prospectus to any of our contracts or other documents, the
reference may not be complete and, for a copy of the contract or
document, you should refer to the exhibits that are part of the
registration statement.
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INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements
Report of Independent
    Registered Public Accounting Firm
F-2
Consolidated Balance Sheets
    as of December 31, 2003 and 2002
F-3
Consolidated Statements of
    Operations for the years ended December 31, 2003, 2002 and
    2001
F-4
Consolidated Statement of
    Stockholders' Equity (Deficit) for the years ended
    December 31, 2003, 2002 and 2001
F-5
Consolidated Statements of
    Cash Flows for the years ended December 31, 2003, 2002 and
    2001
F-6
Notes to Consolidated
    Financial Statements
F-8
Unaudited Consolidated Financial
    Statements
Consolidated Balance Sheets
    as of June 30, 2004 and December 31, 2003
F-37
Consolidated Statements of
    Operations for the six months ended June 30, 2004 and
    2003
F-38
Consolidated Statements of
    Cash Flows for the six months ended June 30, 2004 and
    2003
F-39
Notes to the Unaudited
    Consolidated Financial Statements
F-40
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Board of Directors
Warren Resources, Inc.
We have audited the accompanying consolidated
balance sheets of Warren Resources, Inc. and Subsidiaries as of
December 31, 2003 and 2002, and the related consolidated
statements of operations, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended
December 31, 2003. 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, 2003 and 2002, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003 in
conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note A to the consolidated
financial statements, effective January 1, 2001, the
Company adopted Statement of Financial Accounting Standards
No. 133,
Accounting for Derivative Instruments and
Hedging Activities
; effective January 1, 2002, the
Company adopted Statement of Financial Accounting Standards
No. 142,
Goodwill and Other Intangible Assets
; and,
effective January 1, 2003, the Company changed its method
of accounting for asset retirement obligations as required by
the provisions of Statement of Financial Accounting Standards
No. 143,
Asset Retirement Obligations
.
/s/ GRANT THORNTON LLP
Oklahoma City, Oklahoma
February 16, 2004 (except for the
last three paragraphs of Note P,
as to which the date is August 23, 2004)
F-2
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
2003
2002
ASSETS
Current Assets
Cash and cash equivalents
$
24,528,999
$
23,184,936
Accounts receivable — trade
2,386,180
6,895,483
Accounts receivable from affiliated partnerships
389,271
921,252
Trading securities
201,152
78,383
Restricted investments in U.S. Treasury
    bonds — available for sale, at fair value (amortized
    cost of $1,293,411 in 2003 and $683,513 in 2002)
1,402,358
810,822
Other current assets
2,031,701
2,053,248
Total current assets
30,939,661
33,944,124
Other Assets
Oil and gas properties — at cost, based
    on successful efforts method of accounting, net of accumulated
    depletion and amortization
94,949,545
48,684,362
Property and equipment — at cost, net
591,663
751,479
Restricted investments in U.S. Treasury
    bonds — available for sale, at fair value (amortized
    cost of $12,627,574 in 2003 and $7,571,860 in 2002)
13,808,777
9,058,851
Deferred bond offering costs, net of accumulated
    amortization of $3,684,097 in 2003 and $3,051,046 in 2002
2,756,971
3,390,022
Goodwill
3,430,246
3,430,246
Other assets
4,576,800
5,365,435
Restricted cash
—
3,637,775
120,114,002
74,318,170
$
151,053,663
$
108,262,294
LIABILITIES
    AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of debentures
$
4,809,470
$
5,466,970
Current maturities of other long-term liabilities
208,383
178,980
Accounts payable and accrued expenses
8,956,529
3,822,809
Deferred income — turnkey drilling
    contracts with affiliated partnerships
22,438,272
32,265,725
Total current liabilities
36,412,654
41,734,484
Long-Term Liabilities
Debentures, less current portion
43,285,230
49,202,730
Other long-term liabilities, less current portion
1,613,081
1,353,129
44,898,311
50,555,859
Minority Interest
13,348,654
8,970,078
Stockholders' Equity
8% convertible preferred stock — $.0001
    par value; authorized, 10,000,000 shares; issued and
    outstanding, 6,507,729 shares in 2003 and 1,784,197 shares in
    2002 (aggregate liquidation preference $78,092,748 in 2003 and
    $21,410,364 in 2002)
76,334,024
20,955,838
Common stock — $.0001 par value;
    authorized, 100,000,000 shares; issued, 17,349,070 shares in
    2003 and 17,581,996 shares in 2002
1,735
1,758
Additional paid-in capital
47,739,159
52,424,147
Accumulated deficit
(67,729,178
)
(66,529,795
)
Accumulated other comprehensive income, net of
    applicable income taxes of $517,000 in 2003 and $646,000 in 2002
776,359
971,508
57,122,099
7,823,456
Less common stock in Treasury — at
    cost; 632,250 shares in 2003 and 707,691 shares in 2002
728,055
821,583
56,394,044
7,001,873
$
151,053,663
$
108,262,294
The accompanying notes are an integral part of
these statements.
F-3
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
OPERATIONS
Year Ended December 31,
2003
2002
2001
Revenues
Turnkey contracts with affiliated partnerships
$
11,300,646
$
5,841,110
$
30,102,946
Oil and gas sales from marketing activities
5,620,522
11,272,398
14,866,954
Well services, 81%, 79% and 12% with affiliated
    partnerships, respectively
1,167,564
1,895,453
5,574,335
Oil and gas sales
5,717,814
592,528
948,270
Net gain (loss) on investments
21,761
464,185
(10,337
)
Interest and other income
1,340,059
5,257,842
1,977,082
Gain on sale of unproved oil and gas properties
494,497
4,286,774
—
25,662,863
29,610,290
53,459,250
Expenses
Turnkey contracts
7,284,653
4,965,426
25,953,340
Cost of marketed oil and gas purchased from
    affiliated partnerships
5,500,426
11,121,522
15,298,842
Well services
662,128
838,878
3,519,085
Production and exploration
3,811,595
1,325,764
567,756
Depreciation, depletion, amortization and
    impairment
3,249,860
9,930,162
14,462,119
General and administrative
4,496,034
6,277,792
5,484,773
Interest
1,528,069
6,312,631
5,776,234
Contingent repurchase obligation
—
(3,064,661
)
3,318,993
26,532,765
37,707,514
74,381,142
Loss before provision for income taxes
(869,902
)
(8,097,224
)
(20,921,892
)
Deferred income tax expense (benefit)
129,000
(471,000
)
151,700
Net loss before minority interest and change in
    accounting principle
(998,902
)
(7,626,224
)
(21,073,592
)
Minority interest
(112,263
)
—
—
Net loss before change in accounting principle
(1,111,165
)
(7,626,224
)
(21,073,592
)
Cumulative effect of change in accounting
    principle
(88,218
)
—
—
Net loss
(1,199,383
)
(7,626,224
)
(21,073,592
)
Less dividends and accretion on preferred shares
4,561,543
16,206
—
Net loss applicable to common stockholders
$
(5,760,926
)
$
(7,642,430
)
$
(21,073,592
)
Basic and diluted loss per common share
$
(0.34
)
$
(0.44
)
$
(1.20
)
Weighted average common shares outstanding
16,827,857
17,339,869
17,532,882
The accompanying notes are an integral part of
these statements.
F-4
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY (DEFICIT)
Years ended December 31, 2003, 2002 and
2001
Accumulated
Total
Preferred Stock
Common Stock
Additional
Other
Stockholders'
Paid-in
Accumulated
Comprehensive
Treasury
Equity
Shares
Amount
Shares
Amount
Capital
Deficit
Income
Stock
(Deficit)
Balance at January 1, 2001
—
$
—
17,528,261
$
17,528
$
52,187,679
$
(37,829,979
)
$
500,360
$
—
$
14,875,588
Conversion to common stock from convertible
    debentures
—
—
9,318
10
9,990
—
—
—
10,000
Purchase of treasury stock
—
—
—
—
—
—
—
(10,010
)
(10,010
)
Comprehensive loss
Net loss
—
—
—
—
—
(21,073,592
)
—
—
(21,073,592
)
Other comprehensive loss
Cumulative effect of change in accounting
    principle
—
—
—
—
—
—
(1,449,930
)
—
(1,449,930
)
Reclassification adjustment for derivative losses
—
—
—
—
—
—
1,449,930
—
1,449,930
Net change in unrealized gain on investment
    securities available for sale, net of applicable income taxes
—
—
—
—
—
—
(236,100
)
—
(236,100
)
Total comprehensive loss
(21,309,692
)
Balance at December 31, 2001
—
—
17,537,579
17,538
52,197,669
(58,903,571
)
264,260
(10,010
)
(6,434,114
)
Change in par value of common stock
—
—
—
(15,784
)
15,784
—
—
—
—
Dividends declared on preferred stock
—
—
—
—
(16,206
)
—
—
—
(16,206
)
Shares issued for services
—
—
23,695
2
86,902
—
—
—
86,904
Conversion to common stock from convertible debt
—
—
20,722
2
139,998
—
—
—
140,000
Issuance of preferred stock, net of offering
    costs of $454,740
1,784,197
20,955,838
—
—
—
—
—
—
20,955,838
Purchase of treasury stock
—
—
—
—
—
—
—
(811,573
)
(811,573
)
Comprehensive loss
Net loss
—
—
—
—
—
(7,626,224
)
—
—
(7,626,224
)
Other comprehensive loss
Net change in unrealized gain on investment
    securities available for sale, net of applicable income taxes
—
—
—
—
—
—
707,248
—
707,248
Total comprehensive loss
(6,918,976
)
Balance at December 31, 2002
1,784,197
20,955,838
17,581,996
1,758
52,424,147
(66,529,795
)
971,508
(821,583
)
7,001,873
Retirement of common stock
—
—
(232,926
)
(23
)
(123,445
)
—
—
93,528
(29,940
)
Dividends declared on preferred stock
—
—
—
—
(4,272,297
)
—
—
—
(4,272,297
)
Issuance of preferred stock, net of offering
    costs of $1,593,990
4,723,532
55,088,940
—
—
—
—
—
—
55,088,940
Accretion of preferred stock to redemption value
—
289,246
—
—
(289,246
)
—
—
—
—
Comprehensive loss
Net loss
—
—
—
—
—
(1,199,383
)
—
—
(1,199,383
)
Other comprehensive loss
Net change in unrealized gain on investment
    securities available for sale, net of applicable income taxes
—
—
—
—
—
—
(195,149
)
—
(195,149
)
Total comprehensive loss
(1,394,532
)
Balance at December 31, 2003
6,507,729
$
76,334,024
17,349,070
$
1,735
$
47,739,159
$
(67,729,178
)
$
776,359
$
(728,055
)
$
56,394,044
The accompanying notes are an integral part of
these statements.
F-5
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS
Year Ended December 31,
2003
2002
2001
Cash flows from operating activities:
Net loss
$
(1,199,383
)
$
(7,626,224
)
$
(21,073,592
)
Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities:
Accretion of discount on available for sale debt
    securities
(563,495
)
(514,818
)
(473,080
)
Amortization and write-off of deferred bond
    offering costs
633,051
515,886
442,130
Gain on sale of U.S. Treasury bonds-available for
    sale
(132,827
)
(28,104
)
(21,019
)
Depreciation, depletion, amortization and
    impairment
3,249,860
9,930,162
14,462,119
Accretion of asset retirement obligation
62,452
—
—
Cumulative effect of accounting change
88,218
—
—
Gain on sale of oil and gas properties
(494,497
)
(4,286,774
)
—
Common stock issued for services
—
86,904
—
Non-cash compensation
—
200,000
—
Deferred tax expense (benefit)
129,000
(471,000
)
151,700
Change in assets and liabilities:
(Increase) decrease in trading securities
(122,769
)
127,606
235,527
(Increase) decrease in accounts receivable-trade
4,509,303
(902,157
)
275,723
(Increase) decrease in accounts receivable from
    affiliated partnerships
531,981
(119,591
)
(21,740
)
Decrease in other assets
810,183
2,886,299
862,956
Increase (decrease) in accounts payable and
    accrued expenses
3,633,658
(2,704,532
)
(1,251,636
)
Decrease in deferred income from affiliated
    partnerships
(5,223,496
)
(677,861
)
(12,619,695
)
Increase (decrease) in contingent repurchase
    obligation to affiliated partnerships
—
(3,064,661
)
3,318,993
Increase (decrease) in other long-term
    liabilities
(633,611
)
548,200
—
Net cash provided by (used in) operating
    activities
5,277,628
(6,100,665
)
(15,711,614
)
Cash flows from investing activities:
Purchases of U.S. Treasury bonds-available for
    sale
(5,692,731
)
(14,906
)
(1,264,058
)
Purchases of oil and gas properties
(12,699,505
)
(4,699,453
)
(16,944,421
)
Purchases of property and equipment
(40,043
)
(50,592
)
(189,666
)
Proceeds from the sale of oil and gas properties,
    net of selling fees
494,497
12,874,512
—
Proceeds from the sale of property and equipment
52,353
—
—
Proceeds from U.S. Treasury bonds-available for
    sale
723,442
845,081
763,353
Decrease (increase) in restricted cash
3,637,775
(3,637,775
)
—
Net cash provided by (used in) investing
    activities
(13,524,212
)
5,316,867
(17,634,792
)
Cash flows from financing activities:
Payments on long-term debt
(1,911,336
)
(2,813,965
)
(1,876,645
)
Deferred offering costs
—
—
(812,886
)
Issuance of preferred stock, net
14,304,156
3,861,718
—
Dividends paid on preferred stock
(2,772,233
)
—
—
Purchase of treasury stock
(29,940
)
(2,624
)
(10,010
)
Net cash provided by (used in) financing
    activities
9,590,647
1,045,129
(2,699,541
)
Net increase (decrease) in cash and cash
    equivalents
1,344,063
261,331
(36,045,947
)
Cash and cash equivalents at beginning of year
23,184,936
22,923,605
58,969,552
Cash and cash equivalents at end of year
$
24,528,999
$
23,184,936
$
22,923,605
The accompanying notes are an integral part of
these statements.
F-6
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS — (Continued)
Year Ended December 31,
2003
2002
2001
Supplemental disclosure of cash flow information
Cash paid for interest, net of amount capitalized
$
895,018
$
5,770,006
$
5,275,100
Cash paid for income taxes
$
—
$
—
$
—
Noncash investing and financing activities:
Conversion to common stock from convertible debt
$
—
$
140,000
$
10,000
Exchange of 2007 Sinking Fund Bond for preferred
    stock
3,858,392
978,600
—
Exchange of 2017 Sinking Fund Bond for preferred
    stock
864,160
—
—
Accounts receivable consisting of service credits
    relating to the sale of Pinnacle
—
450,000
—
Other assets consisting of deferred payments
    relating to the conveyance of oil and gas property
—
5,818,183
—
Purchase of treasury stock of $808,949 and
    incurrence of noncash compensation of $200,000 through the
    issuance of a noninterest-bearing note (Note D)
—
1,008,949
—
Accrued preferred stock dividend
1,500,064
16,206
—
Preferred stock issued to minority interest (see
    Note J)
3,782,664
—
—
Preferred stock issued to acquire property, net
    of deferred income of $4,604,000 (see Note I)
7,972,000
—
—
During 2003, the Company acquired affiliated
    L.L.C. interests in exchange for 1,956,850 shares of preferred
    stock (Note J). In conjunction with the acquisition, assets
    were acquired and liabilities were assumed as follows:
Estimated fair value of assets acquired
$
28,346,462
Liabilities assumed
8,646,926
Estimated fair value of preferred stock
$
19,699,536
During 2003, the Company recorded the cumulative
    effect of SFAS 143 for asset retirement obligations, as
    follows:
Increase to oil and gas properties
$
557,465
Increase of asset retirement obligation
645,683
Cumulative effect of accounting change
$
88,218
During 2002, the Company acquired affiliated
    L.L.C. interests in exchange for 1,342,960 shares of preferred
    stock (Note J). In conjunction with the acquisition, assets were
    acquired and liabilities were assumed as follows:
Estimated fair value of assets acquired
$
25,256,708
Liabilities assumed
9,141,188
Estimated fair value of preferred stock
$
16,115,520
The accompanying notes are an integral part of
these statements.
F-7
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Note A — Organization and Accounting
Policies
Nature of
Operations:
Warren Resources, Inc.
(the "Company") was formed as a New York corporation
on June 12, 1990 for the purpose of acquiring and
developing oil and gas properties. On September 5, 2002,
the Company changed its State of Incorporation to Delaware. As a
result, all shares of the Company's stock were converted
into shares of the Delaware corporation and the par value of
stock was changed from $0.001 to $0.0001 per share. Primarily,
the Company's oil and gas properties are 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. Also, the Company, through its wholly owned
subsidiaries, provides turnkey contract drilling services to
affiliated partnerships and joint ventures, well services
including engineering, maintenance, operations and gas marketing
and transportation services.
Management
Plans:
The Company has incurred a
net loss of approximately $1.2 million during 2003 and at
December 31, 2003, current liabilities exceeded current
assets by approximately $5.5 million. The Company had
equity of approximately $56.4 million at December 31,
2003.
In order to improve operations and liquidity and
meet its cash flow needs, the Company has or intends to do the
following:
•
Raise additional capital through the sale of
    either preferred or common stock (see Note P —
    Subsequent Events).
•
Obtain a credit facility based in part on the
    value of our proved reserves.
•
Generate gross profit from turnkey drilling
    contracts equal to approximately 25% of the total amount of
    total turnkey price and satisfy the drilling obligations
    relating to the contracts.
•
Use $2.0 million of deferred drilling
    credits from Anadarko Petroleum Corporation to develop our
    acreage in the Washakie Basin, Wyoming.
As a result of these plans, management believes
that it will generate sufficient cash flows to meet its current
obligations in 2004.
Principles of
Consolidation:
The consolidated
financial statements include the accounts of the Company, its
wholly owned subsidiaries, Warren Development Corp., Warren
Drilling Corp., Warren Management Corp., Warren E&P, Inc.
(formerly known as Petroleum Development Corp), CJS Pinnacle
Petroleum Services, LLC ("Pinnacle") which was sold on
February 14, 2002 and certain partnerships where the
Company has majority control (Note J). All significant
intercompany accounts and transactions have been eliminated in
consolidation.
The Company conducts the majority of its oil and
gas operations through joint ventures and partnerships. The
Company enters into joint venture agreements with limited
partnerships whereby the Company assigns 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 is an undivided interest in
the mineral rights and each owner is responsible for its
designated well expenditures. In exchange for the 75% working
interest, the limited partners pay intangible drilling costs
and, if a well is successful, the Company pays completion costs,
including lease and well equipment. The Company has a 25%
interest in the joint venture before payout and receives an
additional reversionary 15% interest once payout occurs. The
Company also has a 10% interest in the partnership revenue and
expenses which increases to 25% once payout occurs. Payout is
achieved when the limited partners in a particular partnership
receive distributions equal to 100% of their original
investment. Distributions received by the participants are
determined by the revenues generated from the wells in each of
the various partnerships less any applicable lease operating
expenses. Therefore, once payout is achieved, the Company has a
total interest of 55% in the net revenue generated from all
wells assigned to a particular
F-8
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
partnership. The Company has subordinated
substantially all its general partner and joint venture rights
to production for 1998 and earlier partnerships until payout and
its general partner's interest in 1999 and later
partnerships until payout. The Company proportionately
consolidates its share of the costs incurred on undivided
working interest of affiliated partnerships and joint ventures
in which the Company does not have majority control. The Company
primarily incurs lease acquisition costs and completion costs,
including lease and well equipment, on wells developed in these
partnerships and joint ventures. All significant intercompany
accounts and transactions have been eliminated.
Oil and Gas
Properties:
The Company uses the
successful efforts method of accounting for oil and gas
properties. Under this methodology, costs incurred to acquire
mineral interests in oil and gas properties, to drill and equip
exploratory wells that find proved reserves and to drill and
equip development wells are capitalized.
Costs to drill exploratory wells that do not find
proved reserves, geological and geophysical costs and costs of
carrying and retaining unproved properties are expensed.
Unproved oil and gas properties that are
individually significant are periodically assessed for
impairment of value and a loss is recognized at the time of
impairment by providing an impairment allowance. Other unproved
properties are amortized based on the Company's experience
of successful drilling, terms of leases and historical lease
expirations.
Capitalized costs of producing oil and gas
properties are depleted by the units-of-production method on a
field-by-field basis. Lease costs are depleted using total
proved reserves while lease equipment and intangible development
costs are depleted using proved developed reserves. The
Company's proved properties are evaluated on a
field-by-field basis for impairment. An impairment loss is
indicated whenever net capitalized costs exceed expected future
net cash flow based on engineering estimates. In this
circumstance, the Company recognizes an impairment loss for the
amount by which the carrying value of the properties exceeds the
estimated fair value (based on discounted cash flow).
On the sale or retirement of a complete unit of a
proved property, the cost and related accumulated depletion and
amortization are eliminated from the property accounts, and the
resultant gain or loss is recognized. On the retirement or sale
of a partial unit of proved property, the cost is charged to
accumulated depletion and amortization with a resulting gain or
loss recognized in earnings.
On the sale of an entire interest in an unproved
property, a gain or loss on the sale is recognized, taking into
consideration the amount of any recorded impairment if the
property had been assessed individually. If a partial interest
in an unproved property is sold, the amount received is treated
as a reduction of the cost of the interest retained.
Investment in CJS Pinnacle Petroleum
Services, LLC:
Pinnacle, a
drilling services company, was formed in 1997 and at that time
the Company obtained a 25% interest through its initial capital
contribution of $500 and a 9% loan to Pinnacle of $1,800,000.
The Company accounted for its 25% investment using the equity
method. On January 1, 1999, the Company acquired an
additional 50% interest in Pinnacle by the assumption of
liabilities of approximately $2,267,000. Effective
September 1, 2000, with the acquisition of Warren E&P,
Inc., Pinnacle became a 100% owned subsidiary. On
February 14, 2002, the Company completed the sale of
substantially all of the assets of Pinnacle (Note C).
Revenue
Recognition:
Affiliated
partnerships enter into agreements with the Company to drill
wells to completion for a fixed price. The Company, in turn,
enters into drilling contracts primarily with unrelated parties
to drill wells on a day work basis. Therefore, if problems are
encountered on a well, the cost of that well will increase and
gross profit will decrease and could result in a loss on the
well. The Company recognizes revenue from the turnkey drilling
agreements on a proportional performance method as services are
performed. When estimates of revenues and expenses indicate a
loss, the total estimated loss is accrued.
F-9
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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. Oil and gas sales from marketing
activities result from sales by the Company of oil and gas
produced by affiliated joint ventures and partnerships and are
recognized when delivered to purchasers.
Cash and Cash
Equivalents:
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 which
exceed federally insured limits. At December 31, 2003 and
2002, the Company had approximately 99% and 97%, respectively,
of its cash and cash equivalents with one financial institution.
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. Restricted cash must be used to
purchase zero coupon U.S. Treasury bonds to secure
repayment of the outstanding debentures (Note G).
Accounts
Receivable:
Accounts receivable
include amounts due from affiliated partnerships and joint
ventures for advances and expenditures made by the Company on
behalf of such entities, as well as trade receivables. 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 grants credit to purchasers of oil
and gas and owners of managed properties, substantially all of
whom are located in California and Wyoming.
Investments:
The Company classifies its debt and equity 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 measured at fair value and are classified as
current or noncurrent in proportion to the debt that is being
collateralized. Net unrealized gains and losses are excluded
from net earnings and reported as other comprehensive income
(loss). Realized gains and losses are determined on the basis of
specific identification of the securities.
Offering
Costs:
Costs incurred in
connection with the issuance of long-term debt are capitalized
and amortized over the term of the related debt using the
effective interest rate method. Costs associated with the
issuance of preferred stock are reflected as a reduction of
proceeds and the discount is accreted to the liquidation value
over seven years from the date of issuance.
Contingent Repurchase
Obligation:
A contingent
repurchase obligation is recognized when the present value of
the Company's potential future obligation to affiliated
partnerships under repurchase agreements (Note G) is
greater than their estimated future net revenues from oil and
gas properties, as determined by independent petroleum engineers.
Income Taxes:
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.
F-10
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Use of
Estimates:
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.
Gas
Imbalances:
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.
Capitalized
Interest:
Interest of
approximately $5,700,000, $1,400,000 and $2,300,000 was
capitalized during the years ended December 31, 2003, 2002
and 2001, respectively, relating to California and Wyoming
properties on which exploration activities were in progress
during 2003, 2002 and 2001. Approximately $1,933,000 of interest
previously capitalized was charged against the proceeds of the
conveyance of certain of these unproved properties in 2002
(Note C).
Hedging
Activities:
The Company accounted
for its hedging instruments using the fair value method of
SFAS 133 as amended. For instruments qualifying and
designated as hedges, the increase and decrease in fair value
net of related deferred income taxes is reported in equity.
Gains and losses from the Company's price risk management
activities are recognized in gas revenues when the associated
sale occurs and the resulting cash flows are reported as cash
flows from operating activities. Gains and losses on hedging
contracts that are closed before the hedged production occurs
are deferred until the production month originally hedged. In
the event of a loss of correlation between changes in oil and
gas reference prices under a hedging instrument and actual oil
and gas prices, a gain or loss is recognized currently to the
extent the hedging instrument has not offset changes in actual
oil and gas prices. For the year ended December 31, 2001,
the Company hedged approximately 3,000 dekatherms of natural gas
per day for the months April 2000 through March 2001 based on
the Inside FERC Index price and fixed floor and ceiling prices
of $2.50 and $3.55, respectively. For the year ended
December 31, 2001, the Company incurred losses on its
hedging contracts of approximately $509,000, which are reflected
as a reduction of gas sales from marketing activities.
The Company adopted the provisions under
Statement of Financial Accounting Standards
("SFAS") No. 133,
Accounting for
Derivative Instruments and Hedging Activities
, as amended,
in the first quarter of its year ended December 31, 2001.
In accordance with the transition provisions of
SFAS No. 133, the Company recorded a
net-of-tax-cumulative-effect-type adjustment of approximately
$1,450,000 in accumulated other comprehensive income to
recognize at fair value all derivatives that are designated as
cash flow hedging financial instruments. The Company's
hedging agreements expired in March 2001.
Accounting for Long-Lived
Assets:
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.
Stock Based
Compensation:
The Company has a
stock-based employee plan, which is described more fully in
Note E to the financial statements. The Company accounts
for stock based employee awards using the intrinsic value method
for its employee option plans in which compensation is
recognized only when the fair value of the underlying stock
exceeds the exercise price of the option at the date of grant.
The exercise price of all options equaled or exceeded market
price of the stock at the date of grant. Accordingly, no
compensation cost has been recognized for the options issued.
Had compensation cost been determined based on the fair value of
the options at the grant dates, the Company's net loss
would have been adjusted to the
F-11
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
pro forma amounts for the years ended as
indicated below. Stock based awards to nonemployees are
accounted for under the fair value method of accounting.
2003
2002
2001
Net loss — As reported
$
(5,760,926
)
$
(7,642,430
)
$
(21,073,592
)
Net loss — Pro forma
(7,908,384
)
(8,052,112
)
(21,360,468
)
Pro forma — Basic and diluted loss per
    common share
$
(0.47
)
$
(0.46
)
$
(1.22
)
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
2003, 2002 and 2001, respectively: no expected dividends,
expected volatility of 31%, 33% and 28%, risk-free interest rate
of 3.25%, 3.22% and 3.64% and expected lives of five years for
incentive options issued in 2003, 2002 and 2001, respectively.
The volatility assumptions were developed using a peer group of
similar energy companies. The weighted average fair value of the
options issued in 2003, 2002 and 2001 was $1.57, $0.06 and
$0.73, respectively.
The Black-Scholes options valuation model was
developed for use in estimating the fair value of traded options
that have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price
volatility. The existing models do not necessarily provide a
reliable single measure of the fair value of its employee
options because the Company's employee options have
characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in
management's opinion.
Property and
Equipment:
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 10 years. Major classes of property and
equipment consisted of the following at December 31:
2003
2002
Equipment
$
1,004,891
$
1,047,989
Automobiles and trucks
30,433
33,086
Furniture and fixtures
145,260
148,730
Land and buildings
119,736
137,625
Office equipment
99,090
94,868
1,399,410
1,462,298
Less accumulated depreciation, depletion,
    amortization and impairment
807,747
710,819
$
591,663
$
751,479
Earnings (Loss) Per Common
Share:
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
bonds and debentures are converted using the if-converted
method. Conversion or exercise is not assumed if the results are
antidilutive.
F-12
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Potential common shares relating to options,
preferred stock and convertible bonds and debentures excluded
from the computations of diluted earnings (loss) per share
because they are antidilutive are as follows:
Year Ended December 31
2003
2002
2001
Employee stock options
2,241,012
1,514,459
1,770,000
Convertible bonds and debentures
5,387,820
5,768,903
6,216,022
Preferred stock
6,507,729
1,784,197
—
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 .5 (Note E).
The Convertible Bonds and Debentures may be
converted from the date of issuance until maturity at 100% of
principal amount into common stock of the Company at prices
ranging from approximately $5.00 to $50.00 (Note D).
Goodwill:
During 2001, goodwill was amortized using the straight-line
method over a 15-year life. The Company adopted SFAS
No. 142,
Goodwill and Other Intangible Assets
,
effective January 1, 2002 and as such, has not subsequently
recorded any amortization of goodwill. Under the new rules, the
Company only adjusts the carrying amount of goodwill or
indefinite life intangible assets upon an impairment.
The Company retained CBIZ Valuation Group, Inc.
to assist management in their development of the fair value
analysis in conducting the testing for impairment of its
goodwill, all of which arose in its acquisition of Warren
E&P, which provides turnkey operations and well services.
The results of the analysis indicated that no impairment of
goodwill had occurred. The Company has set the beginning of the
second quarter (April) as the annual period for goodwill
impairment testing. The results will be reported no later than
June 30 of each year.
The following reconciles reported net loss and
related per share amounts to amounts that would have been
presented exclusive of amortization expense recognized for
goodwill that is no longer being amortized:
Year Ended December 31,
2003
2002
2001
Report net loss
$
(5,760,926
)
$
7,642,430
)
$
(21,073,592
)
Goodwill amortization
—
—
269,572
Adjusted net loss
$
(5,760,926
)
$
(7,642,430
)
$
(20,804,020
)
Net loss per share — basic and diluted
Reported net loss
$
(0.34
)
$
(0.44
)
$
(1.20
)
Goodwill amortization
—
—
0.01
Adjusted net loss
$
(0.34
)
$
(0.44
)
$
(1.19
)
Recent
Accounting Pronouncements
In January 2003, the FASB issued FASB
Interpretation 46 (FIN 46),
Consolidation of
Variable Interest Entities
. FIN 46 clarifies the application
of Accounting Research Bulletin 51,
Consolidated
Financial Statements
, for certain entities that do not have
sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties or in which equity investors do not have the
characteristics of a controlling financial interest
("variable interest entities"). Variable interest
entities within the scope of FIN 46 are required to be
consolidated by their primary beneficiary. The primary
F-13
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
beneficiary of a variable interest entity is
determined to be the party that absorbs a majority of the
entity's expected losses, receives a majority of its
expected returns, or both. FIN 46 applies immediately to
variable interest entities created after January 31, 2003,
and to variable interest entities in which an enterprise obtains
an interest after that date. The Company has determined that the
partnerships created after 1998 do not qualify as variable
interest entities.
As a result of the recapitalizations (see
Note J) the Company has consolidated certain drilling
partnerships in which it has majority control and contained
certain repurchase agreements (see Note G).
In June 2001, the Financial Accounting Standard
Board issued SFAS No. 143,
Accounting for Asset
Retirement Obligations
, which requires entities to record
the fair value of a liability for an asset retirement obligation
in the period in which it is incurred and a corresponding
increase in the carrying amount of the related long-lived asset.
This statement is effective for fiscal years beginning after
June 15, 2002. The Company adopted SFAS No. 143
on January 1, 2003 and recorded a net asset of $557,000, a
related liability of $645,000 (using a 10% discount rate) and a
cumulative effect on change in accounting principle on prior
years of $88,000. As of December 31, 2002, the Company had
an allowance for asset retirement obligations of $434,000,
relating to certain nonproducing wells. The new standard had no
material impact on income before the cumulative effect of
adoption in the first quarter of 2003, nor would it have had a
material impact on the quarterly results for 2002 assuming an
adoption of this accounting standard on a proforma basis. During
2003, the asset retirement liability was increased by
approximately $62,000, as a result of accretion and recorded as
interest expense. During 2003, the Company also sold certain
non-strategic oil and gas properties deemed not commercially
productive which resulted in a decrease to the asset retirement
liability of approximately $245,000. The Company has treasury
bills held in escrow with a fair market value of $2,721,000 that
are legally restricted for potential plugging and abandonment
liability in the Wilmington field.
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,
2003
2002
U.S. Treasury Bonds, stripped of interest,
    maturing 2007 through 2023, aggregate par value of $23,414,000
    and $17,780,000, respectively
Amortized cost
$
13,920,985
$
8,255,373
Gross unrealized gains
1,290,150
1,614,300
Estimated fair value
$
15,211,135
$
9,869,673
During 2003, 2002 and 2001, the Company
recognized approximately $(87,000), $461,000 and $(3,100),
respectively, of unrealized gains (losses) on its trading
securities and $109,000, $28,000 and $21,000, respectively, of
realized gains from its investments in trading and
available-for-sale securities. During 2003, 2002 and 2001, the
Company recognized realized gains of approximately $109,000,
$28,000 and $21,000, respectively, resulting 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
collateralizing its commitment under certain repurchase
agreements (Note G).
F-14
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The amortized cost and estimated fair values of
available-for-sale securities, by contractual maturity, at
December 31, 2003 are shown below.
Amortized
Estimated Fair
Cost
Value
Due after one year through five years
$
3,092,367
$
3,098,169
Due after five years through ten years
6,079,662
6,698,081
Due after ten years
4,748,956
5,414,885
Total
$
13,920,985
$
15,211,135
Note C — Sale of Assets
Pinnacle Assets
During 2001, the Company initiated a plan to
dispose of substantially all assets of Pinnacle which was
completed on February 14, 2002, for a purchase price of
$4.2 million to Basic Energy Services, Inc. ("Basic
Energy"). Pinnacle's operations comprised a portion of
the Company's well service business. Under the purchase
agreement dated December 31, 2001, Basic Energy paid the
Company $3.7 million in cash at the closing and $500,000 in
contract drilling services credits issued by Basic Energy, which
may be utilized by the Company over a three-year period with a
maximum of $25,000 in any month. Additionally, the Company
entered into a non-compete agreement with Basic Energy.
In connection with the plan of disposal, the
Company determined that the carrying value of Pinnacle's
assets exceeded their fair values. Accordingly, an impairment
expense of approximately $825,000, which is included as part of
depreciation, depletion and amortization, and represents the
excess of the carrying value of $4,568,198 over the fair value
of $3,742,941, has been charged to operations in 2001. The fair
value is based on the net selling price of the completed
transaction. The components of the carrying value and fair value
are as follows:
Carrying Value
Fair Value
Goodwill
$
223,042
$
—
Property and equipment
4,345,156
3,742,941
$
4,568,198
$
3,742,941
Kirby Decker
Acreage
During June 2002, the Company initiated a plan to
dispose of its unproved Kirby Decker acreage, which was
completed in August 2002. The Company sold all of its
24,133 gross (22,075 net) acres, which was located in
Bighorn County, Montana for proceeds of approximately $895,000.
In connection with the disposal, the Company determined that the
carrying value of this property exceeded its fair value.
Accordingly, an impairment expense of approximately $1,100,000,
was included as part of depreciation, depletion, amortization
and impairment expense for the year ended December 31,
2002. The fair value was based on the estimated selling price of
the property.
Atlantic Rim
Project
The Company signed a property exchange and
development agreement with Anadarko E&P Company LP
("Anadarko"), a wholly owned subsidiary of Anadarko
Petroleum Corporation, on December 13, 2002. As a result of
these transactions, the Company effectively sold a partial
interest in unproved properties and recognized a gain of
approximately $4,300,000 after recovery of its unproved property
costs.
F-15
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Pursuant to the exchange agreement, the Company
conveyed to Anadarko its interest in certain coalbed methane
properties of approximately 86,000 net acres within a defined
area of mutual interest ("AMI") located in the
Washakie Basin, Carbon County, Wyoming. Anadarko conveyed to the
Company its interest in certain acreage in the AMI with each
party owning a 50% interest in approximately 141,000 net acres
in the AMI.
The Company received $12,000,000 in cash and a
deferred payment commitment of $6,000,000 for the three
(3) year period commencing August 1, 2002 and a
reimbursement of prior drilling expenses of approximately
$2,200,000. Anadarko will pay for the Company's
proportionate share of the AMI costs, as defined, associated
with exploration and development of oil and gas properties for
up to $2,000,000 for each of the three years until Anadarko has
paid $2,000,000 for each such twelve-month period. Subject to
mutually agreed upon force majeure events, on each
August 1, Anadarko will pay the Company the difference, if
any, between $2,000,000 and the amount of costs and expenses
actually paid by Anadarko during the preceding year. At
December 31, 2003, the Company had $2,000,000 in deferred
credits remaining, which are expected to be utilized in 2004.
Note D — Long-Term Debt
At December 31,
2003
2002
Sinking Fund Debentures, due December 31,
    2007, bearing interest at 12%, due in monthly payments. Annual
    Sinking Fund payments, based on 20% of total outstanding
    principal, commencing on December 31, 2002. As of
    December 31, 2003 and 2002, principal collateralized by
    $3,206,000 and $0, respectively, principal amount of zero coupon
    U.S. Treasury Bonds due November 15, 2007
$
9,616,000
$
14,376,000
Secured Convertible Debentures, due
    December 31, 2009, bearing interest at 12%, due in monthly
    payments. As of December 31, 2003 and 2002, principal
    collateralized by $790,000 and $790,000, respectively, principal
    amount of zero coupon U.S. Treasury Bonds due
    November 15, 2009
790,000
790,000
Secured Convertible Bonds, due December 31,
    2010, bearing interest at 12%, due in monthly payments. As of
    December 31, 2003 and 2002, principal collateralized by
    $1,705,000 and $1,715,000, respectively, principal amount of
    zero coupon U.S. Treasury Bonds due November 15, 2010
1,705,000
1,715,000
Sinking Fund Convertible Debentures, due
    December 31, 2010, bearing interest at 13.02%, due in
    monthly payments. Annual Sinking Fund payments, based on 8.33%
    of total outstanding principal, commenced on December 31,
    1999. As of December 31, 2003 and 2002, principal
    collateralized by $6,107,000 and $3,774,000, respectively,
    principal amount of zero coupon U.S. Treasury Bonds due
    November 15, 2010
14,655,200
14,780,200
Sinking Fund Convertible Debentures, due
    December 31, 2015, bearing interest at 13.02%, due in
    monthly payments. Annual Sinking Fund payments, based on 5.88%
    of total outstanding principal, commenced on December 31,
    1999. As of December 31, 2003 and 2002, principal
    collateralized by $3,469,000 and $2,248,000, respectively,
    principal amount of zero coupon U.S. Treasury Bonds due
    November 15, 2015
11,792,500
12,137,500
Secured Convertible Bonds, due December 31,
    2016, bearing interest at 12%, due in monthly payments. As of
    December 31, 2003 and 2002, principal collateralized by
    $1,365,000 and $1,460,000, respectively, principal amount of
    zero coupon U.S. Treasury Bonds due November 15, 2016
1,365,000
1,460,000
F-16
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
At December 31,
2003
2002
Sinking Fund Convertible Debentures, due
    December 31, 2017, bearing interest at 12%, due in monthly
    payments. Annual Sinking Fund payments, based on 5.56% of total
    outstanding principal, commenced on December 31, 1999. As
    of December 31, 2003 and 2002, principal collateralized by
    $1,223,000 and $802,000, respectively, principal amount of zero
    coupon U.S. Treasury Bonds due November 15, 2017
5,500,000
6,590,000
Secured Convertible Bonds, due December 31,
    2020, bearing interest at 12%, due in monthly payments. As of
    December 31, 2003 and 2002, principal collateralized by
    $1,485,000 and $1,635,000, respectively, principal amount of
    zero coupon U.S. Treasury Bonds due November 15, 2020
1,485,000
1,635,000
Secured Convertible Bonds, due December 31,
    2022, bearing interest at 12%, due in monthly payments. As of
    December 31, 2003 and 2002, principal collateralized by
    $1,186,000 and $1,186,000 respectively, principal amount of zero
    coupon U.S. Treasury Bonds due November 15, 2022
1,186,000
1,186,000
48,094,700
54,669,700
Less current maturities
4,809,470
5,466,970
Long-term portion
$
43,285,230
$
49,202,730
Other long-term liabilities consists of the
    following at December 31:
Other miscellaneous long-term debt, consisting of
    debt collateralized by treasury stock and asset retirement
    obligations
$
1,821,464
$
1,532,109
Less current maturities
208,383
178,980
Long-term portion
$
1,613,081
$
1,353,129
During 2002, the Company entered into an
agreement to purchase 702,500 shares of common stock from a
stockholder through the issuance of a non-interest bearing note.
The Company discounted the non-interest bearing note at 10% and
the outstanding balance at December 31, 2002 and 2003 was
approximately $984,000 and $925,000, respectively, net of
discount of approximately $549,000 and $462,000, respectively,
which is included in other long-term liabilities. The note
requires monthly payments of $13,333 until August of 2012 and is
collateralized by treasury stock. In the event of default as
defined by the agreement, the only remedy available to the
stockholder is the issuance of the common stock.
During 2003 and 2002, the Company exchanged
preferred stock for 2007 debentures with an outstanding
principal of $3,858,000 and $979,000, respectively. Also, during
2003, the Company exchanged preferred stock for 2017 debentures
with an outstanding principal of $864,000. The estimated fair
value of the preferred stock, which was based on sales to
third-party accredited investors, equaled the carrying value of
the debenture. As such, no gain or loss was recognized for the
exchange.
F-17
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The convertible bonds and 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 of the bonds and
debentures and range from approximately $5.00 to $50.00.
Conversion of debt would increase the number of shares
outstanding at December 31 as follows:
Outstanding
Per Share
Common
Principal
Conversion
Shares
2003
Maturity Date
Amount
Price
If Converted
Sinking Fund 12% Bond
December 31, 2007
9,616,000
—
—
Secured Convertible 12% Bond
December 31, 2009
$
790,000
$
8.00
98,750
Secured Convertible 12% Bond
December 31, 2010
1,705,000
8.00
213,125
Sinking Fund 13.02% Bond
December 31, 2010
14,655,200
5.00
2,931,040
Sinking Fund 13.02% Bond
December 31, 2015
11,792,500
8.00
1,474,063
Secured Convertible 12% Bond
December 31, 2016
1,365,000
8.00
170,625
Sinking Fund 12% Bond
December 31, 2017
5,500,000
15.00
366,667
Secured Convertible 12% Bond
December 31, 2020
1,485,000
20.00
74,250
Secured Convertible 12% Bond
December 31, 2022
1,186,000
20.00
59,300
$
48,094,700
5,387,820
Outstanding
Per Share
Common
Principal
Conversion
Shares
2002
Maturity Date
Amount
Price
If Converted
Sinking Fund 12% Bond
December 31, 2007
14,376,000
—
—
Secured Convertible 12% Bond
December 31, 2009
$
790,000
$
8.00
98,750
Secured Convertible 12% Bond
December 31, 2010
1,715,000
8.00
214,375
Sinking Fund 13.02% Bond
December 31, 2010
14,780,200
5.00
2,956,040
Sinking Fund 13.02% Bond
December 31, 2015
12,137,500
8.00
1,517,188
Secured Convertible 12% Bond
December 31, 2016
1,460,000
8.00
182,500
Sinking Fund 12% Bond
December 31, 2017
6,590,000
10.00
659,000
Secured Convertible 12% Bond
December 31, 2020
1,635,000
20.00
81,750
Secured Convertible 12% Bond
December 31, 2022
1,186,000
20.00
59,300
$
54,669,700
5,768,903
F-18
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Outstanding
Per Share
Common
Principal
Conversion
Shares
2001
Maturity Date
Amount
Price
If Converted
Sinking Fund 12% Bond
December 31, 2007
$
15,390,000
—
—
Secured Convertible 12% Bond
August 31, 2002
470,000
$
4.50
104,444
Sinking Fund 12% Bond
August 31, 2002
55,000
4.50
12,222
Secured Convertible 12% Bond
December 31, 2009
840,000
7.00
120,000
Secured Convertible 12% Bond
December 31, 2010
1,740,000
7.00
248,571
Sinking Fund 13.02% Bond
December 31, 2010
15,095,200
5.00
3,019,040
Sinking Fund 13.02% Bond
December 31, 2015
12,737,500
8.00
1,592,188
Secured Convertible 12% Bond
December 31, 2016
1,580,000
7.00
225,714
Sinking Fund 12% Bond
December 31, 2017
7,215,000
10.00
721,500
Secured Convertible 12% Bond
December 31, 2020
1,780,000
17.50
101,714
Secured Convertible 12% Bond
December 31, 2022
1,236,000
17.50
70,629
$
58,138,700
6,216,022
Each year, holders of the secured convertible
debentures and sinking fund convertible debentures may tender to
the Company up to 10% of the aggregate debentures issued.
Assuming annual tender of the maximum amount possible, the
estimated principal that can be tendered by the secured
convertible and sinking fund debenture holders, including
contractual maturities, is as follows:
Fiscal Year
Ending
December 31,
2004
$
4,809,470
2005
4,328,523
2006
3,895,671
2007
9,815,160
2008
2,524,588
Thereafter
22,721,288
$
48,094,700
Annual sinking fund requirements are as follows:
Fiscal Year
Ending
December 31,
2004
$
2,928,915
2005
3,132,303
2006
3,221,234
2007
3,368,266
2008
1,845,447
Thereafter
9,065,409
$
23,561,574
F-19
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note E — Stockholders'
Equity
During 2003 and 2002, the Company issued
1,320,164 and 359,687 shares, respectively, of convertible
preferred stock ("preferred stock") through a private
placement with accredited investors at a price of $12 per share
for gross proceeds of $15,841,968 and $4,316,244, respectively.
Also, during 2003 and 2002, the Company issued 3,005,186 and
1,342,960 shares, respectively, of preferred stock to its
affiliated limited partnerships under a partnership
recapitalization offering at a price of $12 per share (see
Note J). The Company also exchanged 393,522 and 81,550
shares of preferred stock for 2007 debentures in 2003 and 2002,
respectively (see Note D). The preferred stock has an 8%
cumulative dividend, payable quarterly. Preferred dividends of
approximately $1.5 million and $16,000 were accrued at
December 31, 2003 and 2002 and paid in the following month.
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 at the
election of the holder, commencing one year after the date of
issuance. Each outstanding redeemable convertible preferred
share is convertible into common stock of the Company based on
the table below. The conversion rate is subject to adjustment as
defined by the agreement.
Preferred to
Period
Common
Until June 30, 2005
1 to 1
July 1, 2005 through June 30, 2006
1 to .75
July 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
capital. The accretion of preferred stock results in a reduction
of earnings per share applicable to common stockholders.
During 2003, the Board of Directors approved and
the Company issued 1,374,553 stock options to officers and
employees of the Company exercisable at prices ranging from $4
to $10 per share. The options are exercisable at a price not
less than the fair market of the stock at the date of grant,
have an exercisable period of five years and generally are fully
vested at the date of grant. During 2003, certain employees
forfeited 648,000 stock options as a result of terminations.
On September 6, 2001, the Board of Directors
approved the issuance of 2,520,613 stock options to officers and
employees under certain plans subject to stockholder approval.
These plans were approved at the annual stockholder meeting in
2002. As a result, the Company issued and granted a total of
2,505,242 options exercisable at $10 per share. The options are
exercisable at a price not less than the fair market of the
stock at the date of grant, have an exercisable period of five
years and generally are fully vested at the date of grant. On
October 1, 2002, in order to improve the Company's
capital structure, senior management and other employees
voluntarily surrendered to the company and terminated 2,760,783
stock options issued in 2001 that were exercisable at prices
ranging from $4 to $10 per share through September 4, 2006.
In September 2000, the Company adopted an
employee stock option plan for certain employees with a maximum
of 1,975,000 shares which may be issued and granted a total of
1,642,000 options exercisable at $4.00 per share. During 2001,
the Company issued and granted a total of 153,000 options under
the plan. During 2002, options under this plan were not granted
by the Company. The options are exercisable at a price not less
than the fair market of the stock at the date of grant, have an
exercisable period of five years and generally vest 25% after
one year, 50% after two years and the final 25% three years
after the date of
F-20
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
grant. A total of 1,050,000 options granted in
2000 to certain of the employees vest 50% upon grant and 25%
each on the second and third anniversaries of the date of grant.
A summary of the status of the Company's
options issued to employees as of December 31, 2003, 2002
and 2001 and changes during the years ended on those dates is
presented below:
Incentive
Weighted Average
Options
Exercise Price
Options outstanding — January 1,
    2001
1,642,000
$
4.00
Issued
153,000
4.00
Exercised
—
Expired
—
Forfeited
(25,000
)
4.00
Options outstanding — December 31,
    2001
1,770,000
4.00
Issued
2,505,242
10.00
Exercised
—
Expired
—
Forfeited
(2,760,783
)
8.74
Options outstanding — December 31,
    2002
1,514,459
5.29
Issued
1,374,553
4.05
Exercised
—
Expired
—
Forfeited
(648,000
)
4.00
Options outstanding — December 31,
    2003
2,241,012
$
5.10
The following table summarizes information about
the Company's stock options outstanding at
December 31, 2003.
Options Outstanding
Weighted Average
Options Exercisable
Exercise Price
at Year End
Remaining Life (in years)
at Year End
$4.00
1,817,813
3.68
1,762,563
$7.00
25,000
4.94
25,000
$10.00
398,199
2.95
398,199
Total
2,241,012
3.56
2,185,762
F-21
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note F — Income Taxes
The Company and its subsidiaries file a
consolidated income tax return.
The Company's effective income tax rate
differed from the federal statutory rate as follows:
2003
2002
2001
Income taxes at federal statutory rate
$
(295,767
)
$
(2,753,056
)
$
(7,113,443
)
Change in valuation allowance
364,836
1,812,915
11,560,422
Nondeductible expenses
46,517
55,126
264,101
State income taxes at statutory rate
(52,194
)
(485,833
)
(1,255,314
)
Adjustment of estimated income tax provision of
    prior year
65,608
899,550
(3,312,841
)
Other
—
298
8,775
$
129,000
$
(471,000
)
$
151,700
The components of the net deferred tax asset are
as follows as of December 31:
2003
2002
Deferred tax assets related to:
Net operating loss carryforward
$
25,977,793
$
22,868,443
Oil and gas properties and tangible equipment
—
2,240,782
Other
314,400
134,422
26,292,193
25,243,647
Less valuation allowance
24,320,523
23,955,687
Total deferred tax assets
1,971,670
1,287,960
Deferred tax liabilities related to:
Capitalized intangible assets
887,172
636,162
Oil and gas properties and tangible equipment
570,706
—
Net unrealized gain on investments
513,792
651,798
Total deferred tax liabilities
1,971,670
1,287,960
Net deferred tax asset
$
—
$
—
The valuation allowance increased $364,836,
$1,812,915 and $11,560,422 for the years ended December 31,
2003, 2002 and 2001, respectively.
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.
At December 31, 2003, the Company had net
operating loss carryforwards for federal income tax purposes of
approximately $65,000,000, which begin to expire in 2012.
F-22
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note G — Commitments And
Contingencies
General
Commitments
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.
The maximum termination compensation for all executives is
$2,889,000, at December 31, 2003.
Oil and Gas
Partnerships
The Company is the managing general partner in
various oil and gas partnerships. Accordingly, the Company is
unconditionally liable for liabilities that may be incurred by
such partnerships. Additionally, the Company has indemnified
various working interest (general) partners of affiliated
partnerships against any liability that may be incurred in
connection with the partnerships, in excess of such
partner's interest, in the undistributed net assets of the
partnership and insurance proceeds thereof which continues
through the date of termination of the partnership from 2025 to
2030, unless the partnership is dissolved at an earlier date.
The partnerships have no liabilities except accounts payable to
the Company for lease operating and administrative expenses.
The Company has a contract with Western Gas
related to its Piper Federal lease. The contract is for the sale
of a minimum of 2,500 Mcf of gas per day at the wellhead
and expires on February 1, 2005. If the Company fails to
deliver 2,500 Mcf of gas per day, Western Gas may charge the
Company a deficiency fee. The deficiency fee is defined as the
amount of deficient Mcf times 90% (amount below 2,500 Mcf times
90%) times the deficiency rate of $0.47 per Mcf representing
gathering, compression and transportation charges. The maximum
deficiency charge for 2004 and 2005 totals approximately
$375,000. At December 31, 2003, no deficiency fees were due
under the contract.
The Company has a contract with Western Gas
related to its Haight Less lease through December 31, 2004.
The contract is for the sale of a minimum of 550 Mcf of gas
per day at the wellhead. Since approximately 1998, the contract
has been extended on a year-by-year basis. If the Company fails
to deliver 550 Mcf of gas per day, Western Gas reduces the
sales price by a nominal amount. During 2003, 2002 and 2001, the
Company was in compliance with the purchase contract.
The Company has a transportation contract with
Williston Basin Interstate ("WBI") through
October 8, 2006 related to its LX Bar lease. If the Company
fails to deliver 6,000 Mcf of gas per day, WBI may charge the
Company a transportation fee. The transportation fee is defined
as the amount of deficient Mcf times the transportation rate of
approximately $0.30 per Mcf. During 2003, 2002 and 2001, the
Company paid a transportation fees of approximately $169,000,
$276,000 and $172,000, respectively. The maximum deficiency
charge through the period of contract expiration is
approximately $1,800,000.
Repurchase
Agreements
Under certain repurchase agreements, the investor
partners in certain affiliated drilling programs have a right to
have their interests repurchased by the Company. Such purchase
price is calculated at a formula price and is payable in seven
to 25 years from the date of admission to the program. For
certain affiliated programs formed prior to 1998, the maximum
purchase price for all such interests was fully secured at
maturity by zero coupon U.S. Treasury Bonds held by an
independent trust company. The face amounts of such securities
F-23
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
are released to the Company when equal amounts of
cash distributions are made to investors. Under certain other
repurchase agreements formed from 1998 to 2001, the investors
have a right to have their interests repurchased by the Company
under the same formula price seven years from the date of the
original investment. In determining the amount of the contingent
repurchase obligation for the 1998 to 2001 programs, the present
value of the obligation is computed based on the lesser of the
formula purchase price or the estimated discounted present value
("PV-10") of future net revenues of proved developed
and undeveloped reserves of each program, net of future capital
costs and the Company's working interest. During 2002, the
Company contributed leases to certain drilling programs and
recognized an expense of approximately $254,000. As a result of
the recapitalizations (see Note J), any payment made under
pre-1998 guarantees would be recorded as a reduction to minority
interest as shown on the Company's balance sheet. At
December 31, 2003, the maximum cash outlay relating to the
pre-1998 contingent repurchase obligation was $8,082,511, which
is net of U.S. Treasury Bonds with a face value of $1,374,000.
Also as of December 31, 2003, based on the
December 31, 2003 reserve reports of the respective
drilling programs, the aggregate PV-10 value of the assets in
the 1998 to 2001 programs was $15.8 million. The formula
purchase price as of December 31, 2003 was
$96.5 million. Because the PV-10 value is less than the
formula purchase price, the Company's maximum repurchase
obligation as of December 31, 2003 was equal to the PV-10
of $15.8 million. In the event of repurchase, Warren
receives the investors interest in the program, which includes
their pro rata share of the program's reserves and related
future cash flows.
Trust
Indenture Agreements
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
outstanding when due at maturity. At December 31, 2003 and
2002, the face amounts of U.S. Treasury Bonds securing the
Company's obligation under the Trust Indenture Agreements
were $20,536,000 and $13,610,000, respectively, and the market
values of these U.S. Treasury Bonds were approximately
$14,023,000 and $8,108,000, respectively.
Leases
The Company leases office space in New York City,
which expires in March 2008. The Company's oil and gas
administrative office in Casper, Wyoming occupies 3,750 square
feet under a lease currently being negotiated. In June 2003, the
Company entered into an office lease in Roswell, New Mexico,
which expires in May 2005.
Future minimum annual rental payments, which are
subject to escalation and include utility charges as of
December 31, 2003, are as follows:
Year ending
December 31,
2004
$
166,486
2005
160,186
2006
155,686
2007
155,686
2008
38,921
$
676,965
Rent expense under these leases was approximately
$162,000, $254,000 and $281,000 for the years ended
December 31, 2003, 2002 and 2001, respectively.
F-24
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Litigation
In 1998, Warren E&P, Inc. was sued in the
81st Judicial District Court of Frio County, Texas by Stricker
Drilling Company, Inc. and Manning Safety Systems to recover the
value of lost equipment based on a well blow out. Warren was
later joined in the suit as a defendant. As a result of the
lawsuit, Gotham Insurance Company, Warren E&P's well
blow-out insurer, intervened. The suit was settled in 1999 with
all parties except Gotham. Gotham paid over $1.7 million
under the insurance policy and now seeks a refund of
approximately $1.5 million of monies paid, denying
coverage, and alleging fraud and misrepresentation and a failure
of Warren E&P to act with due diligence and pursuant to
safety regulations. Warren E&P countersued for the remaining
proceeds under the policy coverage. In the summer and fall of
2000, summary judgments were entered for Warren E&P on
essentially all claims except its bad faith claims against
Gotham. Gotham's claims against Warren E&P and Warren
were rejected. Final judgment was rendered by the District Court
on May 14, 2001, in Warren E&P's favor for the
remaining policy proceeds, interest and attorney fees. Gotham
appealed the final judgment to the San Antonio Court of Appeals
seeking a refund of approximately $1.5 million. On
July 23, 2003, a three judge panel of the San Antonio Court
of Appeals rendered its decision in favor of Gotham on all
points, except for the amount of restitution owed by Warren
E&P and related parties, reversing the earlier summary
judgment entered by the trial court for Warren E&P. Although
the three judge panel of the San Antonio Court of Appeals
acknowledged that Gotham asked for the Court to render its
judgment in Gotham's favor on its restitution claims,
Gotham gave no particulars, and therefore the Court of Appeals
remanded Gotham's restitution claims to the trial court for
further proceedings consistent with its opinion. Although the
ultimate resolution is uncertain, counsel has advised Warren
E&P that it believes the three judge panel of the San
Antonio Court of Appeals committed numerous errors of fact and
law, primarily relying on their erroneous conclusion that Warren
E&P as operator of the oil well incurred no loss.
Accordingly, in November 2003 Warren E&P appealed the San
Antonio Court of Appeals panel decision to the Texas Supreme
Court. On February 17, 2004, we were advised that the Texas
Supreme Court had accepted our appeal and requested the parties
to submit full briefs regarding our petition.
The Company is a party to various matters of
litigation arising in the normal course of business (see Note
I). 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.
Note H — Employee Benefit
Plans
The Company has a retirement plan covering
substantially all qualified corporate employees under
section 401(k) of the Internal Revenue Code. The Company
contributed for each participant a matching contribution equal
to 50% of the participant's contribution to a maximum of 6%
of each employee's annual compensation. The Company may
also make discretionary contributions. The Company's
expenses under the plan were approximately $66,000, $78,000 and
$92,000 for the years ended December 31, 2003, 2002 and
2001, respectively.
Note I — Related Party
Transactions
Affiliated
Partnerships
The Company contributed mineral rights with an
agreed-upon fair value of $142,247 and $184,916 during 2003 and
2002, respectively, to affiliated partnerships in exchange for a
10% interest in these partnerships. The mineral rights remain at
cost in the Company's property accounts. Affiliated
partnerships paid $6,077,150, $5,163,250 and $14,443,250 to the
Company during 2003, 2002 and 2001, respectively, under fixed
price turnkey drilling contracts. At December 31, 2003 and
2002, accounts receivable from affiliated partnerships were
approximately $389,000 and $921,000, respectively, relating
primarily to administrative costs paid by the Company on behalf
of the partnerships.
F-25
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
During the third quarter of 2003, certain joint
venture general partnerships formed between accredited investors
and Warren Resources, Inc. commenced a vote to (a) amend
their joint venture agreement to allow for two classes of
partners: preferred partners and common partners and
(b) allow partners to select whether they wanted to be
preferred partners having certain preferred rights in the joint
venture by consenting to the additional capital contributed by
the Company in the form of its unregistered preferred shares.
For its additional capital contribution, Warren received
additional common partner interests in the joint venture. During
the fourth quarter of 2003, the joint ventures received the
necessary 50% of affirmative votes required to effect the
transaction. As a result, the Company issued approximately
1,048,000 preferred shares with an estimated value of
$12,576,000 to the joint ventures as consideration for the joint
ventures working interest in certain unproved acreage in
Wyoming. Additionally, approximately $4,604,000 of deferred
income was eliminated as a result of the transaction and was
recorded as a reduction in the property basis.
Other Joint
Venture Agreements
Warren E&P, Inc. is party to separate joint
venture agreements with the affiliated partnerships. The
agreements form a joint venture between Warren E&P and each
partnership for the purpose of participating in the drilling and
re-completing of oil wells. Under the terms of the agreements,
property acquisition and capital equipment costs are borne by
Warren E&P. Generally, intangible drilling and development
costs are borne by the partnerships.
Under the terms of the joint venture agreement,
the affiliated partnerships have an initial 75% interest in the
aggregate net profits of the properties. Once the partnerships
have received distributions equal to the payments under the
turnkey contract, Warren E&P will receive an additional
reversionary interest of 15% and the partnerships' interest
will be reduced to 60%.
The partnerships are parties to a standard form
of operating agreement with Warren E&P (the
"Operator") pursuant to which the Operator will be
responsible for the operation of the wells. Also, the Operator
is engaged to supervise all drilling and recompletion of wells,
on behalf of all working interests, and has full control of all
operations of the wells as covered under the operating
agreement. Each partnership pays the Operator its pro rata share
of monthly operating expenses.
In May 1999, the Company entered into an
agreement with Magness Petroleum Company ("Magness")
to form a joint venture for the purpose of participating in the
horizontal drilling and re-completing of existing oil wells and
the drilling of new oil wells within the Wilmington Oil Field in
Los Angeles County, California.
On September 28, 1999, Magness filed a
complaint against Warren, Warren E&P, and certain Warren
subsidiaries in the Superior Court of Los Angeles County,
alleging that we had breached our joint venture agreement with
Magness and an alleged oral agreement regarding advance payment
of expenses for drilling and completion operations. The
Wilmington Field comprises approximately 81% of the estimated
present value of our proven reserves and has a carrying value of
approximately $54 million. Magness sought dissolution of
the joint venture, an accounting and a declaratory judgment as
to the rights of the parties under the joint venture agreement.
The Company was successful in enforcing the arbitration
provision in the joint venture agreement and entered into an
agreement with Magness to submit the matter for arbitration by
the Judicial Arbitration Mediation Services, or
"JAMS". The arbitrator ruled that the joint venture
agreement is a valid enforceable agreement, declined to dissolve
the joint venture, denied Magness' claims for breach of
contract, and held that he and JAMS would retain jurisdiction to
enforce the Final Award. On August 8, 2001, Magness filed a
demand with the American Arbitration Association, or
"AAA," reasserting its claims for dissolution of the
joint venture and breach of contract. Subsequently, Warren
sought to enforce the original Final Award rendered in the JAMS
arbitration. A procedural determination of proper arbitration
forum was eventually determined by the California Court of
Appeals in December 2002 and a Motion for Clarification filed in
January 2003 before the California Superior Court, on
September 24, 2003. The
F-26
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
California Superior Court ordered that
Warren's motion to enforce the Final Award covering
unauthorized direct labor charges and tangible costs be heard by
JAMS and that Magness's theory of dissolution of the Joint
Venture and Warren's drilling rights if the Joint Venture
is not dissolved and Warren's claims for damages for
Magness preventing resumption of drilling activities be heard by
AAA. On January 14, 2004, Warren filed an Amended Answer
and Counterclaim in the AAA arbitration denying Magness's
request to dissolve the joint venture and to drill outside of
the joint venture. Warren seeks damages against Magness in the
amount of $15 million on a number of grounds including
breach of contract. Warren also requests that Magness be removed
as operator for the Wilmington Field because of a breach of its
duties and that an independent operator be appointed in its
place. Accordingly, pending final resolution, further
development of the Wilmington Field will be curtailed (see
Note P).
Other
Income
In December of 2002, the Company's Executive
Vice President died in an accident. The Company carried life
insurance in the amount of approximately $3,750,000 on this
officer. At December 31, 2002, a receivable for these
insurance proceeds, which was collected in February of 2003, was
recorded and income of approximately $3,750,000 was recognized
in Interest and Other Income on the Statement of Operations.
Note J — Recapitalization
Offers
During the fourth quarter of 2002,
13 limited partnerships, of which the Company was the
managing general partner, commenced a vote solicitation of their
limited partners (the "Partnership Recapitalization
Offers") to: (1) obtain the requisite two-thirds
affirmative vote of their respective partners to convert the
drilling program from a Delaware limited partnership into a
Delaware limited liability company (the "LLC") wherein
all LLC members would have limited liability, including the
Company, and (ii) partners could convert their interests to
preferred interests ("Preferred Members"). Upon
conversion to an LLC, the Company agreed to contribute as
additional capital to the LLC its unregistered 8% convertible
preferred stock with a value equal to between 110% to 120% of
the potential repurchase price of consenting Preferred
Members' interests calculated as of December 31, 2002.
The Company would receive additional standard membership
interests in the LLC and be specially allocated, pro rata as a
standard member, additional beneficial interests in the oil and
gas properties owned by their respective programs (the
"Recapitalization"). Preferred Members no longer have
repurchase rights under the original buy/sell agreements.
Standard members continue to have repurchase rights. At
December 31, 2002, six of the thirteen programs obtained
the requisite votes to convert to LLCs and because of the
majority control by the Company were consolidated in the
financial statements for the year ended December 31, 2002.
As a result of the conversions, the Company issued 1,342,960
preferred shares to these six LLC's in 2002 with an
estimated fair value of $16,115,520. At March 31, 2003, the
remaining seven programs obtained the requisite votes to convert
to LLCs and on average 72.9% of the program members elected to
become Preferred Members in their LLC. During the first quarter
the Company issued 1,641,628 preferred shares to the remaining
seven LLCs as a capital contribution, with an estimated fair
value of $19,699,536 and received its pro rata share of
additional standard membership interests in the LLCs. The fair
value of the preferred shares was based on actual cash sales to
independent parties in this time period. Due to the majority
control of these thirteen affiliated partnerships, the Company
has consolidated these entities for financial reporting purposes
at December 31, 2003. The Company
F-27
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
accounted for these acquisitions as purchase
transactions with the estimated fair value of assets acquired
and liabilities assumed in the acquisition as follows:
2003
2002
Estimated fair value of assets acquired
Current assets
$
3,512
$
4,350
Oil and gas properties
28,342,950
25,252,358
Total fair value of assets
28,346,462
25,256,708
Liabilities assumed
Accounts payable
144,122
171,110
Minority interest
8,502,804
8,970,078
Total liabilities assumed
8,646,926
9,141,188
Cost of acquisition
$
19,699,536
$
16,115,520
Subsequent to the recapitalization offers that
closed on March 31, 2003, and December 31, 2002,
certain minority interest limited partners elected to convert to
preferred members, which resulted in the Company issuing 315,222
preferred shares to these individuals with an estimated fair
value of $3,782,664.
The following summarizes pro forma unaudited
results of operations for the years ended December 31,
2003, 2002 and 2001, as if these acquisitions had been
consummated immediately prior to January 1, 2001. These pro
forma results are not necessarily indicative of future results.
Pro Forma (Unaudited)
Year Ended December 31,
2003
2002
2001
Revenues
$
26,531,361
$
33,960,704
$
61,007,202
Net loss
$
(658,131
)
$
(10,333,144
)
$
(20,903,952
)
Loss per share, basic and diluted
$
(0.31
)
$
(0.60
)
$
(1.19
)
The operations of the affiliated partnerships are
included in the accompanying consolidated operating statements,
subsequent to December 31, 2002, for the 2002 acquisition
and subsequent to March 31, 2003, for the 2003 acquisition.
Note K — Fair Value of
Financial Instruments
The following methods and assumptions were used
to estimate the fair value of each class of financial
instruments and does 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
Securities and Available For Sale.
The fair values are based upon
quoted market prices for those or similar investments.
Restricted
Cash.
The balance sheet carrying
value amounts of restricted cash approximates fair value of such
assets.
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.
F-28
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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.
2003
2002
Carrying
Carrying
Fair Value
Amount
Fair Value
Amount
Financial assets
Cash and cash equivalents
$
24,528,999
$
24,528,999
$
23,184,936
$
23,184,936
U.S. Treasury bonds and other
    investments — trading securities
201,152
201,152
78,383
78,383
U.S. Treasury bonds — available for sale
15,211,135
15,211,135
9,869,673
9,869,673
Restricted cash
—
—
3,637,775
3,637,775
Financial liabilities
Fixed rate debentures
$
(53,169,798
)
$
(48,094,700
)
$
(61,691,195
)
$
(54,669,700
)
Other long-term liabilities
(1,821,464
)
(1,821,464
)
(1,532,109
)
(1,532,109
)
Note L — 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:
2003
2002
2001
Property acquisition — unproved
$
9,967,002
$
176,030
$
6,912,000
Property acquisition — proved
28,389,424
25,419,962
—
Exploration costs
525,098
471,948
3,763,417
Development costs
10,425,296
3,888,221
6,269,004
$
49,306,820
$
29,956,161
$
16,944,421
Asset retirement costs of approximately $307,000
are included in proved property acquisition costs for 2003.
Of the above development costs incurred for the
years ended December 31, 2003, 2002 and 2001, the amounts
of approximately $0, $343,000 and $390,000, respectively, were
incurred to develop proved undeveloped properties from the prior
year.
During the years ended December 31, 2003,
2002 and 2001, exploration costs of approximately $92,000,
$472,000 and $282,000, respectively, were expensed.
The Company had the following aggregate
capitalized costs relating to the Company's oil and gas
activities at December 31:
2003
2002
Unproved oil and gas properties
$
50,738,040
$
31,296,142
Proved oil and gas properties
103,423,818
73,558,896
154,161,858
104,855,038
Less accumulated depreciation, depletion,
    amortization
and impairment
59,212,313
56,170,676
$
94,949,545
$
48,684,362
F-29
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (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:
2003
2002
2001
Revenues
$
5,717,814
$
592,528
$
948,270
Production costs
(3,719,780
)
(294,520
)
(285,980
)
Exploration costs
(91,815
)
(471,948
)
(281,776
)
Accretion of asset retirement obligation
(62,452
)
—
—
Depreciation, depletion, amortization and
    impairment
(3,102,354
)
(9,606,606
)
(12,899,648
)
Loss from oil and gas producing activities
$
(1,258,587
)
$
(9,780,546
)
$
(12,519,134
)
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.
Depreciation, depletion, amortization and
impairment expense was $3,102,354, $9,606,606 and $12,899,648 or
$2.37, $120 and $258 per equivalent Mcf of production for the
years ended December 31, 2003, 2002 and 2001, respectively.
These amounts include impairment expenses, primarily for
unproved properties of $1,899,705, $9,299,981 and $11,112,516
for the years ended December 31, 2003, 2002 and 2001,
respectively, which was based on prices at December 31 for
2003 and 2002 and March 15, 2002 for 2001, for fair value
determination.
Note M — Oil and Gas Reserve Data
(Unaudited)
The following estimates of proved reserve
quantities and related standardized measure of discounted 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.
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%
per year to reflect the estimated timing of the future cash
flows.
F-30
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following summaries of changes in reserves
(in thousands of barrels (MBbls) and in millions of cubic feet
(MMcf)) and standardized measure of discounted future net cash
flows were prepared from estimates of proved reserves developed
by independent petroleum engineers.
Summary of Changes in Proved
Reserves
Year ended December 31,
2003
2002
2001
MBbls
MMcf
MBbls
MMcf
MBbls
MMcf
Proved reserves
Beginning of year
12,324
8,502
8,478
2,495
11,770
11,516
Purchase of reserves in place
2,688
4,218
3,538
1,770
—
—
Discoveries and extensions
—
6,291
—
5,294
4
947
Revisions of previous estimates
199
(2,778
)
312
(1,002
)
(3,293
)
(9,936
)
Production
(87
)
(785
)
(4
)
(55
)
(3
)
(32
)
End of year
15,124
(1)
15,448
(1)
12,324
(2)
8,502
(2)
8,478
2,495
Proved developed reserves
Beginning of year
404
4,544
8
1,648
243
8,034
End of year
476
7,006
404
4,544
8
1,648
(1)
Included in 2003 reserves, 2,469 MBbls and
    1,028 MMcf is attributable to consolidated subsidiaries in
    which there is an average 25% minority interest.
(2)
Included in 2002 reserves, 1,195 MBbls and
    577 MMcf is attributable to consolidated subsidiaries in
    which there is an average 34% minority interest.
Standardized Measure of Discounted Future Net
Cash Flows
Relating to Proved Oil and Gas
Reserves
At December 31,
2003
2002
2001
(Amounts in thousands)
Future cash inflows
$
499,693
$
362,982
$
122,032
Future production costs and taxes
(69,180
)
(47,661
)
(25,676
)
Future development costs
(60,272
)
(43,003
)
(31,556
)
Future income tax expenses
(87,042
)
(110,939
)
(4,749
)
Net future cash flows
283,199
161,379
60,051
Discounted at 10% for estimated timing of cash
    flows
(137,073
)
(89,961
)
(40,539
)
Standardized measure of discounted future net
    cash flows
$
146,126
(1)
$
71,418
(2)
$
19,512
(1)
Included in 2003 reserves, $23,017 is
    attributable to consolidated subsidiaries in which there is an
    average 25% minority interest.
(2)
Included in 2002 reserves, $10,462 is
    attributable to consolidated subsidiaries in which there is an
    average 34% minority interest.
F-31
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Changes in Standardized Measure of Discounted
Future Net Cash Flows
Related to Proved Oil and Gas
Reserves
Year Ended December 31,
2003
2002
2001
(Amounts in thousands)
Sales, net of production costs and taxes
$
(1,934
)
$
(298
)
$
(662
)
Discoveries and extensions
9,339
5,550
272
Purchases of reserves in place
30,875
30,944
—
Changes in prices and production costs
7,624
46,531
(42,613
)
Revisions of quantity estimates
(2,882
)
1,884
(15,976
)
Net changes in development costs
(13,341
)
(1,048
)
2,823
Interest factor — accretion of discount
11,396
2,047
11,783
Net change in income taxes
5,677
(41,566
)
27,762
Changes in production rates (timing) and
    other
27,954
7,862
(52,973
)
Net increase (decrease)
74,708
51,906
(69,584
)
Balance at beginning of year
71,418
19,512
89,096
Balance at end of year
$
146,126
$
71,418
$
19,512
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, 2003,
2002 and 2001 were $28.45, $27.15 and $13.87 per barrel and
$4.50, $3.36 and $1.76 per thousand cubic feet, 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,
2004, 2005 and 2006 are $10,587,489, $22,960,986 and
$17,815,400, 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.
F-32
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note N — Quarterly Information
(Unaudited)
Summarized quarterly financial data for the years
ended December 31, 2003 and 2002 are as follows:
2003
Quarter
First
Second
Third
Fourth
Year
Revenues
$
4,437,681
$
4,441,003
$
6,173,532
$
10,610,647
$
25,662,863
Gross profit
634,381
1,117,818
1,383,088
3,412,457
6,547,744
Net loss
(2,034,484
)
(949,688
)
(371,269
)
(2,405,485
)
(5,760,926
)
Loss per share
Basic and diluted
$
(0.12
)
$
(0.06
)
$
(0.02
)
$
(0.14
)
$
(0.34
)
2002
Quarter
First
Second
Third
Fourth
Year
Revenues
$
8,092,392
$
7,553,080
$
5,794,244
$
8,170,574
$
29,610,290
Gross profit (loss)
(89,514
)
864,947
1,867,136
(1,292,670
)
1,349,899
Net income (loss)
574,420
(2,587,965
)
(1,088,942
)
(4,539,943
)
(7,642,430
)
Income (loss) per share
Basic and diluted
$
0.03
$
(0.15
)
$
(0.06
)
$
(0.27
)
$
(0.44
)
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.
During the fourth quarter of 2003, the Company
had the following significant adjustment:
•
Recognized impairment on oil and gas properties
    of approximately $1,900,000 as a result of the expiration of
    certain unproved Washakie leases and net capitalized costs
    exceeding the expected future net cash flow based on engineering
    estimates on certain properties (see Note L).
The effect of this adjustment was to increase the
net loss by approximately $1,900,000 or $(0.11) per basic and
diluted share for the quarter and year ended December 31,
2003.
During the fourth quarter of 2002, the Company
had the following significant adjustments:
•
Recognized impairment on oil and gas properties
    of approximately $9,300,000 as a result of the net capitalized
    costs exceeding the expected future net cash flow based on
    engineering estimates (see Note M).
•
Recorded life insurance proceeds of $3,750,000
    relating to the death of Executive Vice President, James C.
    Johnson, Jr. (see Note I).
•
Recognized a gain of $4,300,000 as a result of
    the sale of oil and gas properties to Anadarko.
•
Reversed previously recognized turnkey revenue of
    $4,300,000 relating to wells that were previously in drilling
    programs but were part of the asset sale of Anadarko.
The effect of these adjustments was to increase
the net loss by approximately $5,550,000 or $(0.32) per basic
and diluted share for the quarter and year ended
December 31, 2002.
F-33
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note O — Segment
Information
The Company's operating activities can be
divided into four major segments: turnkey contracts, oil and gas
marketing, oil and gas exploration and production operations and
well services. The Company drills oil and natural gas wells for
Company-sponsored drilling partnerships and retains an interest
in each well. The Company also markets natural gas for
affiliated partnerships. The Company charges Company-sponsored
partnerships and other third parties competitive industry rates
for well operations and gas gathering. Segment information for
the years ended December 31 is as follows:
2003
2002
2001
Revenues from external customers
Turnkey contracts
$
11,300,646
$
5,841,110
$
30,102,946
Oil and gas marketing
5,620,522
11,272,398
14,866,954
Oil and gas operations
6,212,311
4,879,302
948,270
Well services
1,167,564
1,895,453
5,574,335
Other
1,361,820
5,722,027
1,966,745
$
25,662,863
$
29,610,290
$
53,459,250
Intersegment revenue
Well services
$
—
$
—
$
983,910
Other
—
25,660
228,857
$
—
$
25,660
$
1,212,767
Interest and other income
Turnkey contracts
$
4,246
$
3,368
$
23,003
Oil and gas marketing
—
—
—
Oil and gas operations
6,586
31,439
81,001
Well services
—
2,540
17,183
Other
1,329,227
5,246,155
2,084,752
Intersegment elimination
—
(25,660
)
(228,857
)
$
1,340,059
$
5,257,842
$
1,977,082
Consolidated revenues
Total segment revenue
$
24,301,043
$
23,888,263
$
52,476,415
Other
1,361,820
5,747,687
2,195,602
Intersegment elimination
—
(25,660
)
(1,212,767
)
$
25,662,863
$
29,610,290
$
53,459,250
F-34
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
2003
2002
2001
Interest expense
Turnkey contracts
$
9,200
$
5,577
$
116,933
Oil and gas marketing
—
—
—
Oil and gas operations
—
—
—
Well services
—
28,957
292,515
Other
1,518,869
6,303,757
5,595,643
Elimination of intersegment
—
(25,660
)
(228,857
)
$
1,528,069
$
6,312,631
$
5,776,234
Depreciation, depletion, amortization and
    impairment
Turnkey contracts
$
102,534
$
102,942
$
100,450
Oil and gas marketing
—
—
—
Oil and gas operations
3,102,354
9,606,606
12,899,648
Well services
—
47,643
961,253
Other
44,972
172,971
500,768
$
3,249,860
$
9,930,162
$
14,462,119
Operating income (loss)
Turnkey contracts
$
3,908,505
$
3,835,194
$
2,458,217
Oil and gas marketing
120,096
150,876
(431,888
)
Oil and gas operations
(695,052
)
(6,021,629
)
(12,438,133
)
Well services
505,436
982,515
2,367,993
Other
(4,708,887
)
(7,044,180
)
(12,878,081
)
$
(869,902
)
$
(8,097,224
)
$
(20,921,892
)
Assets
Turnkey contracts
$
23,625,826
$
34,982,047
$
31,688,540
Oil and gas marketing
192,642
192,642
192,642
Oil and gas operations
106,113,628
54,582,576
56,931,996
Well services
—
94,338
4,471,379
Other
21,121,567
18,410,691
1,615,657
$
151,053,663
$
108,262,294
$
94,900,214
Capital expenditures
Turnkey contracts
$
—
$
—
$
42,616
Oil and gas marketing
—
—
—
Oil and gas operations
12,735,327
4,744,732
16,955,738
Well services
—
—
92,315
Other
4,221
5,313
43,418
$
12,739,548
$
4,750,045
$
17,134,087
F-35
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note P — Subsequent
Events
In February 2004, the Company completed an equity
private placement financing. The Company, for a negotiated total
purchase price of $14 million, sold 2 million shares
of common stock, five-year Class A warrants to purchase
500,000 shares of common stock at $10 per share, and five-year
Class B warrants to purchase 500,000 shares at $12.50 per
share. These warrants are subject to a cash-only exercise
provision. The securities were sold only to "accredited
investors" as defined in Rule 501(a) under
Regulation D of the Securities Act of 1933, as amended (the
"Securities Act"). Additionally, pursuant to the
Subscription and Registration Rights Agreement dated
February 3, 2004, commencing the earlier of
February 3, 2005 or 170 days after the completion of
an Initial Public Offering by the Company, certain holders have
a right to demand that 2,000,000 shares of outstanding common
stock and 1,000,000 shares of common stock issuable upon
exercise of our Class A and Class B warrants, be
registered under the Securities Act. The four Purchasers of the
equity private placement were institutional investors managed by
a Boston-based institutional investment adviser. These
securities have not been registered under the Securities Act, or
under state securities laws, and may not be offered or sold in
the United States absent registration with the Securities and
Exchange Commission or an applicable exemption from the
registration requirements.
In July 2004, the Company completed an equity
private placement financing. The Company, for a negotiated total
purchase price of $5,950,000, sold 850,000 shares of common
stock, five-year Class A warrants to purchase 212,500
shares of common stock at $10 per share, and five-year
Class B warrants to purchase 212,500 shares at $12.50 per
share. These warrants are subject to a cash-only exercise
provision. The securities were sold only to "accredited
investors" as defined in Rule 501(a) under
Regulation D of the Securities Act of 1933, as amended (the
"Securities Act"). Additionally, pursuant to the
Subscription and Registration Rights Agreement dated
July 31, 2004, commencing the earlier of February 3,
2005 or 170 days after the completion of an initial public
offering by the Company, certain holders have a right to demand
that 1,000,000 shares of outstanding common stock and 500,000
shares of common stock issuable upon exercise of our
Class A and Class B warrants, be registered under the
Securities Act. The five Purchasers of the equity private
placement were institutional investors managed by a Boston-based
institutional investment adviser. These securities have not been
registered under the Securities Act, or under state securities
laws, and may not be offered or sold in the United States absent
registration with the Securities and Exchange Commission or an
applicable exemption from the registration requirements.
In regard to the Magness matter discussed in
Note I, the AAA arbitration was held from May 3, 2004
through May 14, 2004 and further expert oral testimony is
scheduled in Los Angeles on September 29, 2004. A ruling is
expected in the AAA arbitration by the end of 2004. The JAMS
arbitration hearing on the motion to enforce the final award was
held from May 19, 2004. On August 16, 2004, Judge
Wisot issued an order granting our motion to enforce the final
award covering unauthorized direct labor charges, ruling that
these charges are recoverable by us as improperly billed to the
joint venture.
Management believes Warren has meritorious
defenses to Magness's claims, as well as valid claims and
counterclaims against Magness. Management believes Warren will
prevail in upholding the validity and enforceability of the
joint venture agreement. However, this is not certain, and
although the consequences of Magness prevailing in a dissolution
of the joint venture are not entirely predictable, if Magness
does prevail in dissolving the joint venture, management
believes that Warren would retain a 47% working interest in the
undeveloped properties. Additionally, if the joint venture were
dissolved, Warren's estimated proved natural gas and oil
reserves, as of December 31, 2003, would decrease from
106.2 Bcfe to approximately 73 Bcfe and the estimated
discounted future net revenues from our estimated proved
reserves would decrease from $183.0 million to
approximately $129 million.
F-36
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
UNAUDITED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
June 30, 2004
December 31, 2003
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents
$
20,033,002
$
24,528,999
Accounts receivable — trade
3,382,432
2,386,180
Accounts receivable from affiliated partnerships
138,058
389,271
Trading securities
273,873
201,152
Restricted investments in U.S. Treasury
    Bonds — available for sale, at fair value (amortized
    cost of $1,320,197 in 2004 and $1,293,411 in 2003)
1,396,695
1,402,358
Other current assets
2,225,722
2,031,701
Total current assets
27,449,782
30,939,661
Other Assets
Oil and gas properties — at cost, based
    on successful efforts method of accounting, net of accumulated
    depreciation, depletion and amortization
102,423,044
94,949,545
Property and equipment — at cost, net
460,591
591,663
Restricted investments in U.S. Treasury
    Bonds — available for sale, at fair value (amortized
    cost of $12,869,723 in 2004 and $12,627,574 in 2003)
13,719,477
13,808,777
Deferred bond offering costs (net of accumulated
    amortization of $3,905,720 in 2004 and $3,684,097 in 2003)
2,535,348
2,756,971
Goodwill
3,430,246
3,430,246
Other assets
3,276,265
4,576,800
Total other assets
125,844,971
120,114,002
$
153,294,753
$
151,053,663
LIABILITIES AND STOCKHOLDERS'
    EQUITY
Current Liabilities
Current maturities of debentures
$
4,691,970
$
4,809,470
Current maturities of other long-term liabilities
326,939
208,383
Accounts payable and accrued expenses
8,406,396
8,956,529
Deferred income — turnkey drilling
    contracts with affiliated partnerships
19,187,876
22,438,272
Total current liabilities
32,613,181
36,412,654
Long-Term Liabilities
Debentures, less current portion
42,227,730
43,285,230
Other long-term liabilities, less current portion
1,420,395
1,613,081
43,648,125
44,898,311
Minority Interest
11,604,063
13,348,654
Stockholders' Equity
8% convertible preferred stock, par value $.0001;
    authorized 10,000,000 shares, issued and outstanding, 6,552,674
    shares in 2004 and 6,507,729 shares in 2003 (aggregate
    liquidation preference $78,632,076 in 2004 and $78,092,748 in
    2003)
77,020,766
76,334,024
Common Stock — $.0001 par value;
    authorized, 100,000,000 shares; issued 19,374,070 in 2004 and
    17,349,070 shares in 2003)
1,937
1,735
Additional paid-in-capital
58,623,635
47,739,159
Accumulated deficit
(70,047,359
)
(67,729,178
)
Accumulated other comprehensive income, net of
    applicable income taxes of $371,000 in 2004 and $517,000 in 2003
558,460
776,359
66,157,439
57,122,099
Less common stock in Treasury — at
    cost; 632,250 shares in 2004 and 2003
728,055
728,055
Total stockholders' equity
65,429,384
56,394,044
$
153,294,753
$
151,053,663
The accompanying notes are an integral part of
these financial statements.
F-37
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
OPERATIONS
Six Months Ended June 30,
2004
2003
(Unaudited)
Revenues
Turnkey contracts with affiliated partnerships
$
3,250,396
$
1,876,672
Oil and gas sales from marketing activities
2,795,567
2,789,524
Well services
511,932
501,420
Oil and gas sales
2,680,839
2,832,493
Net gain (loss) on investments
(87,971
)
126,330
Interest and other income
1,091,592
752,245
Gain on sale of oil and gas properties
120,193
—
10,362,548
8,878,684
Expenses
Turnkey contracts
3,343,404
1,234,640
Cost of marketed oil and gas purchased from
    affiliated partnerships
2,724,401
2,731,079
Well services
261,355
329,775
Production & exploration
2,046,301
1,952,416
Depreciation, depletion, amortization and
    impairment
1,533,614
519,295
General and administrative
2,337,236
2,164,886
Interest
256,205
1,238,434
12,502,516
10,170,525
Loss before provision for income taxes
(2,139,968
)
(1,291,841
)
Deferred income tax expense (benefit)
146,000
(194,000
)
Net loss before minority interest and change in
    accounting principle
(2,285,968
)
(1,097,841
)
Minority interest
(32,213
)
(62,045
)
Net loss before change in accounting principle
(2,318,181
)
(1,159,886
)
Cumulative effect of change in accounting
    principle
—
(88,218
)
Net loss
(2,318,181
)
(1,248,104
)
Less dividends and accretion on preferred shares
3,290,321
1,736,068
Net loss applicable to common stockholders
$
(5,608,502
)
$
(2,984,172
)
Basic and diluted loss per common share
Loss before accounting change
$
(0.31
)
$
(0.17
)
Cumulative effect of change in accounting
    principle
—
—
Net loss
$
(0.31
)
$
(0.17
)
Weighted average common shares outstanding
18,357,891
16,871,121
The accompanying notes are an integral part of
these financial statements.
F-38
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS
For the Six Months Ended
June 30,
2004
2003
(Unaudited)
Cash flows from operating activities:
Net loss
$
(2,318,181
)
$
(1,248,104
)
Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities:
Accretion of discount on available-for-sale debt
    securities
(333,551
)
(271,431
)
Amortization and write-off of deferred bond
    offering costs
221,623
408,438
Gain on sale of U.S. treasury bonds —
    available for sale
—
(122,965
)
Depreciation, depletion, amortization and
    impairment
1,533,614
519,295
Accretion of asset retirement obligation
33,281
—
Gain on sale of oil and gas properties
(120,193
)
—
Deferred tax expense (benefit)
146,000
(194,000
)
Change in assets and liabilities:
Increase in trading securities
(72,720
)
(560,079
)
(Increase) decrease in accounts
    receivable — trade
(996,252
)
4,540,791
Decrease in accounts receivable from affiliated
    partnerships
251,213
558,642
(Increase) decrease in other assets
1,106,514
(247,163
)
Decrease in accounts payable and accrued expenses
(618,563
)
(557,204
)
Decrease in deferred income from affiliated
    partnerships
(3,250,396
)
(1,791,172
)
Decrease in other long term liabilities
(72,950
)
(366,586
)
Net cash provided by (used in) operating
    activities
(4,490,561
)
668,462
Cash flows from investing activities:
Purchases of oil and gas properties
(10,235,162
)
(3,937,623
)
Purchase of property and equipment
(6,108
)
(3,539
)
Proceeds from the sale of oil and gas properties
120,193
—
Proceeds from the sale of property and equipment,
    net of selling fees
24,000
45,850
Proceeds from U.S. Treasury Bonds —
    available for sale
64,616
1,172,390
Net cash used in investing activities
(10,032,461
)
(2,722,922
)
Cash flows from financing activities:
Payments on other long-term debt
(1,209,460
)
(1,329,906
)
Issuance of common stock, net
14,175,000
—
Repurchase of common stock
—
(29,940
)
Issuance of preferred stock, net
126,730
2,058,252
Dividends paid on preferred stock
(3,065,245
)
(800,092
)
Net cash provided by (used in) financing
    activities
10,027,025
(101,686
)
Net decrease in cash and cash equivalents
(4,495,997
)
(2,156,146
)
Cash and cash equivalents at beginning of period
24,528,999
23,184,936
Cash and cash equivalents at end of period
$
20,033,002
$
21,028,790
Supplemental disclosure of cash flow information
Cash paid for interest, net of amount capitalized
$
—
$
829,996
Cash paid for income taxes
$
—
$
—
The accompanying notes are an integral part of
these financial statements.
F-39
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Note 1 — Organization
Warren Resources, Inc. (the "Company"
or "Warren") was formed on June 12, 1990 under
the laws of the state of New York for the purpose of acquiring
and developing oil and gas properties. On September 5,
2002, the Company changed its state of incorporation to
Delaware. On July 7, 2004, the Company changed its state of
incorporation to Maryland. As a result, all shares of the
Company's stock were converted into shares of the Maryland
corporation. The Company's properties are primarily located
in New Mexico, North Dakota, Texas, Wyoming and California. In
addition, the Company serves as the managing general partner
(the "MGP") to affiliated partnerships and joint
ventures.
The accompanying unaudited financial statements
and related notes present the Company's consolidated
financial position as of June 30, 2004 and December 31,
2003, and the consolidated results of operations and
consolidated cash flows for the six months ended June 30,
2004 and 2003. The unaudited financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial
information and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted
in the United States of America for complete financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results
for the six months ended June 30, 2004, are not necessarily
indicative of the results that may be expected for the fiscal
year ending December 31, 2004. The accounting policies
followed by the Company are set forth in Note A to the
Company's financial statements on Form 10-K for the
year ended December 31, 2003. These interim financial
statements and notes thereto should be read in conjunction with
the consolidated financial statements presented in the
Company's 2003 Annual Report on Form 10-K.
Note 2 — Management's
Plans
The Company had a net loss of $2.3 million
for the six months ended June 30, 2004, as compared to a
loss of $1.2 million for the corresponding six months ended
June 30, 2003. At June 30, 2004, current liabilities
exceeded current assets by approximately $5.2 million.
In order to improve operations and liquidity and
meet its cash flow needs, the company has or intends to do the
following:
•
Raise additional capital through the sale of
    common and preferred stock.
•
Obtain a credit facility based in part on the
    value of our proved reserves.
•
Generate turnkey profit from turnkey drilling
    contracts equal to approximately 25% of the total amount of
    total turnkey price.
•
Increase oil and gas production and revenues by
    drilling our Wyoming and California properties.
•
Use $2.0 million of deferred drilling
    credits from Anadarko Petroleum Corporation to develop our
    acreage in the Washakie Basin, Wyoming.
As a result of these plans, management believes
that it will generate sufficient cash flows to meet its current
obligations in 2004.
Note 3 — Stock Options
At June 30, 2004, the Company had
stock-based compensation plans. The Company accounts for those
plans under the recognition and measurement principles of
Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees
, and related
interpretations. The following table illustrates the effect on
net loss and loss per share if the Company had applied the
fair-value recognition provisions of
F-40
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Financial Accounting Standards Board
(FASB) Statement No. 123,
Accounting for
Stock-Based Compensation
, to stock-based employee
compensation:
Six Months Ended June 30,
2004
2003
Net loss, as reported
$
(2,318,181
)
$
(1,248,104
)
Deduct: Total stock-based employee compensation
    expense determined under fair-value-based method for all awards,
    net of related tax effects
(711,373
)
(547,278
)
Pro forma net loss
$
(3,029,554
)
$
(1,795,382
)
Basic and diluted loss per share:
As reported —
$
(0.31
)
$
(0.17
)
Pro forma —
$
(0.34
)
$
(0.21
)
Note 4 — Plugging and Abandonment
Liability
In June 2001, the Financial Accounting Standard
Board issued SFAS No. 143,
Accounting for Asset
Retirement Obligations
, which requires entities to record
the fair value of a liability for an asset retirement obligation
in the period in which it is incurred and a corresponding
increase in the carrying amount of the related long-lived asset.
The Company adopted SFAS No. 143 on January 1, 2003
and recorded a net asset of $557,000, a related liability of
$645,000 (using a 10% discount rate) and a cumulative effect of
change in accounting principle of $88,000. During the six months
ending June 30, 2004 and 2003 the asset retirement
liability was increased by approximately $33,000 and $42,000
respectively, as a result of accretion and recorded as interest
expense. During the six months ended June 30, 2004, there
has been no significant changes in cash flow assumptions for the
liability or liabilities incurred or settled during the period.
The Company has treasury bills held in escrow with a fair market
value of $2,709,000 which are legally restricted for potential
plugging and abandonment liability in the Wilmington field.
Note 5 — Changes in
Stockholders' Equity
During the six months ended June 30, 2004,
the Company raised $14 million through the private
placement of 2,000,000 shares of common stock and issued
1,000,000 warrants to four institutional investors managed by a
large Boston-based investment advisor. The Company also sold
25,000 shares of its common stock for $175,000 and issued 12,500
warrants to a single investor. All warrants have expected lives
of five years and have a cumulative weighted average exercise
price of $11.07.
As of June 30, 2004, 6,552,674 shares of
convertible preferred stock were issued and outstanding.
Preferred dividends of approximately $1.6 million and
$1.5 million were accrued at June 30, 2004 and
December 31, 2003, respectively. The Company has incurred
cumulative issuance costs of approximately $2.1 million in
relation to these shares. For the six months ended June 30,
2004, the Company issued 44,944 preferred shares, 33,614
relating to the recapitalization of drilling programs and 11,330
for cash consideration of approximately $135,960. The preferred
stock pays an 8% cumulative dividend, which is payable
quarterly, and is treated as a deduction in additional paid in
capital. 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
at the election of the holder, commencing one year after the
date of issuance. Each outstanding redeemable convertible
preferred share is convertible into common stock of the Company
based
F-41
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
on the table below. The conversion rate is
subject to adjustment from time to time as defined by the
agreement.
Preferred to
Period
Common
Until June 30, 2005
1 to 1
July 1, 2005 through June 30, 2006
1 to .75
July 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 $12.00 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 up to a maximum
of 1.5 shares of common stock for each one share of
preferred stock redeemed. The Company is accreting the carrying
value of its preferred stock to its redemption price using the
effective interest method with changes recorded to additional
paid in capital. The accretion of preferred stock results in a
reduction of earnings per share applicable to common
stockholders.
Note 6 — Loss Per Share
Basic loss per share is computed by dividing net
loss by the weighted average number of shares of common stock
outstanding during the period. Diluted loss per share is based
on the assumption that stock options are converted into common
shares using the treasury stock method and convertible bonds,
debentures and preferred stock are converted using the
if-converted method. Conversion is not assumed if the results
are anti-dilutive. Potential common shares at June 30, 2004
and June 30, 2003 of 11,869,784 and 9,633,171 respectively,
relating to convertible bonds, debentures and preferred stock,
2,751,262 and 2,257,012, respectively, relating to incentive
stock options and 1,193,125 potential shares relating to
warrants at June 30, 2004, were excluded from the
computation of diluted loss per share because they are
anti-dilutive. Incentive stock options have a weighted average
exercise price of $5.45 and $5.06 at June 30, 2004 and
June 30, 2003, respectively. Warrants have a weighted
average exercise price of $11.07 at June 30, 2004. The
convertible bonds and debentures may be converted from the date
of issuance until maturity at 100% of principal amount into
common stock of the Company at prices ranging from $5 to $50.
The preferred stock may be converted at the discretion of the
holder (see Note 5).
F-42
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note 7 — Long-Term Debt
The convertible bonds and debentures may be
converted from the date of issuance until maturity at 100% of
principal amount into common stock of the Company at prices
ranging from $5 to $50. Each year the holders of the convertible
debentures may tender to the Company up to 10% of the aggregate
debentures issued and outstanding. Bonds and debentures
outstanding are as follows:
June 30,
December 31,
2004
2003
12% Sinking Fund Debentures, due
    December 31, 2007
$
9,141,000
$
9,616,000
12% Secured Convertible Debentures, due
    December 31, 2009
770,000
790,000
12% Secured Convertible Bonds, due
    December 31, 2010
1,700,000
1,705,000
13.02% Sinking Fund Convertible Debentures, due
    December 31, 2010
14,545,200
14,655,200
13.02% Sinking Fund Convertible Debentures, due
    December 31, 2015
11,642,500
11,792,500
12% Secured Convertible Bonds, due
    December 31, 2016
1,365,000
1,365,000
12% Sinking Fund Convertible Debentures, due
    December 31, 2017
5,135,000
5,500,000
12% Secured Convertible Bonds, due
    December 31, 2020
1,485,000
1,485,000
12% Secured Convertible Bonds, due
    December 31, 2022
1,136,000
1,186,000
46,919,700
48,094,700
Less current portion
4,691,970
4,809,470
Long-term portion
$
42,227,730
$
43,285,230
Note 8 — Capitalized
Interest
Interest of approximately $2,978,000 and
$2,532,000 was capitalized during the six months ended
June 30, 2004 and 2003, respectively, relating to
California and Wyoming properties.
Note 9 — Contingencies
Arbitrations vs. Magness Petroleum Company.
On September 28, 1999, Magness
Petroleum Company, our joint venture partner in the Wilmington
field, filed a complaint against us, Warren E&P, Inc., our
principal operating subsidiary, and certain of our other
subsidiaries in the Superior Court of Los Angeles County,
California, alleging that we had breached our joint venture
agreement with Magness, as well as an alleged oral agreement
regarding advance payment of expenses for drilling and
completion operations. Magness sought dissolution of the joint
venture, an accounting and a declaratory judgment as to the
rights of the parties under the joint venture agreement. We
successfully enforced the arbitration provision contained in the
joint venture agreement and entered into a written stipulation
with Magness to submit the matter for arbitration by the
Judicial Arbitration and Mediation Services, or JAMS, before the
Honorable Keith J. Wisot, a retired Los Angeles Superior
Court Judge. Judge Wisot, as the arbitrator, ruled that the
joint venture agreement is a valid enforceable agreement,
declined to dissolve the joint venture, denied Magness's
claims for breach of contract, determined that Magness was not
entitled to reimbursement of direct labor charges to the field
and tangible well costs, and held that he and JAMS would retain
jurisdiction to enforce the final award. In addition, the
parties stipulated on the record that Judge Wisot retain
jurisdiction to adjudicate any future disputes among the
parties. The Superior Court case was dismissed in January 2000.
On August 8, 2001, Magness filed a demand
with the American Arbitration Association, or AAA, reasserting
its claims for dissolution of the joint venture under a new
dissolution theory and breach of
F-43
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
contract. The dissolution theory was based on
Magness's claim that voting rights within the joint venture
should be based on ownership of working interests in the
Wilmington Townlot Unit, which includes property never
contributed to the joint venture, instead of ownership of joint
venture working interests. We then brought suit in the
California Superior Court seeking to enforce the original final
award issued by Judge Wisot in the JAMS arbitration and to
enforce the oral stipulation among the parties to have JAMS
retain jurisdiction to adjudicate any future disputes. On
September 24, 2003, after a number of court proceedings,
the California Superior Court ordered JAMS to hear our motion to
enforce the final award covering unauthorized direct labor
charges and tangible costs and for the AAA to hear
Magness's new theory of dissolution of the joint venture,
to make a determination as to whether Magness can independently
drill new wells in the Wilmington Townlot Unit without our
consent if the joint venture is not dissolved, and whether we
were entitled to damages as a result of Magness preventing the
resumption of drilling activities by us as ordered by
Judge Wisot in the JAMS arbitration.
On January 14, 2004, we filed an amended
answer in the AAA arbitration denying Magness's request to
dissolve the joint venture, together with counterclaims seeking
damages against Magness initially in the amount of
$15 million, which was subsequently increased to in excess
of $40 million, on a number of grounds, including breach of
contract. We also requested that Magness be removed as operator
for the joint venture wells in the Wilmington Field due to a
breach of its duties and that an independent operator be
appointed in its place. We asserted a further claim against
Magness that in the event the joint venture is dissolved prior
to completion of the venture, we would be entitled to damages in
the amount of $26 million. The AAA arbitration was held
from May 3, 2004 through May 14, 2004 and further
expert oral testimony is scheduled in Los Angeles on
September 29, 2004. A ruling is expected in the AAA
arbitration by the end of 2004. The JAMS arbitration hearing on
the motion to enforce the final award was held from May 19,
2004 through May 21, 2004. On August 16, 2004, Judge
Wisot issued an order granting our motion to enforce the final
award covering unauthorized direct labor charges, ruling that
these charges are recoverable by us as improperly billed to the
joint venture.
We believe that we have meritorious defenses to
Magness's claims, as well as valid claims and counterclaims
against Magness. We believe that we will prevail in upholding
the validity and enforceability of the joint venture agreement.
However, this is not certain, and although the consequences of
Magness prevailing in a dissolution of the joint venture are not
entirely predictable, if Magness does prevail in dissolving the
joint venture, we believe that we would retain a 47% working
interest in the undeveloped properties to be liquidated by the
joint venture. If that were to occur, our estimated proved
natural gas and oil reserves, as of December 31, 2003,
would decrease from 106.2 Bcfe to approximately
73 Bcfe and the estimated discounted future net revenues
from our estimated proved reserves would decrease from
$183.0 million to approximately $129 million.
Gotham Insurance Company v.
Warren.
In 1998, we and our
subsidiary, Warren E&P, Inc., were sued in the 81st Judicial
District Court of Frio County, Texas by Stricker Drilling
Company, Inc. and Manning Safety Systems to recover the value of
lost equipment based on a well blow-out. As a result of the
lawsuit, Gotham Insurance Company, Warren E&P's well
blow-out insurer, intervened. The suit was settled in 1999 with
all parties except Gotham. Gotham paid over $1.7 million
under the insurance policy and now seeks a refund of
approximately $1.5 million of monies paid, denying
coverage, and alleging fraud and misrepresentation and a failure
of Warren E&P to act with due diligence and pursuant to
safety regulations. Warren E&P countersued for the remaining
proceeds under the policy coverage. In the summer and fall of
2000, summary judgments were entered for Warren E&P on
essentially all claims except its bad faith claims against
Gotham. Gotham's claims against Warren E&P and us were
rejected. Final judgment was rendered by the District Court on
May 14, 2001 in Warren E&P's favor for the
remaining policy proceeds, interest and attorneys' fees.
Gotham appealed the final judgment to the San Antonio Court of
Appeals seeking a refund of approximately $1.5 million. On
July 23, 2003, the San Antonio Court of Appeals reversed
the trial court's earlier summary
F-44
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
judgment for Warren E&P and remanded the case
to the trial court. In November 2003, Warren E&P appealed
the San Antonio Court of Appeals' panel decision to the
Texas Supreme Court, and in July 2004, the Court denied
appellate review. If we elect not to appeal, the matter will be
remanded to the trial court in the 81st Judicial District Court
of Frio County, Texas, for further proceedings consistent with
the San Antonio Court of Appeals' decision.
We are also a party to legal actions arising in
the ordinary course of our business. In the opinion of our
management, based in part on consultation with legal counsel,
the liability, if any, under these claims is either adequately
covered by insurance or would not have a material adverse effect
on us.
Repurchase
Agreements
Under certain repurchase agreements, the investor
partners in certain affiliated partnerships have a right to have
their interests repurchased by the Company. Such purchase price
is calculated at a formula price and is payable in seven to
25 years from the date of admission to the partnership. For
certain affiliated partnerships formed prior to 1998, the
maximum purchase price for all such interests was fully secured
at maturity by zero coupon U.S. Treasury Bonds held by an
independent trust company. The face amounts of such securities
are released to the Company when equal amounts of cash
distributions are made to investors. As a result of the
recapitalizations, any payment made under this guarantee would
be recorded as a reduction to minority interest as shown on the
Company's balance sheet. At June 30, 2004, the maximum
cash outlay relating to these repurchase obligations is
approximately $5,900,000. This amount is collateralized by U.S.
Treasury Bonds with a face value of approximately $1,100,000.
For certain other repurchase agreements relating
to partnerships formed from 1998 to 2001, to the extent that the
drilling programs and other program investors elect not to
purchase a withdrawing partner's interest, investor
partners have a right to have their interests repurchased by the
Company at a formula price. This right is effective seven to
25 years from the date of the original partnership
investment. In determining the amount of the repurchase
obligation, the obligation is computed based on the lesser of
the formula purchase price or the estimated cash flows
discounted at 10% ("PV-10") from proved developed and
undeveloped reserves of each partnership. At June 30, 2004,
the formula purchase price with respect to these partnerships
was approximately $96,500,000. However, this amount is limited
to approximately $15,800,000 based on the PV-10 of the assets in
these partnerships. This limitation may increase when we drill
the remaining 22 wells on behalf of these seven drilling
programs and will fluctuate due to the variables in determining
discounted cash flows, such as price changes and reserve
revisions. In the event of repurchase, Warren receives the
investors interest in the program and their pro rata share of
the programs reserves and related future cash flows.
F-45
Table of Contents
WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note 10 — Business Segment
Information
The Company's operating activities can be
divided into four major segments: turnkey contracts, oil and gas
marketing, oil and gas exploration and production operations and
well services. The Company drills oil and natural gas wells for
Company-sponsored drilling programs and retains an interest in
each well. Also, the Company markets natural gas for affiliated
drilling programs. The Company charges Company-sponsored
drilling programs and other third parties competitive industry
rates for well operations and gas gathering. Segment information
is as follows:
Six Months Ended
June 30,
June 30,
2004
2003
Revenues
Turnkey Contracts
$
3,250,396
$
1,876,672
Oil and Gas Marketing
2,795,567
2,789,524
Oil and Gas Operations
2,680,839
2,832,493
Well Services
511,932
501,420
Other
1,123,814
878,575
$
10,362,548
$
8,878,684
June 30,
June 30,
2004
2003
Operating Income (Loss)
Turnkey Contracts
$
(144,616
)
$
590,975
Oil and Gas Marketing
71,166
58,445
Oil and Gas Operations
(784,898
)
432,987
Well Services
250,577
171,645
Other
(1,532,197
)
(2,545,893
)
$
(2,139,968
)
$
(1,291,841
)
Note 11 — Comprehensive
Loss
Other comprehensive loss consists primarily of
net unrealized investment gains and losses, net of income tax
effect. Total comprehensive losses for the periods are as follow:
2004
2003
Six months ending June 30
$
(2,536,080
)
$
(957,048
)
Note 12 — Consent
Solicitation
During the fourth quarter of 2002,
13 limited partnerships, of which the Company was the
managing general partner, commenced a vote solicitation of their
limited partners (the "Partnership Recapitalization
Offers") to: (1) obtain the requisite two-thirds
affirmative vote of their respective partners to convert the
drilling program from a Delaware limited partnership into a
Delaware limited liability company (the "LLC") wherein
all LLC members would have limited liability, including the
Company, and (ii) upon conversion to an LLC, the Company
would contribute as additional capital to the LLC its
unregistered 8% convertible preferred stock with a value equal
to between 110% to 120% of the potential repurchase price of
consenting members' interests ("Preferred
Members") calculated as of December 31, 2002. For its
additional capital contribution, the Company received standard
membership interests in the LLC and as a standard member was
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WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
specially allocated, pro rata, the Preferred
Members' interests in the oil and gas properties owned by
their respective programs (the "Recapitalization").
Members converting to Preferred Member interests received
preferential rights in the LLC. Election by members to become
Preferred Members terminated their repurchase rights as standard
members under the LLC buy/sell agreements. At December 31,
2002, six of the thirteen programs voted to convert to LLCs and
because of the majority control by the Company were consolidated
in the financial statements for the year ended December 31,
2002. As a result, the Company issued 1,342,960 preferred shares
to these six LLC's in 2002 with an estimated fair value of
$16,115,520. At March 31, 2003, the remaining seven
programs voted to convert to LLCs and on average 72.9% of the
program members converted to become Preferred Members in their
LLC. During the first quarter ended March 31, 2003, the
Company issued 1,641,628 preferred shares to the remaining seven
LLCs as a capital contribution, with an estimated fair value of
$19,699,536 and received its pro rata share of additional
standard membership interests in the LLCs. The fair value of the
preferred shares was based on actual cash sales to independent
parties in this time period. Due to the majority control of
these thirteen affiliated partnerships, the Company has
consolidated these entities for financial reporting purposes at
June 30, 2003. The Company accounted for the remaining
seven LLCs as a purchase transaction as of June 30, 2003
with the estimated fair value of the assets and liabilities
assumed in the acquisition as follows:
Estimated fair value of assets acquired
Current assets
$
3,512
Oil and gas properties
28,342,950
Total fair value of assets
28,346,462
Liabilities assumed
Accounts payable
144,122
Minority Interest
8,502,804
Total liabilities assumed
8,646,926
Cost of acquisition
$
19,699,536
Subsequent to the recapitalization offers that
closed on June 30, 2003, and December 31, 2002,
certain minority interest limited partners elected to convert to
preferred members during the six months ended June 30,
2004, which resulted in the Company issuing 44,944 preferred
shares to these individuals with an estimated fair value of
$539,328.
The following summarizes pro forma unaudited
results of operations for the six months ended June 30,
2003 as if these acquisitions had been consummated immediately
prior to January 1, 2003. These pro forma results are not
necessarily indicative of future results.
Pro Forma
Six Months Ended
June 30, 2003
Revenues
$
11,201,767
Net loss
$
(596,601
)
Loss per common share — basic and
    diluted
$
(0.14
)
Note 13 — Goodwill
The Company adopted SFAS No. 142,
Goodwill and Other Intangible Assets
, effective
January 1, 2002 and as such, has not subsequently recorded
any amortization of goodwill. Under SFAS No. 142 the
Company only adjusts the carrying amount of goodwill or
indefinite life intangible assets upon an impairment. During
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WARREN RESOURCES, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
the three months ended June 30, 2004 and
June 30, 2003, no events occurred which would indicate that
an impairment of goodwill existed.
During the second quarter of 2004, the Company
retained an independent outside valuation expert to assist in
developing the fair value analysis necessary to conduct the
testing for impairment of its goodwill, all of which arose in
its acquisition of Warren E&P. The results of this analysis
indicated that no impairment of goodwill had occurred in 2004.
The 2005 annual impairment testing will be performed during the
second quarter of 2005.
Note 14 — Subsequent
Events
In July 2004, the Company completed an equity
private placement financing. The Company, for a negotiated total
purchase price of $5,950,000, sold 850,000 shares of common
stock, five-year Class A warrants to purchase 212,500
shares of common stock at $10 per share, and five-year
Class B warrants to purchase 212,500 shares at $12.50 per
share. These warrants are subject to a cash-only exercise
provision. The securities were sold only to "accredited
investors" as defined in Rule 501(a) under
Regulation D of the Securities Act of 1933, as amended (the
"Securities Act"). Additionally, pursuant to the
Subscription and Registration Rights Agreement dated
July 31, 2004, commencing the earlier of February 3,
2005 or 170 days after the completion of an initial public
offering by the Company, certain holders have a right to demand
that 1,000,000 shares of outstanding common stock and 500,000
shares of common stock issuable upon exercise of our
Class A and Class B warrants, be registered under the
Securities Act. The five purchasers of the equity private
placement were institutional investors managed by a Boston-based
institutional investment adviser. These securities have not been
registered under the Securities Act, or under state securities
laws, and may not be offered or sold in the United States absent
registration with the Securities and Exchange Commission or an
applicable exemption from the registration requirements.
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APPENDIX A TO PROSPECTUS
GLOSSARY OF CERTAIN OIL AND NATURAL GAS
TERMS
The following are abbreviations and definitions
of certain terms commonly used in the oil and gas industry and
in this 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 is 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 that 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.
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.
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.
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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.
Farm-out 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.
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 within a productive or potentially productive
formation. This operation usually yields a well which has the
ability to produce higher volumes than a vertical well drilled
in the same 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.
Injection well or
injector.
A well which is used to
place liquids or gases into the producing zone during
secondary/tertiary recovery operations to assist in maintaining
reservoir pressure and enhancing recoveries from the field.
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:
•
ground clearing, drainage construction, location
    work, road making, temporary roads and ponds, surveying and
    geological works;
•
drilling, completion, logging, cementing,
    acidizing, perforating and fracturing of wells;
•
hauling mud and water, perforating, swabbing,
    supervision and overhead;
•
renting horizontal tools, milling tools and
    bits; and
•
construction of derricks, pipelines and other
    physical structures necessary for the drilling or preparation of
    the wells.
Lease.
An instrument
which grants to another (the lessee) the exclusive right to
enter to explore for, drill for, produce, store and remove oil
and natural gas on the mineral interest, in consideration for
which the
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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.
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 wells.
The sum
of all the complete and partial well ownership interests (i.e.,
if we own 25% percent of the working interest in eight producing
wells, the subtotal of this interest to the total net producing
well count would be two net producing wells).
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 wellfore drilled into it.
Permeability.
The
capacity of a geologic formation to allow water, natural gas or
oil to pass through it.
Pod.
A grouping of
10 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.
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.
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%.
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 production expenses and taxes.
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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.
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.
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 waterflooding
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.
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:
•
well casings;
•
wellhead equipment;
•
water disposal facilities;
•
metering equipment;
•
tubing and pumps;
•
gathering lines; and
•
storage tanks.
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Table of Contents
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.
Undeveloped acreage.
Lease acreage on which wells have been 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.
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.
Ultimate recovery.
The total expected recovery of oil and gas from a producing
well, leasehold, pool or field.
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Table of Contents
APPENDIX B TO PROSPECTUS
SUMMARY RESERVE REPORT OF
WILLIAMSON PETROLEUM CONSULTANTS,
INC.
As of December 31, 2003
Table of Contents
WILLIAMSON PETROLEUM CONSULTANTS,
INC.
550 West Texas Avenue, Suite 300
Midland, Texas 79701-4246
Phone: 432-685-6100
Fax: 432-685-3909
E-Mail: wpc@wpc-inc.com
February 10, 2004
Warren Resources, Inc.
489 Fifth Avenue, 32nd Floor
New York, New York 10017
Attention Mr. Norman F. Swanton
Gentlemen:
Subject:
Evaluation of Oil and Gas Reserves to the
    Combined Interests of Warren Resources, Inc. in 1) the
    Direct Interests in Certain Properties, 2) the Interest as
    the General Partner in Certain Partnerships, and 3) the
    Total Controlled Interests in 13 LLC's Effective
    December 31, 2003 for Disclosure to the Securities and
    Exchange Commission
Williamson Project 3.8962
Williamson Petroleum Consultants, Inc. has
performed an engineering evaluation to estimate proved reserves
and future net revenue from oil and gas properties to the
subject interests. This evaluation was authorized by
Mr. Norman F. Swanton of Warren Resources, Inc. (Warren).
Projections of the reserves and future net revenue to the
evaluated interests were based on economic parameters and
operating conditions considered applicable as of
December 31, 2003 and are pursuant to the requirements of
the Securities and Exchange Commission (SEC). This evaluation,
in conjunction with other documents and data, is being used by
Warren as an annual update of the subject properties and for SEC
filings. Following is a summary of the results of the proved
evaluation effective December 31, 2003:
Proved
Proved
Developed
Developed
Proved
Producing
Nonproducing
Undeveloped
Total Proved
Net Reserves to the Evaluated Interests:
Oil/ Condensate, MBBL
475.948
0.000
14,647.731
15,123.680
Other Liquids, MBBL
0.000
0.000
0.000
0.000
Gas, MMCF
7,005.532
0.000
8,442.038
15,447.570
Future Net Revenue, M$:
Undiscounted
28,730.881
0.000
341,510.781
370,241.656
Discounted Per Annum at 10.00 Percent
20,460.939
0.000
162,524.359
182,985.328
Note: Due to the method of rounding within Aries
Software, Total Proved may not equal PDP + PDNP + PU.
The attached Definitions describe all categories
of proved reserves, and the Discussion describes the bases of
this evaluation.
B-1
Table of Contents
Warren Resources, Inc.
Mr. Norman F. Swanton
February 10, 2004
Page 2
It has been a pleasure to serve you by preparing
this engineering evaluation. All related data will be retained
in our files and are available for your review.
Yours very truly,
WILLIAMSON PETROLEUM
    CONSULTANTS, INC.
/s/ JOHN D. SAVAGE, P.E.
John D. Savage, P.E.
Executive Vice President
JDS/ BES/thb
Attachments
B-2
Table of Contents
DISCUSSION
Introduction
Williamson Petroleum Consultants, Inc.
(Williamson) has performed an engineering evaluation to estimate
proved reserves and future net revenue from oil and gas
properties to the combined direct interests of Warren Resources,
Inc. (Warren) in certain properties, the interests of Warren as
the general partner in certain partnerships, and the total
controlled interests of Warren in 13 LLC's. This evaluation
was authorized by Mr. Norman F. Swanton of Warren. The
results of the evaluation are summarized in the cover letter and
are presented by year in the summary tables.
Following the discussion is a list of all of the
partnerships with proved reserves managed by Warren. When
applicable, this listing shows the payout date for each
partnership and the general partner/limited partner interest
split before and after payout.
The individual projections of lease reserves and
economics include data that describe the production forecasts
and associated evaluation parameters such as interests, taxes,
product prices, operating costs, investments, salvage values,
abandonment costs, and net profit interests.
The properties evaluated in this report are
located in the states of California, New Mexico, North Dakota,
Texas, and Wyoming with the majority of the value in California.
Major-value properties are discussed in the Major Property
Review section of this Discussion.
Projections of the reserves and future net
revenue to the evaluated interests were based on economic
parameters and operating conditions considered to be applicable
as of December 31, 2003 and are pursuant to the financial
reporting requirements of the Securities and Exchange Commission
(SEC). This evaluation, in conjunction with other documents and
data, is being used by Warren as an annual update and for SEC
filings.
Net income to the evaluated interests is the
future net revenue after consideration of royalty revenue
payable to others, taxes, operating expenses, investments,
salvage values, abandonment costs, and net profit interests, as
applicable. The future net revenue is before federal income tax
and excludes consideration of any encumbrances against the
properties if such exist.
The future net revenue values presented in the
Lease Reserves and Economics section of this report and
summarized in the cover letter were based on projections of oil
and gas production. It was assumed there would be no significant
delay between the date of oil and gas production and the receipt
of the associated revenue for this production.
Unless specifically identified and documented by
Warren as having curtailment problems, gas production trends
have been assumed to be a function of well productivity and not
of market conditions. The effect of "take or pay"
clauses in gas contracts was not considered.
Oil and gas reserves were evaluated for the
proved developed producing, proved developed nonproducing, and
proved undeveloped categories. The summary classification of
proved developed reserves combines the proved developed
producing and proved developed nonproducing categories.
In preparing this evaluation, no attempt has been
made to quantify the element of uncertainty associated with any
category. Reserves were assigned to each category as warranted.
The attached Definitions describe all categories of proved
reserves.
Oil reserves are expressed in thousands of United
States (U.S.) barrels (MBBL) of 42 U.S. gallons. Gas
volumes are expressed in millions of cubic feet (MMCF) at
60 degrees Fahrenheit and at the legal pressure base that
prevails in the state in which the reserves are located. No
adjustment of the individual gas volumes to a common pressure
base has been made.
The future net revenue was discounted at an
annual rate of 10.00 percent as requested by Warren. Future
net revenue was also discounted at various secondary rates and
is displayed as totals only. The 10.00 percent rate was
included in accordance with the reporting requirements of the
SEC. The future net revenue was discounted monthly at the
midpoint of the month. Capital costs were discounted at the time
they occurred and
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Table of Contents
were compounded annually. No opinion is expressed
by Williamson in this report as to a fair market value of the
evaluated properties.
This report includes only those costs and
revenues which are considered by Warren to be directly
attributable to individual leases and areas. There could exist
other revenues, overhead costs, or other costs associated with
Warren which are not included in this report. Such additional
costs and revenues are outside the scope of this report. This
report is not a financial statement for Warren and should not be
used as the sole basis for any transaction concerning Warren or
the evaluated properties.
The reserves projections in this evaluation are
based on the use of the available data and accepted industry
engineering methods. Future changes in any operational or
economic parameters or production characteristics of the
evaluated properties could increase or decrease their reserves.
Unforeseen changes in market demand or allowables set by various
regulatory agencies could also cause actual production rates to
vary from those projected. The dates of first production for
nonproducing properties were based on estimates by Warren or
Williamson and the actual dates may vary from those estimated.
Williamson reserves the right to alter any of the reserves
projections and the associated economics included in this
evaluation in any future evaluations based on additional data
that may be acquired.
Williamson is an independent consulting firm and
does not own any interests in the oil and gas properties covered
by this report. No employee, officer, or director of Williamson
is an employee, officer, or director of Warren. Neither the
employment of nor the compensation received by Williamson is
contingent upon the values assigned to the properties covered by
this report.
Data Sources
All data utilized in the preparation of this
report with respect to interests, reversionary status, oil and
gas prices, gas categories, gas contract terms, operating
expenses, investments, salvage values, abandonment costs, net
profit interests, well information, and current operating
conditions, as applicable, were provided by Warren and the
operators. The production data were updated by client data
through October 2003 in California. Production was updated by
public record through September 2003 in New Mexico and Texas,
and October 2003 in Wyoming. In North Dakota, production was
updated by public record through August 2003. All data have been
reviewed for reasonableness and, unless obvious errors were
detected, have been accepted as correct. It should be emphasized
that revisions to the projections of reserves and economics
included in this report may be required if the provided data are
revised for any reason. No inspection of the properties was made
as this was not considered within the scope of this evaluation.
No investigation was made of any environmental liabilities that
might apply to the evaluated properties, and no costs are
included for any possible related expenses.
Warren represented to Williamson that it has, or
can generate, the financial and operational capabilities to
accomplish those projects evaluated by Williamson which require
capital expenditures.
Method of Reserves Determination
The estimates of reserves contained in this
report were determined by accepted industry methods and in
accordance with the attached Definitions of Oil and Gas
Reserves. Methods utilized in this report include extrapolation
of historical production trends, analogy to similar properties,
and volumetric calculations. Where sufficient production history
and other data were available, reserves for producing properties
were determined by extrapolation of historical production
trends. Analogy to similar properties or volumetric calculations
were used for nonproducing properties and those producing
properties which lacked sufficient production history and other
data to yield a definitive estimate of reserves. Reserves
projections based on analogy are subject to change due to
subsequent changes in the analogous properties or subsequent
production from the evaluated properties. Volumetric
calculations are often based upon limited log and/or core
analysis data and incomplete reservoir fluid and formation rock
data. Since these limited data must frequently be extrapolated
over an assumed drainage area, subsequent production performance
trends or material balance calculations may cause the need for
significant revisions to the estimates of reserves.
B-4
Table of Contents
Oil Pricing
West Texas Intermediate (WTI) NYMEX spot
prices were subtracted from lease wellhead prices provided by
Warren for the most recent 12-month period to determine lease
price differentials. These lease differentials were used with a
December 31, 2003 WTI NYMEX spot price of $32.55 to
estimate wellhead prices at the effective date. Prices were held
constant for the life of the properties.
Gas Pricing
Henry Hub (HH) NYMEX spot prices were
subtracted form the lease wellhead prices provided by Warren for
the most recent 12-month period to determine lease price
differentials. These lease differentials were used with a
December 31, 2003 HH NYMEX spot price of $5.825 to estimate
wellhead prices at the effective date. In addition, the L-X Bar
wells include price deductions to cover the cost attributed to
transportation, commodity, and gathering. The Atlantic Rim wells
include a price adjustment to cover gathering costs. All prices
are held constant for the life of the properties.
Pricing Statement
It should be emphasized that with the current
economic uncertainties, fluctuation in market conditions could
significantly change the economics of the properties included in
this report.
Operating Expenses
Operating expenses were provided by Warren for
the period between November 2002 and October 2003 and
are represented to be an average of all recurring expenses which
are billable to the working interest owners. Expenses for
workovers, well stimulations, and other maintenance were not
included in the operating expenses unless such work was expected
on a recurring basis. Judgments for the exclusion of the
nonrecurring expenses were made by Warren and/or Williamson. For
new and developing properties where data were unavailable,
operating expenses were estimated by Warren based on analogy
with similar properties. Operating costs were held constant for
the life of the properties.
Production and Ad Valorem Taxes
State production taxes have been deducted at the
published rates as appropriate. Average county ad valorem taxes
were deducted for those properties located in states for which
the data were available. Any ad valorem taxes for properties in
other states were assumed to be included in the operating
expenses.
Investments
All capital costs for drilling and completion of
wells and nonrecurring workover or operating costs have been
deducted as applicable. These costs were provided by Warren or,
where not supplied, were estimated by Williamson. No adjustments
were made to account for the potential effect of inflation on
these costs.
Salvage and Property Abandonment
Neither salvage values nor abandonment costs were
provided by Warren to be included in this evaluation.
Major Property Review
Wilmington
Townlot Unit, Los Angeles County, California
The top valued property in this evaluation is the
Wilmington Townlot Unit (WTU). The producing wells and the
25 proposed waterflood patterns make up over
78.4 percent of the total proved future net revenue
discounted at 10.00 percent per annum (DFNR).
B-5
Table of Contents
The WTU is located in the Wilmington field, Los
Angeles County, western side of the Wilmington field. The WTU
first produced in 1937. Production has been primarily from the
following zones: Tar, Ranger, Upper Terminal, Ford, and 237/
Schist.
The WTU Ranger and Upper Terminal zones were
unitized by Exxon Company, USA effective February 1, 1972.
The following year, waterflooding began in the Ranger and Upper
Terminal zones. Exxon operated the property until May of 1997
when it was purchased by the current operator, Magness Petroleum
Company.
Recoveries from the WTU have been lower than
expected based on waterflood recoveries from offsetting
properties in the Wilmington field. This is most likely due to
poor completion design which led to poor vertical conformance
and poor sweep efficiency of some Ranger — Upper
Terminal sub-zones. The complex faulting patterns present in the
WTU may also have hindered an efficient sweep of the reservoir.
It is believed that there is a significant amount
of recoverable oil remaining in these unswept sub-zones;
however, proper completion design and proper waterflood pattern
design and placement will be required to capture this oil.
To estimate the remaining waterflood reserves in
the WTU, secondary-to-primary recovery ratios were calculated
for the three waterflood areas closest to the WTU. An average
secondary-to-primary ratio of 0.6:1.0 was calculated for the
offsets. Assuming that the WTU could experience a similar
recovery, an estimated gross 22,500,000 barrels of oil
remain to be recovered through enhanced waterflood operations.
Approximately 25 five-spot waterflood patterns will need to
be established to recover the above reserves. During 1999, work
was started on the first three waterflood patterns. These three
patterns are scheduled to be completed by December 2004. It
is anticipated that full-scale waterflooding will begin upon
complete development of the first three patterns.
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K
EY
B
ANC
C
APITAL
M
ARKETS
J
EFFERIES
& C
OMPANY,
I
NC.
S
ANDERS
M
ORRIS
H
ARRIS
You should rely only on the information
contained or incorporated by reference in this prospectus. No
dealer, salesperson or other person is authorized to give
information that is not contained in this prospectus. This
prospectus is not an offer to sell nor is it seeking an offer to
buy these securities in any jurisdiction where the offer or sale
is not permitted.
Through and
including                     ,
2004 (the 25th day after the date of this prospectus), all
dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation
to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
Table of Contents
PART II
INFORMATION NOT REQUIRED IN
PROSPECTUS
Item 13.     Other
Expenses of Issuance and Distribution.
The following table indicates the expenses to be
incurred in connection with the offering described in this
Registration Statement, other than underwriting discounts and
commissions, all of which will be paid by the Company. All
amounts are estimates, other than the registration fee and the
NASD fee.
SEC registration fee
$
8,869.00
NASD filing fee
*
Nasdaq National Market listing fee
*
Printing and engraving expenses
*
Legal fees and expenses
*
Accounting fees and expenses
*
Blue Sky fees and expenses
*
Transfer agent and registrar fees and expenses
*
Miscellaneous
*
Total
$
*
To be completed by amendment.
We will pay all of the expenses to be incurred in
connection with the issuance and distribution of the securities
registered hereby.
Item 14.     Indemnification
of Directors and Officers.
The Maryland General Corporation Law allows
corporations to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or
completed action or suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he
or she is or was a director, officer, employee or agent of the
corporation or is or was serving at the request of the
corporation as a director, officer, employee, partner, trustee,
or agent of another corporation, partnership, joint venture,
trust, other enterprise or employee benefit plan, unless it is
established that:
•
the act or omission was material to the matter
    giving rise to the proceeding and either was committed in bad
    faith or was the result of active and deliberate dishonesty;
•
the person actually received an improper personal
    benefit in money, property or services; or
•
in the case of any criminal proceeding, the
    person had reasonable cause to believe that the act or omission
    was unlawful.
Under Maryland law, indemnification may be
provided against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by the person in
connection with the proceeding. The indemnification may be
provided, however, only if authorized for a specific proceeding
after a determination has been made that indemnification is
permissible under the circumstances because the person met the
applicable standard of conduct. This determination is required
to be made:
•
by the board of directors by a majority vote of a
    quorum consisting of directors not, at the time, parties to the
    proceeding or, if a quorum cannot be obtained, then by a
    majority vote of a committee of the board consisting solely of
    two or more directors not, at the time, parties to the
    proceeding and who a majority of the board of directors
    designated to act in the matter;
II-1
Table of Contents
•
by special legal counsel selected by the board or
    board committee by the vote set forth above, or, if such vote
    cannot be obtained, by a majority of the entire board; or
•
by the stockholders.
If the proceeding is one by or in the right of
the corporation, indemnification may not be provided as to any
proceeding in which the person is found liable to the
corporation.
A Maryland corporation may pay, before final
disposition, the expenses, including attorneys' fees,
incurred by a director, officer, employee or agent in defending
a proceeding. Under Maryland law, expenses may be advanced to a
director or officer when the director or officer gives a written
affirmation of his or her good faith belief that he or she has
met the standard of conduct necessary for indemnification and a
written undertaking to the corporation to repay the amounts
advanced if it is ultimately determined that he or she is not
entitled to indemnification. Maryland law does not require that
the undertaking be secured, and the undertaking may be accepted
without reference to the financial ability of the director or
officer to repay the advance. Unless limited by its articles of
incorporation, a Maryland corporation is required to indemnify
any director who has been successful, on the merits or
otherwise, in defense of a proceeding for reasonable expenses.
The determination as to reasonableness of expenses is required
to be made in the same manner as required for indemnification.
Under Maryland law, the indemnification and
advancement of expenses provided by statute are not exclusive of
any other rights to which a person who is not a director seeking
indemnification or advancement of expenses may be entitled under
any charter, bylaw, agreement, vote of stockholders, vote of
directors or otherwise.
Our articles of incorporation provide that we
shall indemnify each director or officer:
•
to the fullest extent permitted by the Maryland
    General Corporation Law, or any similar provision or provisions
    of applicable law at the time in effect, in connection with any
    threatened, pending or completed action, suit or proceeding,
    whether civil, criminal, administrative or investigative, by
    reason of the fact that he or she is or was at any time a
    director or officer, or is or was at any time serving at our
    request as a director, officer, employee, agent or trustee of
    another corporation, partnership, limited liability company,
    joint venture, trust, other enterprise or employee benefit
    plan; and
•
to the fullest extent permitted by the common law
    and by any statutory provision other than the Maryland General
    Corporation Law in connection with any threatened, pending or
    completed action, suit or proceeding, whether civil, criminal,
    administrative or investigative, by reason of the fact that he
    or she is or was at any time a director or officer, or is or was
    at any time serving at our request as a director, officer,
    employee, agent or trustee of another corporation, partnership,
    limited liability company, joint venture, trust, other
    enterprise or employee benefit plan.
Additionally, our articles of incorporation
provide that we may indemnify any of our employees or agents to
the fullest extent permitted by the Maryland General Corporation
Law, or any similar provision or provisions of applicable law at
the time in effect, in connection with any threatened, pending
or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact
that he or she is or was at any time our employee or agent, or
is or was at any time serving at our request as a director,
officer, employee, agent or trustee of another corporation,
partnership, limited liability company, joint venture, trust,
other enterprise or employee benefit plan.
Reasonable expenses incurred in defending any
action, suit or proceeding described above shall be paid by the
corporation in advance of the final disposition of such action,
suit or proceeding upon receipt of an undertaking by or on
behalf of such director, officer or employee to repay such
amount to the corporation if it shall ultimately be determined
that he is not entitled to be indemnified by us.
In addition to the general indemnification
described above, Maryland law permits corporations to include
any provision expanding or limiting the liability of its
directors and officers to the corporation or its
II-2
Table of Contents
stockholders for money damages, but may not
include any provision that restricts or limits the liability of
its directors or officers to the corporation or its stockholders:
•
to the extent that it is proved that the person
    actually received an improper benefit or profit in money,
    property, or services for the amount of the benefit or profit in
    money, property or services actually received; or
•
to the extent that a judgment or other final
    adjudication adverse to the person is entered in a proceeding
    based on a finding in the proceeding that the person's
    action, or failure to act, was the result of active and
    deliberate dishonesty and was material to the cause of action
    adjudicated in the proceeding.
We have adopted, in our charter, a provision that
eliminates and limits the personal liability of each of our
directors and officers to the full extent permitted by the laws
of the State of Maryland.
We have entered into an indemnification agreement
with each of our directors and officers against liabilities that
may arise by reason of their status or service as directors or
officers and to advance their expenses incurred as a result of a
proceeding as to which they may be indemnified. These
indemnification agreements are intended to be in addition to any
other rights that the indemnitee may have under our certificate
of incorporation, bylaws and applicable law.
Item 15.     Recent
Sales of Unregistered Securities.
Since its inception, we have issued securities in
the following transactions, each of which was exempt from the
registration requirements of the Securities Act of 1933, as
amended, under Sections 3(a)(9) and 4(2) of the Securities
Act, as transactions by an issuer not involving any public
offering or under Rules 701 and 506 thereunder. All of the
below-referenced securities are deemed restricted securities for
the purposes of the Securities Act.
In August 2004, we granted options to purchase
60,000 shares of common stock exercisable at $7.00 per
share to six directors, and one of our officers exercised an
option to purchase 98,750 shares of our common stock for an
aggregate purchase price of $395,000.
Between February and July 2004, we issued
41,749 shares of our Series A 8% cumulative
convertible preferred stock to six accredited investor drilling
programs formed from 1996 through 1997 as an additional capital
contribution and received additional standard membership
interests in the LLCs.
In February and July 2004, we issued
2,875,000 shares of our common stock to five institutional
investors and one individual accredited investor for an
aggregate purchase price of $20,125,000 in cash. In addition, as
part of this transaction, we issued Class A warrants to
purchase 718,750 shares of our common stock at an
exercise price per share of $10.00 and Class B warrants to
purchase 718,750 shares of our common stock at an
exercise price per share of $12.00 to these institutional
investors.
In January 2004, we issued 11,331 shares of
our Series A 8% cumulative convertible preferred stock to
five accredited investors as an offering price of
$12.00 per share for an aggregate purchase price of
$135,972 in cash.
In April 2004, we granted options to purchase
510,250 shares of our common stock exercisable at
$7.00 per share to 27 officers, directors and employees
pursuant to our stock option plans.
In December 2003, we granted options to purchase
25,000 shares of our common stock exercisable at $7.00 per
share to one director pursuant to our stock option plan.
Between March and December 2003, we issued
(i) 3,005,186 shares of our Series A 8%
cumulative convertible preferred stock to six accredited
investor drilling programs formed from 1994 through 1997 and two
joint venture programs formed in 2000 and 2001 as an additional
capital contribution and received additional standard membership
interests in the LLCs; (ii) 905,537 shares of our
Series A 8% cumulative convertible preferred stock to
accredited investors at an offering price of $12.00 per
share for an aggregate purchase price of $10,866,444 in cash;
and (iii) 393,522 shares of our Series A 8%
cumulative convertible
II-3
Table of Contents
preferred stock to individual and entity holders
of $4,722,264 principal amount of our 2007 and 2017 convertible
bonds who elected to convert their bonds into our preferred
stock at a conversion price of $12 principal amount per share.
In November 2003, we issued 419,287 shares
of our Series A institutional 8% cumulative convertible
preferred stock to three accredited investors at an offering
price of $12.00 per share for an aggregate purchase price
of $5,031,444 in cash. As part of this transaction, we issued
Class A warrants to purchase 180,625 shares of our
common stock at an exercise price per share of $10.00 to
investors and their representatives.
In September 2003, we granted options to purchase
85,000 shares of our common stock exercisable at $4.00 per
share to eight officers, directors and employees pursuant to our
stock option plans.
In May 2003, we granted options to purchase
1,264,053 shares of our common stock exercisable at
$7.00 per share to 24 officers, directors and employees
pursuant to our stock option plans.
In December 2002, we issued
(i) 359,694 shares of our Series A 8% cumulative
convertible preferred stock to accredited investors at an
offering price of $12.00 per share for an aggregate
purchase price of $4,316,328 in cash;
(ii) 81,543 shares of our Series A 8% cumulative
convertible preferred stock to individual and entity holders of
$978,516 principal amount of our 2007 and 2017 bonds who elected
to convert their bonds into our preferred stock at a conversion
price of $12.00 principal amount per share; and
(iii) 1,342,960 shares of our Series A 8%
cumulative convertible preferred stock to six accredited
investor drilling programs formed from 1994 through 1997 as an
additional capital contribution and received additional standard
membership interests in the LLCs.
During September 2001, we granted options to
purchase 2,505,242 shares our common stock exercisable at
$10.00 per share to 22 officers, directors and employees
under our stock option plans.
Item 16.
Exhibits and Financial Statement
    Schedules.
Exhibit
Number
Description
1.1*
*
Form of Underwriting Agreement among Warren
    Resources, Inc. and the underwriters named therein
2.1(
1)
Stock Exchange Agreement dated September 1,
    2000 by and among Warren Resources, Inc., Petroleum Development
    Corporation, James C. Johnson, Jr. and Gregory S. Johnson.
3.1(
9)
Articles of Incorporation of Warren Resources,
    Inc. filed May 20, 2004 (Maryland)
3.2(
9)
Articles Supplementary (Series A 8%
    Cumulative Convertible Preferred Stock ($.0001 par value))
    (Maryland)
3.3(
9)
Articles Supplementary (Series A
    Institutional 8% Cumulative Convertible Preferred Stock
    ($.0001 par value)) (Maryland)
3.4(
9)
Certificate of Correction to Articles
    Supplementary (Series A 8% Cumulative Convertible Preferred
    Stock) (Maryland)
3.5(
9)
Certificate of Correction to Articles
    Supplementary (Series A Institutional 8% Cumulative
    Convertible Preferred Stock) (Maryland)
3.6(
9)
Bylaws of the Warren Resources, Inc.
4.1*
*
Specimen Stock Certificate for Common Stock
4.2(
1)
Indenture between Warren Resources, Inc. and
    Continental Stock Transfer and Trust Company, as Trustee, dated
    December 1, 2000 regarding 12% debentures due
    December 31, 2007
4.3(
1)
Form of Bond Certificate for 12% debentures
    due December 31, 2007
4.4(
1)
Indenture between Warren Resources, Inc. and
    Continental Stock Transfer and Trust Company, as Trustee, dated
    February 1, 1999 regarding 13.02% sinking fund
    convertible bonds due December 31, 2010 and
    December 31, 2015
4.5(
1)
Form of Bond Certificate for
    13.02% debentures due December 31, 2010
II-4
Table of Contents
Exhibit
Number
Description
4.6(
1)
Form of Bond Certificate for
    13.02% debentures due December 31, 2015
4.11
(6)
Form of Class A Common Stock Purchase Warrant
4.12
(6)
Form of Class B Common Stock Purchase Warrant
4.13
(2)
Form of Registration Rights Agreement dated
    December 12, 2002 by and between Warren Resources, Inc. and
    the Investors in the Series A 8% Cumulative Convertible
    Preferred Stock
4.14
(7)
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
4.15
(9)
Form of Subscription and Registration Rights
    Agreement dated July 30, 2004 by and between Warren
    Resources, Inc. and the Accredited Investors in Warren
    Resources, Inc.'s private placement dated July 9, 2004
4.16
(5)
Form of Contribution Agreement by and between
    Warren Resources, Inc. and various Delaware limited liability
    companies
5.1*
*
Opinion of Patton Boggs LLP, counsel to Warren
    Resources, Inc.
10.1(
1)
2000 Equity Incentive Plan for Employees of
    Warren E&P, Inc. (formerly Petroleum Development
    Corporation, a wholly owned subsidiary of Warren Resources, Inc.)
10.2(
1)
Amendment to 2000 Stock Incentive Plan for
    Employees of Warren E&P, Inc. (formerly Petroleum
    Development Corporation, a wholly owned subsidiary of Warren
    Resources, Inc.)
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 Warren Resources, Inc. and Norman F. Swanton
10.6(
8)
Amendment to Employment Agreement dated
    January 1, 2004, between Warren Resources, Inc. and Norman
    F. Swanton
10.7(
1)
Employment Agreement dated January 1, 2001,
    between Warren Resources, Inc. and Timothy A. Larkin
10.8(
8)
Amendment to Employment Agreement dated
    January 1, 2004, between Warren Resources, Inc. and Timothy
    A. Larkin
10.9(
8)
Employment Agreement dated January 1, 2004,
    between Warren Resources, Inc. and David E. Fleming
10.10
(8)
Employment Agreement dated March 1, 2004,
    between Warren Resources, Inc. and Lloyd Davies
10.11
(9)
Employment Agreement dated January 1, 2004,
    between Warren Resources, Inc. and Ellis Vickers
10.12
(1)
Form of Indemnification Agreement between Warren
    Resources, Inc. and each of the directors and certain officers
    of Warren Resources, Inc.
10.13
(1)
Joint Venture Agreement dated May 24, 1999,
    by and between Warren Resources of California, Inc., Warren
    Development Corp., Warren E&P, Inc. and Magness Petroleum
    Company
10.14
(1)
Gas Purchase Agreement dated January 28,
    2000, by and between Western Gas Resources, Inc. and Big Basin
    Petroleum, LLC
10.15
(1)
December 20, 2000 Letter of Agreement to
    Amend the Gas Purchase Contract dated January 28, 2000,
    between Western Gas Resources Inc. and Petroleum Development
    Corp., as successor in interest to Big Basin Petroleum, LLC
10.16
(1)
Gas Purchase and Sales Contract dated
    April 1, 2000, between Warren Resources, Inc. and Tenaska
    Marketing Ventures
10.17
(1)
Form of Master Gas Purchase and Sale Agreement
10.18
(3)
Exchange Agreement dated December 13, 2002
    between Anadarko Petroleum Corporation and Warren Resources, Inc.
II-5
Table of Contents
Exhibit
Number
Description
10.19
(3)
Joint Exploration Agreement dated
    December 11, 2002 between Anadarko Petroleum Corporation
    and Warren Resources, Inc.
14(4)
Code of Ethics for Senior Financial Officers
21*
Subsidiaries of Warren Resources, Inc.
23.1*
Consent of Grant Thorton LLP
23.2*
Consent of Williamson Petroleum Consultants, Inc.
23.3*
Consent of CBIZ Valuation Group, Inc.
23.4*
*
Consent of Patton Boggs LLP (contained in
    Exhibit 5.1)
24.1*
Powers of Attorney (included on signature page of
    this registration statement)
(1)
Incorporated by reference to the Company's
    Registration Statement on Form 10, Commission File
    No. 000-33275, filed on October 26, 2001.
(2)
Incorporated by reference to the Company's
    Current Report on Form 8-K, Commission File
    No. 000-33275, filed on December 17, 2002.
(3)
Incorporated by reference to the Company's
    Current Report on Form 8-K, Commission File
    No. 000-33275, filed on December 24, 2002.
(4)
Incorporated by reference to the Company's
    Annual Report on Form 10-K for the year ended
    December 31, 2002, Commission File No. 000-33275,
    filed on March 31, 2003.
(5)
Incorporated by reference to the Company's
    Quarterly Report on Form 10-Q for the quarter ended
    June 30, 2003, Commission File No. 000-33275, filed on
    August 13, 2003.
(6)
Incorporated by reference to the Company's
    Annual Report on Form 10-K for the year ended
    December 31, 2003, Commission File No. 000-33275,
    filed on March 15, 2004.
(7)
Incorporated by reference to the Company's
    Current Report on Form 8-K, Commission File
    No. 000-33275, filed on February 11, 2004.
(8)
Incorporated by reference to the Company's
    Quarterly Report on Form 10-Q for the quarter ended
    March 31, 2004, Commission File No. 000-33275, filed
    on May 12, 2004.
(9)
Incorporated by reference to the Company's
    Quarterly Report on Form 10-Q for the quarter ended
    June 30, 2004, Commission File No. 000-33275, filed on
    August 16, 2004.
*
Filed herewith.
**
To be filed by amendment.
Item 17.
Undertakings.
Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than payment by the registrant
of expenses incurred or paid by a director, officer, or
controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any
    liability under the Securities Act of 1933, the information
    omitted from the form of prospectus filed as part of this
    registration statement in reliance upon
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Rule 430A and contained in a form of
    prospectus filed by the registrant pursuant to
    Rule 424(b)(1) or (4) or 497(h) under the Securities
    Act shall be deemed to be part of this registration statement as
    of the time it was declared effective.
(2) For the purpose of determining any
    liability under the Securities Act of 1933, each post-effective
    amendment that contains a form of prospectus shall be deemed to
    be a new registration statement relating to the securities
    offered therein, and the offering of such securities at that
    time shall be deemed to be the initial
bona fide
offering
    thereof.
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Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities
Act of 1933, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in New York, New York, on this
25th day of August, 2004.
WARREN RESOURCES, INC.
By:
/s/ NORMAN F. SWANTON
Norman F. Swanton
Chairman and Chief Executive Officer
Each person whose signature appears below as a
signatory to this registration statement constitutes and
appoints Norman F. Swanton and Timothy A. Larkin, or either one
of them, his true and lawful attorney-in-fact and agent with
full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign
any and all amendments to this registration statement, and to
file the same, with all exhibits thereto, and all other
documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every
act and thing requisite and necessary to be done in and about
the premises, as fully to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all that
said attorney-in-fact and agent or his substitute may lawfully
do or cause to be done by virtue hereof. Pursuant to the
requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons
in the capacities and on the dates indicated, in multiple
counterparts with the effect of one original.
Pursuant to the requirements of the Securities
Act of 1933, this registration statement has been signed by the
following persons in the capacities on August 25, 2004.
Signatures
Title
/s/ NORMAN F. SWANTON
Norman F. Swanton
President, Chairman of the Board and Chief
Executive Officer
/s/ TIMOTHY A. LARKIN
Timothy A. Larkin
Executive Vice President and Chief Financial
    Officer
/s/ DOMINICK D'ALLEVA
Dominick D'Alleva
Director
/s/ CHET BORGIDA
Chet Borgida
Director
/s/ ANTHONY L. COELHO
Anthony L. Coelho
Director
/s/ LLOYD G. DAVIES
Lloyd G. Davies
Director
/s/ MARSHALL MILLER
Marshall Miller
Director
II-8
Table of Contents
Signatures
Title
/s/ THOMAS G. NOONAN
Thomas G. Noonan
Director
/s/ MICHAEL R. QUINLAN
Michael R. Quinlan
Director
II-9
Table of Contents
INDEX TO EXHIBITS
Exhibit
Number
Description
1.1*
*
Form of Underwriting Agreement among Warren
    Resources, Inc. and the underwriters named therein
2.1(
1)
Stock Exchange Agreement dated September 1,
    2000 by and among Warren Resources, Inc., Petroleum Development
    Corporation, James C. Johnson, Jr. and Gregory S. Johnson.
3.1(
9)
Articles of Incorporation of Warren Resources,
    Inc. filed May 20, 2004 (Maryland)
3.2(
9)
Articles Supplementary (Series A 8%
    Cumulative Convertible Preferred Stock ($.0001 par value))
    (Maryland)
3.3(
9)
Articles Supplementary (Series A
    Institutional 8% Cumulative Convertible Preferred Stock
    ($.0001 par value)) (Maryland)
3.4(
9)
Certificate of Correction to Articles
    Supplementary (Series A 8% Cumulative Convertible Preferred
    Stock) (Maryland)
3.5(
9)
Certificate of Correction to Articles
    Supplementary (Series A Institutional 8% Cumulative
    Convertible Preferred Stock) (Maryland)
3.6(
9)
Bylaws of the Warren Resources, Inc.
4.1*
*
Specimen Stock Certificate for Common Stock
4.2(
1)
Indenture between Warren Resources, Inc. and
    Continental Stock Transfer and Trust Company, as Trustee, dated
    December 1, 2000 regarding 12% debentures due
    December 31, 2007
4.3(
1)
Form of Bond Certificate for 12% debentures
    due December 31, 2007
4.4(
1)
Indenture between Warren Resources, Inc. and
    Continental Stock Transfer and Trust Company, as Trustee, dated
    February 1, 1999 regarding 13.02% sinking fund
    convertible bonds due December 31, 2010 and
    December 31, 2015
4.5(
1)
Form of Bond Certificate for
    13.02% debentures due December 31, 2010
4.6(
1)
Form of Bond Certificate for
    13.02% debentures due December 31, 2015
4.11
(6)
Form of Class A Common Stock Purchase Warrant
4.12
(6)
Form of Class B Common Stock Purchase Warrant
4.13
(2)
Form of Registration Rights Agreement dated
    December 12, 2002 by and between Warren Resources, Inc. and
    the Investors in the Series A 8% Cumulative Convertible
    Preferred Stock
4.14
(7)
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
4.15
(9)
Form of Subscription and Registration Rights
    Agreement dated July 30, 2004 by and between Warren
    Resources, Inc. and the Accredited Investors in Warren
    Resources, Inc.'s private placement dated July 9, 2004
4.16
(5)
Form of Contribution Agreement by and between
    Warren Resources, Inc. and various Delaware limited liability
    companies
5.1*
*
Opinion of Patton Boggs LLP, counsel to Warren
    Resources, Inc.
10.1(
1)
2000 Equity Incentive Plan for Employees of
    Warren E&P, Inc. (formerly Petroleum Development
    Corporation, a wholly owned subsidiary of Warren Resources, Inc.)
10.2(
1)
Amendment to 2000 Stock Incentive Plan for
    Employees of Warren E&P, Inc. (formerly Petroleum
    Development Corporation, a wholly owned subsidiary of Warren
    Resources, Inc.)
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 Warren Resources, Inc. and Norman F. Swanton
10.6(
8)
Amendment to Employment Agreement dated
    January 1, 2004, between Warren Resources, Inc. and Norman
    F. Swanton
Table of Contents
Exhibit
Number
Description
10.7(
1)
Employment Agreement dated January 1, 2001,
    between Warren Resources, Inc. and Timothy A. Larkin
10.8(
8)
Amendment to Employment Agreement dated
    January 1, 2004, between Warren Resources, Inc. and Timothy
    A. Larkin
10.9(
8)
Employment Agreement dated January 1, 2004,
    between Warren Resources, Inc. and David E. Fleming
10.10
(8)
Employment Agreement dated March 1, 2004,
    between Warren Resources, Inc. and Lloyd Davies
10.11
(9)
Employment Agreement dated January 1, 2004,
    between Warren Resources, Inc. and Ellis Vickers
10.12
(1)
Form of Indemnification Agreement between Warren
    Resources, Inc. and each of the directors and certain officers
    of Warren Resources, Inc.
10.13
(1)
Joint Venture Agreement dated May 24, 1999,
    by and between Warren Resources of California, Inc., Warren
    Development Corp., Warren E&P, Inc. and Magness Petroleum
    Company
10.14
(1)
Gas Purchase Agreement dated January 28,
    2000, by and between Western Gas Resources, Inc. and Big Basin
    Petroleum, LLC
10.15
(1)
December 20, 2000 Letter of Agreement to
    Amend the Gas Purchase Contract dated January 28, 2000,
    between Western Gas Resources Inc. and Petroleum Development
    Corp., as successor in interest to Big Basin Petroleum, LLC
10.16
(1)
Gas Purchase and Sales Contract dated
    April 1, 2000, between Warren Resources, Inc. and Tenaska
    Marketing Ventures
10.17
(1)
Form of Master Gas Purchase and Sale Agreement
10.18
(3)
Exchange Agreement dated December 11, 2002
    between Anadarko Petroleum Corporation and Warren Resources, Inc.
10.19
(3)
Joint Exploration Agreement dated
    December 13, 2002 between Anadarko Petroleum Corporation
    and Warren Resources, Inc.
14(4)
Code of Ethics for Senior Financial Officers
21*
Subsidiaries of Warren Resources, Inc.
23.1*
Consent of Grant Thorton LLP
23.2*
Consent of Williamson Petroleum Consultants, Inc.
23.3*
Consent of CBIZ Valuation Group, Inc.
23.4*
*
Consent of Patton Boggs LLP (contained in
    Exhibit 5.1)
24.1*
Powers of Attorney (included on signature page of
    this registration statement)
(1)
Incorporated by reference to the Company's
    Registration Statement on Form 10, Commission File
    No. 000-33275, filed on October 26, 2001.
(2)
Incorporated by reference to the Company's
    Current Report on Form 8-K, Commission File
    No. 000-33275, filed on December 17, 2002.
(3)
Incorporated by reference to the Company's
    Current Report on Form 8-K, Commission File
    No. 000-33275, filed on December 24, 2002.
(4)
Incorporated by reference to the Company's
    Annual Report on Form 10-K for the year ended
    December 31, 2002, Commission File No. 000-33275,
    filed on March 31, 2003.
(5)
Incorporated by reference to the Company's
    Quarterly Report on Form 10-Q for the quarter ended
    June 30, 2003, Commission File No. 000-33275, filed on
    August 13, 2003.
(6)
Incorporated by reference to the Company's
    Annual Report on Form 10-K for the year ended
    December 31, 2003, Commission File No. 000-33275,
    filed on March 15, 2004.
(7)
Incorporated by reference to the Company's
    Current Report on Form 8-K, Commission File
    No. 000-33275, filed on February 11, 2004.
Table of Contents
(8)
Incorporated by reference to the Company's
    Quarterly Report on Form 10-Q for the quarter ended
    March 31, 2004, Commission File No. 000-33275, filed
    on May 12, 2004.
(9)
Incorporated by reference to the Company's
    Quarterly Report on Form 10-Q for the quarter ended
    June 30, 2004, Commission File No. 000-33275, filed on
    August 16, 2004.
*
Filed herewith.
**
To be filed by amendment.