**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

| **x** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** | ** ** |
|-------|----------------------------------------------------------------------------------------------|------------|

 

**For theQuarterly Period Ended June 30, 2006**

 

# **OR**

 

| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** | ** ** |
|-------|-----------------------------------------------------------------------------------------------|------------|

 

**For thetransition period from       to**

 

# **Commission File No. 000-33275**

# ** **

**WARREN RESOURCES, INC.**

(Exact Name ofRegistrant as Specified in its Charter.)

 

| **Maryland**                              |       | **11-3024080**          |
|-------------------------------------------|------------|-------------------------|
| (State or other jurisdiction  of          |       | (I.R.S. Employer        |
| incorporation or  organization)           | ** ** | Identification  Number) |
|                                      |       |                    |
| **489  Fifth Avenue, New York,**          |       |                    |
| **New  York**                             | ** ** | **10017**               |
| (Address of  Principal Executive Offices) |       | (Zip Code)              |

 

Registrant’stelephone number, including area code:

**(212) 697-9660**

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 and 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes xNo o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer (asdefined in Rule 12b-2 of the Exchange Act).

 

Large accelerated filer o                  Acceleratedfiler x                  Non-acceleratedfiler o

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes oNo x

 

Theaggregate number of Registrant’s outstanding shares on August 2, 2006 was 53,825,560shares of Common Stock, $0.0001 par value.

 

 

----

 

**WARRENRESOURCES, INC.**

 

**INDEX**

 
| PART I—  |   | FINANCIAL INFORMATION                                                                                 |   |   |
|---------------|--------|-------------------------------------------------------------------------------------------------------|--------|--------|
|          |   |                                                                                                  |   |   |
|          |   | Item 1.  Financial Statements                                                                         |   |   |
|          |   |                                                                                                  |   |   |
|          |   | Consolidated  Balance Sheets as of June 30, 2006 and December 31, 2005                                |   |   |
|          |   |                                                                                                  |   |   |
|          |   | Consolidated  Statements of Operations for the three and six months ended June 30, 2006 and  2005     |   |   |
|          |   |                                                                                                  |   |   |
|          |   | Consolidated  Statements of Cash Flows for the six months ended June 30, 2006 and 2005                |   |   |
|          |   |                                                                                                  |   |   |
|          |   | Notes  to the Consolidated Financial Statements                                                       |   |   |
|          |   |                                                                                                  |   |   |
|          |   | Item  2. Management’s Discussion and Analysis of Financial Conditions and Results  of Operations |   |   |
|          |   |                                                                                                  |   |   |
|          |   | Item  3. Quantitative and Qualitative Disclosures About Market Risk                                   |   |   |
|          |   |                                                                                                  |   |   |
|          |   | Item  4. Evaluation of Disclosure Controls and Procedures                                             |   |   |
|          |   |                                                                                                  |   |   |
| PART II— |   | OTHER INFORMATION                                                                                     |   |   |
|          |   |                                                                                                  |   |   |
|          |   | Item 1. Legal Proceedings                                                                             |   |   |
|          |   |                                                                                                  |   |   |
|          |   | Item 1A. Risk Factors                                                                                 |   |   |
|          |   |                                                                                                  |   |   |
|          |   | Item  2. Unregistered Sales of Equity Securities and Use of Proceeds                                  |   |   |
|          |   |                                                                                                  |   |   |
|          |   | Item  3. Defaults upon Senior Securities                                                              |   |   |
|          |   |                                                                                                  |   |   |
|          |   | Item  4. Submission of Matters to a Vote of Security Holders                                          |   |   |
|          |   |                                                                                                  |   |   |
|          |   | Item 5. Other Information                                                                             |   |   |
|          |   |                                                                                                  |   |   |
|          |   | Item 6. Exhibits                                                                                      |   |   |
|          |   |                                                                                                  |   |   |
|          |   | Signatures                                                                                            |   |   |

 

2

----

 

**PART I—FINANCIAL INFORMATION**

 

###### **ITEM 1.FINANCIAL STATEMENTS**

 

**Warren Resources, Inc. and SubsidiariesCONSOLIDATED BALANCE SHEETS**

 

**(Unaudited)**

 
| ** **                                                                                                                                                                                                                                | ** ** | **June 30,  2006** | ** **      | **December 31,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|-----------------|------------------------|------------|
| ASSETS                                                                                                                                                                                                                                    |       |               |            |                   |       |
| Current Assets                                                                                                                                                                                                                            |       |               |            |                   |       |
| Cash and cash  equivalents                                                                                                                                                                                                                |       | $                  | 69,672,892      |                   | $          | 114,632,099 |   |
| Accounts  receivable – trade                                                                                                                                                                                                         |       | 3,329,910          |            | 3,945,862              |       |
| Accounts  receivable from affiliated partnerships                                                                                                                                                                                         |       | 45,641             |            | 118,356                |       |
| Trading  securities                                                                                                                                                                                                                       |       | 668,100            |            | —                 |       |
| Restricted investments  in U.S. Treasury Bonds—available-for-sale, at fair value                                                                                                                                                     |       | 112,451            |            | 125,771                |       |
| Other current  assets                                                                                                                                                                                                                     |       | 3,315,388          |            | 2,356,583              |       |
|                                                                                                                                                                                                                                      |       |               |            |                   |       |
| Total current  assets                                                                                                                                                                                                                     |       | 77,144,382         |            | 121,178,671            |       |
|                                                                                                                                                                                                                                      |       |               |            |                   |       |
| Other Assets                                                                                                                                                                                                                              |       |               |            |                   |       |
| Oil and gas  properties—at cost, based on successful efforts method of accounting, net of  accumulated depreciation, depletion and amortization                                                                                      |       | 226,147,275        |            | 185,904,194            |       |
| Property and  equipment—at cost, net                                                                                                                                                                                                 |       | 635,744            |            | 559,612                |       |
| Restricted  investments in U.S. Treasury Bonds—available for sale, at fair value                                                                                                                                                     |       | 1,012,064          |            | 1,821,181              |       |
| Deferred bond  offering costs                                                                                                                                                                                                             |       | 267,687            |            | 277,700                |       |
| Goodwill                                                                                                                                                                                                                                  |       | 3,430,246          |            | 3,430,246              |       |
| Other assets                                                                                                                                                                                                                              |       | 4,009,556          |            | 7,592,799              |       |
|                                                                                                                                                                                                                                      |       |               |            |                   |       |
| Total other  assets                                                                                                                                                                                                                       |       | 235,502,572        |            | 199,585,732            |       |
|                                                                                                                                                                                                                                      | ** ** | **$**              | **312,646,954** | ** **             | **$**      | **320,764,403** | ** ** |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                                                                                |       |               |            |                   |       |
| Current Liabilities                                                                                                                                                                                                                       |       |               |            |                   |       |
| Current  maturities of debentures                                                                                                                                                                                                         |       | $                  | 253,100         |                   | $          | 260,600 |   |
| Current  maturities of other long-term liabilities                                                                                                                                                                                        |       | 330,678            |            | 325,994                |       |
| Accounts payable  and accruals                                                                                                                                                                                                            |       | 13,569,972         |            | 25,042,379             |       |
| Deferred  income—turnkey drilling contracts with affiliated partnerships                                                                                                                                                             |       | 1,074,952          |            | 1,765,829              |       |
|                                                                                                                                                                                                                                      |       |               |            |                   |       |
| Total current  liabilities                                                                                                                                                                                                                |       | 15,228,702         |            | 27,394,802             |       |
|                                                                                                                                                                                                                                      |       |               |            |                   |       |
| Long-Term Liabilities                                                                                                                                                                                                                     |       |               |            |                   |       |
| Debentures, less  current portion                                                                                                                                                                                                         |       | 2,277,900          |            | 2,345,400              |       |
| Other long-term  liabilities, less current portion                                                                                                                                                                                        |       | 6,334,720          |            | 5,974,493              |       |
|                                                                                                                                                                                                                                      |       |               |            |                   |       |
|                                                                                                                                                                                                                                      |       | 8,612,620          |            | 8,319,893              |       |
|                                                                                                                                                                                                                                      |       |               |            |                   |       |
| Minority Interest                                                                                                                                                                                                                         |       | —             |            | 7,009,634              |       |
|                                                                                                                                                                                                                                      |       |               |            |                   |       |
| Commitments and Contingencies                                                                                                                                                                                                             |       |               |            |                   |       |
|                                                                                                                                                                                                                                      |       |               |            |                   |       |
| Stockholders’ Equity                                                                                                                                                                                                                 |       |               |            |                   |       |
| 8% convertible  preferred stock, par value $.0001; authorized 10,000,000 shares, issued and  outstanding, 322,971 shares in 2006 and 652,336 shares in 2005 (aggregate  liquidation preference $3,875,652 in 2006 and $7,828,032 in 2005) |       | 3,859,957          |            | 7,629,622              |       |
| Common stock —  $.0001 par value; authorized, 100,000,000 shares; issued 53,683,608 in 2006  and 52,738,384 shares in 2005                                                                                                           |       | 5,368              |            | 5,274                  |       |
| Additional  paid-in-capital                                                                                                                                                                                                               |       | 366,148,917        |            | 353,714,161            |       |
| Accumulated  deficit                                                                                                                                                                                                                      |       | (80,574,836        | )               | (82,861,220            | )          |
| Accumulated  other comprehensive income, net of applicable income taxes of $129,000 in  2006 and $185,000 in 2005                                                                                                                         |       | 94,281             |            | 280,292                |       |
|                                                                                                                                                                                                                                      |       | 289,533,687        |            | 278,768,129            |       |
| Less common  stock in Treasury—at cost; 632,250 shares in 2006 and 2005                                                                                                                                                              |       | 728,055            |            | 728,055                |       |
| Total  stockholders’ equity                                                                                                                                                                                                          |       | 288,805,632        |            | 278,040,074            |       |
|                                                                                                                                                                                                                                      | ** ** | **$**              | **312,646,954** | ** **             | **$**      | **320,764,403** | ** ** |

 

The accompanyingnotes are an integral part of these financial statements.

 

3

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**Warren Resources, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                                             | ** ** | **Three Months Ended  June 30, (Unaudited)** | ** ** | **Six Months Ended  June 30, (Unaudited)** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                             | ** ** | **2006**                                     | ** ** | **2005**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues                                                               |       |                                         |       |                                       |       |   |   |   |   |
| Oil and gas  sales                                                     |       | $                                            | 7,634,160  |                                       | $          | 2,929,324 |   | $ | 14,443,601 |   | $ | 5,105,911 |   |
| Turnkey  contracts with affiliated partnerships                        |       | 119,913                                      |       | 1,324,538                                  |       | 546,510 |   | 3,603,855 |   |
| Oil and gas  sales from marketing activities                           |       | 503,369                                      |       | 2,310,421                                  |       | 1,518,414 |   | 4,506,495 |   |
| Well services                                                          |       | 209,632                                      |       | 284,636                                    |       | 457,921 |   | 825,295 |   |
| Net gain on  investments                                               |       | 72,731                                       |       | 329,441                                    |       | 49,807 |   | 360,901 |   |
| Interest and  other income                                             |       | 1,153,179                                    |       | 697,909                                    |       | 2,509,181 |   | 1,590,610 |   |
| Gain on sale of  oil and gas properties                                |       | —                                       |       | 89,441                                     |       | — |   | 89,441 |   |
|                                                                   |       | 9,692,984                                    |       | 7,965,710                                  |       | 19,525,434 |   | 16,082,508 |   |
|                                                                   |       |                                         |       |                                       |       |   |   |   |   |
| Expenses                                                               |       |                                         |       |                                       |       |   |   |   |   |
| Production &  exploration                                          |       | 3,176,007                                    |       | 1,999,872                                  |       | 6,155,628 |   | 2,673,034 |   |
| Turnkey  contracts                                                     |       | 94,881                                       |       | 1,746,209                                  |       | 800,597 |   | 3,767,210 |   |
| Cost of marketed  oil and gas purchased from affiliated partnerships   |       | 484,667                                      |       | 2,278,353                                  |       | 1,476,673 |   | 4,443,445 |   |
| Well services                                                          |       | 164,840                                      |       | 171,642                                    |       | 460,323 |   | 366,031 |   |
| Depreciation,  depletion, amortization and impairment                  |       | 1,745,394                                    |       | 918,257                                    |       | 3,218,826 |   | 1,680,152 |   |
| General and  administrative                                            |       | 2,357,786                                    |       | 1,467,007                                  |       | 4,630,905 |   | 2,932,351 |   |
| Interest                                                               |       | 182,981                                      |       | 499,523                                    |       | 373,098 |   | 1,606,277 |   |
| Retirement of  debt                                                    |       | —                                       |       | 349,037                                    |       | — |   | 1,524,270 |   |
|                                                                   |       | 8,206,556                                    |       | 9,429,900                                  |       | 17,116,050 |   | 18,992,770 |   |
|                                                                   |       |                                         |       |                                       |       |   |   |   |   |
| Income (loss)  before provision for income taxes and minority interest |       | 1,486,428                                    |       | (1,464,190                                 | )          | 2,409,384 |   | (2,910,262 | ) |
|                                                                   |       |                                         |       |                                       |       |   |   |   |   |
| Deferred income  tax expense (benefit)                                 |       | 56,000                                       |       | (114,000                                   | )          | 123,000 |   | — |   |
|                                                                   |       |                                         |       |                                       |       |   |   |   |   |
| Income (loss) before minority interest                                 |       | 1,430,428                                    |       | (1,350,190                                 | )          | 2,286,384 |   | (2,910,262 | ) |
|                                                                   |       |                                         |       |                                       |       |   |   |   |   |
| Minority interest                                                      |       | —                                       |       | (32,303                                    | )          | — |   | (200,337 | ) |
|                                                                   |       |                                         |       |                                       |       |   |   |   |   |
| Net income (loss)                                                      |       | 1,430,428                                    |       | (1,382,493                                 | )          | 2,286,384 |   | (3,110,599 | ) |
|                                                                   |       |                                         |       |                                       |       |   |   |   |   |
| Less dividends and accretion on preferred shares                       |       | 45,222                                       |       | 1,602,191                                  |       | 216,148 |   | 3,242,623 |   |
|                                                                   |       |                                         |       |                                       |       |   |   |   |   |
| Net income (loss) applicable to common stockholders                    |       | $                                            | 1,385,206  |                                       | $          | (2,984,684 | ) | $ | 2,070,236 |   | $ | (6,353,222 | ) |
|                                                                   |       |                                         |       |                                       |       |   |   |   |   |
| Earnings (loss) per share – Basic                                 |       | $                                            | 0.03       |                                       | $          | (0.08 | ) | $ | 0.04 |   | $ | (0.18 | ) |
| Earnings (loss) per share – Diluted                               |       | 0.03                                         |       | (0.08                                      | )          | 0.04 |   | (0.18 | ) |
|                                                                   |       |                                         |       |                                       |       |   |   |   |   |
| Weighted average common shares outstanding – Basic                |       | 52,830,408                                   |       | 36,379,461                                 |       | 52,516,684 |   | 35,146,437 |   |
| Weighted average common shares outstanding – Diluted              |       | 54,384,583                                   |       | 36,379,461                                 |       | 54,341,803 |   | 35,146,437 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

4

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**Warren Resources, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                                           | ** ** | **For the six months ended  June 30, (Unaudited)** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                           | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
| Cash flows from operating activities:                                                                |       |                                               |       |   |   |
| Net income (loss)                                                                                    |       | $                                                  | 2,286,384  |   | $ | (3,110,599 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |       |                                               |       |   |   |
| Accretion of  discount on available-for-sale debt securities                                         |       | (44,556                                            | )          | (362,487 | ) |
| Amortization and  write-off of deferred bond offering costs                                          |       | 10,013                                             |       | 947,850 |   |
| Gain on sale of  US treasury bonds—available for sale                                           |       | —                                             |       | (418,001 | ) |
| Depreciation,  depletion, amortization and impairment                                                |       | 3,218,826                                          |       | 1,680,152 |   |
| Accretion of  asset retirement obligation                                                            |       | 168,897                                            |       | 36,543 |   |
| Gain on sale of  oil and gas properties                                                              |       | —                                             |       | (89,441 | ) |
| Expense on the  issuance of warrants                                                                 |       | —                                             |       | 21,705 |   |
| Common stock  cancelled                                                                              |       | (70,670                                            | )          | — |   |
| Stock option  expense                                                                                |       | 234,835                                            |       | — |   |
| Deferred tax  expense                                                                                |       | 123,000                                            |       | — |   |
| Change in assets  and liabilities:                                                                   |       |                                               |       |   |   |
| (Increase)  decrease in trading securities                                                           |       | (668,100                                           | )          | 65,818 |   |
| (Increase)  decrease in accounts receivable—trade                                               |       | 660,951                                            |       | (698,138 | ) |
| Decrease in  accounts receivable from affiliated partnerships                                        |       | 72,715                                             |       | 15,147 |   |
| (Increase)  decrease in other assets                                                                 |       | 2,624,438                                          |       | (3,052,059 | ) |
| Decrease in  accounts payable and accruals                                                           |       | (5,493,342                                         | )          | (1,306,195 | ) |
| Decrease in  deferred income from affiliated partnerships                                            |       | (690,877                                           | )          | (3,990,206 | ) |
| Decrease in  other long term liabilities                                                             |       | —                                             |       | (13,069 | ) |
|                                                                                                 |       |                                               |       |   |   |
| Net cash  provided by (used in) operating activities                                                 |       | 2,432,514                                          |       | (10,272,980 | ) |
|                                                                                                 |       |                                               |       |   |   |
| Cash flows from  investing activities:                                                               |       |                                               |       |   |   |
| Purchase,  exploration and development of oil and gas properties                                     |       | (50,115,263                                        | )          | (25,740,069 | ) |
| Purchase of  property and equipment                                                                  |       | (193,660                                           | )          | (245,049 | ) |
| Proceeds from  the sale of property and equipment                                                    |       | —                                             |       | 180,000 |   |
| Proceeds from  U.S. Treasury Bonds—available-for-sale                                           |       | 557,983                                            |       | 11,156,955 |   |
|                                                                                                 |       |                                               |       |   |   |
| Net cash used in  investing activities                                                               |       | (49,750,940                                        | )          | (14,648,163 | ) |
|                                                                                                 |       |                                               |       |   |   |
| Cash flows from  financing activities:                                                               |       |                                               |       |   |   |
| Payments on debt  and debentures                                                                     |       | (117,055                                           | )          | (16,986,268 | ) |
| Issuance of  common stock, net                                                                       |       | 2,476,274                                          |       | 361,716 |   |
| Dividends paid  on preferred stock                                                                   |       | —                                             |       | (1,574,594 | ) |
|                                                                                                 |       |                                               |       |   |   |
| Net cash  provided by (used in) financing activities                                                 |       | 2,359,219                                          |       | (18,199,146 | ) |
|                                                                                                 |       |                                               |       |   |   |
| Net decrease in  cash and cash equivalents                                                           |       | (44,959,207                                        | )          | (43,120,289 | ) |
| Cash and cash  equivalents at beginning of period                                                    |       | 114,632,099                                        |       | 99,920,885 |   |
|                                                                                                 |       |                                               |       |   |   |
| Cash and cash  equivalents at end of period                                                          |       | $                                                  | 69,672,892 |   | $ | 56,800,596 |   |
|                                                                                                 |       |                                               |       |   |   |
| Supplemental  disclosure of cash flow information                                                    |       |                                               |       |   |   |
| Cash paid for  interest, net of amount capitalized                                                   |       | $                                                  | 194,189    |   | $ | 1,340,484 |   |
| Cash paid for  income taxes                                                                          |       | —                                             |       | — |   |
| Noncash  investing and financing activities                                                          |       |                                               |       |   |   |
| Accrued  preferred stock dividend                                                                    |       | $                                                  | 205,634    |   | $ | 1,564,310 |   |
| Common stock  issued for acquisition of property                                                     |       | 6,185,389                                          |       | — |   |
| Common stock  issued on conversion of preferred stock                                                |       | 3,951,576                                          |       | 61,028,268 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

5

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**WARRENRESOURCES, INC. AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

** **

**NOTE 1—ORGANIZATION**

 

Warren Resources, Inc.(the “Company” or “Warren”), was originally formed on June 12, 1990 for thepurpose of acquiring and developing oil and gas properties. The Company isincorporated under the laws of the state of Maryland. The Company’s propertiesare primarily located in Wyoming, California, New Mexico, North Dakota andTexas. In addition, the Company serves as the managing general partner (the “MGP”)to affiliated partnerships and joint ventures.

 

Theaccompanying unaudited financial statements and related notes present theCompany’s consolidated financial position as of June 30, 2006 and December 31,2005, the consolidated results of operations for the three and six months endedJune 30, 2006 and 2005 and consolidated cash flows for the six months ended June30, 2006 and 2005. The unaudited financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesof America for interim financial information and with the instructions of Form10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all ofthe information and footnotes required by accounting principles generallyaccepted in the United States of America for complete financial statements. Inthe opinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary for a fair presentation have been included.Operating results for the three and six months ended June 30, 2006, are notnecessarily indicative of the results that may be expected for the fiscal yearending December 31, 2006. The accounting policies followed by the Company areset forth in Note A to the Company’s financial statements included in Form 10-Kfor the year ended December 31, 2005. These interim financial statements andnotes thereto should be read in conjunction with the consolidated financialstatements presented in the Company’s 2005 Annual Report on Form 10-K.

 

##### **NOTE 2**—STOCK OPTIONS

##### ** **

Prior to January 1, 2006,we accounted for our nonqualified stock options using the intrinsic value methodunder Accounting Principles Board Opinion No. 25, *Accountingfor Stock Issued to Employees* (“APB 25”). Under APB 25, if theexercise price of employee stock options equaled the market price of theunderlying stock on the grant date, no compensation expense was recorded. Wehad adopted the disclosure-only provisions of Statement of Financial AccountingStandards No. 123, *Accounting for Stock-BasedCompensation* (“SFAS 123”). No stock-based compensation cost for our nonqualifiedstock options was recognized in the Consolidated Statements of Operations forthe three and six months ended June 30, 2005. Effective January 1, 2006, weadopted the fair value recognition provisions of Statement of FinancialAccounting Standards No. 123(R) *Accounting for Stock-BasedCompensation* (“SFAS 123(R)”), using themodified-prospective-transition method. Under that transition method,compensation cost recognized in the first six months of 2006 includes:  (a) compensation cost for all share-basedpayments granted prior to, but not yet vested as of January 1, 2006 and (b)compensation cost for all share-based payments granted subsequent to January 1,2006. The compensation cost is based on the grant-date fair value calculatedusing a Black-Scholes-Merton option-pricing formula and is amortized over thevesting period in accordance with provisions of Statement 123(R). For the threeand six months ended June 30, 2006, we recognized approximately $201,000 and$235,000 in compensation expense related to our non-qualified stock option plans.

 

The following table illustrates the effect on netincome and earnings per share if we had applied the fair value recognitionprovisions of SFAS 123(R) to options granted under our stock option plans forthe three and six months ended June 30, 2005. For purposes of the pro formadisclosure, the fair value of each option grant is estimated on the date ofgrant and amortized to expense over the options’ vesting periods.

 

6

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| ** **                                                                                                                                    | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2005**                        | ** ** | **2005**                      | ** ** |
|                                                                                                                                          |       |                            |       |                          |       |
| Net loss,  applicable to common stockholders, as reported                                                                                     |       | $                               | (2,984,684 | )                             | $          | (6,353,222 | ) |
|                                                                                                                                          |       |                            |       |                          |       |
| Deduct: Total  stock-based employee compensation expense determined under fair-value-based  method for all awards, net of related tax effects |       | —                          |       | (2,614,482                    | )          |
|                                                                                                                                          |       |                            |       |                          |       |
| Pro forma net  loss applicable to common stockholders, as reported                                                                            |       | $                               | (2,984,684 | )                             | $          | (8,967,704 | ) |
|                                                                                                                                          |       |                            |       |                          |       |
| Basic and  diluted loss per share:                                                                                                            |       |                            |       |                          |       |
| As reported -                                                                                                                                 |       | $                               | (0.08      | )                             | $          | (0.18 | ) |
| Pro forma -                                                                                                                                   |       | $                               | (0.08      | )                             | $          | (0.26 | ) |

 

The following assumptionswere used to value stock options:

 
| ** **              | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------|------------|-------------------------------|------------|
| ** **              | ** ** | **2006**                      | ** ** | **2005** | ** ** |
| Dividend yield          |       | 0                             | %          | 0 | % |
| Expected volatility     |       | 48.2                          | %          | 28.68 | % |
| Risk-free interest rate |       | 4.66                          | %          | 3.65 | % |
| Fair value of options   |       | $                             | 5.57       |   | $ | 2.97 |   |
| Expected life           |       | 3.5 years                     |       | 5 years |   |
|                         |            |                               |            |  |  |  |  |

 
| ** **                       | ** ** | ** **     | ** ** | **Weighted** | ** ** | **Weighted**        | ** ** | ** **          | ** ** |
|----------------------------------|------------|----------------|------------|--------------|------------|---------------------|------------|---------------------|------------|
| ** **                       | ** ** | ** **     | ** ** | **Average**  | ** ** | **Aggregate**       | ** ** | **Average**         | ** ** |
| ** **                       | ** ** | **Number**     | ** ** | **Exercise** | ** ** | **Remaining**       | ** ** | **Intrinsic Value** | ** ** |
| ** **                       | ** ** | **of Options** | ** ** | **Price**    | ** ** | **Term (in years)** | ** ** | **(in thousands)**  | ** ** |
| ** **                       | ** ** | ** **     | ** ** | ** **   | ** ** | ** **          | ** ** | ** **          | ** ** |
| Outstanding at December 31, 2005 |       | 2,510,721      |       | $            | 7.23       |                |       |                |       |   |
| Granted                          |       | 417,250        |       | 13.85        |       |                |       |                |       |
| Exercised                        |       | (108,989       | )          | 6.65         |       |                |       |                |       |
| Forfeited or expired             |       | (11,000        | )          | 13.85        |       |                |       |                |       |
| Outstanding at June 30, 2006     |       | 2,807,982      |       | $            | 8.21       |                | 2.81       |                | $          | 17,311 |   |
|                             |       |           |       |         |       |                |       |                |       |
| Exercisable at June 30, 2006     |       | 2,361,732      |       | $            | 7.13       |                | 3.34       |                | $          | 17,290 |   |

 

Thetotal intrinsic value of options exercised during the six months ended June 30,2006 and 2005 was $0.2 million and $0.5 million respectively.

 

As ofJune 30, 2006 there was $2.1 million of total unrecognized compensation costrelated to non-vested stock options granted under the Plans. This cost isexpected to be recognized over a weighted average period of 3 years.

 

7

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Cashreceived from option exercises under all stock-based payment arrangements forthe six months ended June 30, 2006 was $0.7 million. We issue new shares ofcommon stock to settle option exercises.

 

Thefollowing table summarizes information about the Company’s stock optionsoutstanding at June 30, 2006.

 
| **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-------------------------|------------|-------------------------|------------|
| ** **              | ** ** | ** **              | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | ** **              | ** ** | **Weighted** | ** ** | **Average** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| **Exercise**            | ** ** | **Options**             | ** ** | **Average  Exercise** | ** ** | **Remaining  Contractual** | ** ** | **Options** | ** ** | **Average  Exercise** | ** ** |
| **Price**               | ** ** | **Outstanding**         | ** ** | **Price** | ** ** | **Life (Years)** | ** ** | **Exercisable** | ** ** | **Price** | ** ** |
|                    |       |                    |       |   |   |   |   |   |   |   |   |
| $                       | 4.00       |                    |       | 713,783 |   | $ | 4.00 |   | 1.91 |   | 713,783 |   | $ | 4.00 |   |
| 7.00                    |       |                    | 618,500    |   | 7.00 |   | 2.78 |   | 618,500 |   | 7.00 |   |
| 9.05                    |       |                    | 692,500    |   | 9.05 |   | 3.61 |   | 692,500 |   | 9.05 |   |
| 10.00                   |       |                    | 326,949    |   | 10.00 |   | 0.56 |   | 326,949 |   | 10.00 |   |
| 11.00                   |       |                    | 10,000     |   | 11.00 |   | 4.22 |   | 10,000 |   | 11.00 |   |
| 14.85                   |       |                    | 40,000     |   | 14.85 |   | 4.72 |   | — |   | 14.85 |   |
| 13.85                   |       |                    | 406,250    |   | 13.85 |   | 4.38 |   | — |   | 13.85 |   |
|                    |       |                    | 2,807,982  |   | $ | 8.21 |   | 2.81 |   | 2,361,732 |   | $ | 7.13 |   |

 

**Securities Authorized forIssuance Under Compensation Plans**

 

The table below includesinformation about our equity compensation plans as of June 30, 2006:

 
| **Plans**                               | ** ** | **Number of Shares  Authorized for  Issuance under plan** | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available  for future issuance  under equity  compensation plans** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|
| 2000 Equity Incentive Plan              |       | 1,975,000                                                 |       | 409,500                                                                                             |       | $                                                                                  | 8.32       |                                                                                                 | 946,500    |   |
| 2001 Stock Incentive Plan               |       | 2,500,000                                                 |       | 1,116,732                                                                                           |       | $                                                                                  | 10.21      |                                                                                                 | 974,238    |   |
| 2001 Key  Employee Stock Incentive Plan |       | 2,500,000                                                 |       | 1,281,750                                                                                           |       | $                                                                                  | 6.43       |                                                                                                 | 1,008,250  |   |
| Total                                   |       | 6,975,000                                                 |       | 2,807,982                                                                                           |       | $                                                                                  | 8.21       |                                                                                                 | 2,928,888  |   |

 

#### **NOTE3**—CHANGESIN STOCKHOLDERS’ EQUITY

#### ** **

During the six months endedJune 30, 2006, holders of 329,365 shares of convertible preferred stock haveconverted into common stock on a basis of 0.75 shares of common stock for oneshare of convertible preferred stock. As of June 30, 2006, 322,971 shares ofconvertible preferred stock remain outstanding. Preferred dividends ofapproximately $0.6 million and $0.4 million were accrued at June 30, 2006 andDecember 31, 2005, respectively. The accrued dividends have not been paid as ofthe date of this filing.

 

Effective as of June 30,2006, the 8% preferred stockholders agreed by greater than the requisite 66.67%majority to amend their Articles Supplementary filed with the State of Marylandto allow for a dividend on the preferred stock to be paid in kind with WarrenResources’ common stock for the dividends accrued for the four quarters endedJune 30, 2006, which amount equals $.96 per share, or $591,063 in theaggregate. Therefore, in lieu of paying cash, 

 

8

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Warren plans to issue atotal of 46,669 shares of its common stock as a preferred dividend for the fourquarters ended June 30, 2006, after these common shares are registered under aForm S-3 registration statement.

 

The preferred stock paysan 8% cumulative dividend and is treated as a deduction in additional paid incapital. The holders of the preferred stock are not entitled to vote except asdefined by the agreement or as provided by applicable law. The preferred stockmay be voluntarily converted, at the election of the holder into common stockof the Company based on the table below. The conversion rate is subject toadjustment from time to time as defined by the agreement.

 

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

 

Additionally, commencingseven years after the date of issuance (October 1, 2009), holders of thepreferred stock may elect to require the Company to redeem their preferredstock at a redemption price equal to the liquidation value of $12.00 per share,plus accrued but unpaid dividends, if any (“Redemption Price”). Upon thereceipt 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 toholder shares of common stock in an amount equal to 125% of the redemptionprice and any accrued and unpaid dividends, based on the weighted averageclosing “bid” price of the Company’s common stock for the thirty trading daysimmediately preceding the date of the written redemption election by the holderup to a maximum of 1.5 shares of common stock for each one share of preferredstock redeemed. The Company is accreting the carrying value of its preferredstock to its redemption price using the effective interest method with changesrecorded to additional paid in capital. The accretion of preferred stockresults in a reduction of earnings per share applicable to common stockholders.

 

Notwithstanding theforgoing, if the closing “bid” price of the Company’s publicly traded commonstock as reported by the NASDAQ stock market, or any exchange on which theshares of common stock are traded, exceeds 133% of the conversion price then ineffect for the convertible preferred shares for at least 10 days during any30-day trading period, the Company has the right to redeem in whole or in partthe convertible preferred stock at a redemption price of $12 per share (plusany accrued unpaid dividends) or convert the convertible preferred shares (plusany accrued unpaid dividends) into common stock at the then applicableconversion rate.

 

At June 30, 2006, therewere 322,971 preferred shares outstanding that the Company may be required toredeem at the aggregate redemption price of $3,875,652 between July 1, 2010 andJanuary 1, 2011. As noted above, the Company could, at its option, settle theredemption requests in shares of its common stock.

 

During the six monthsended June 30, 2006, employees and directors exercised a total of 108,989 optionsat exercise prices between $4 and $10 per share. Additionally for the six monthsended June 30, 2006, investors exercised a total of 160,573 warrants at exerciseprices of $10 and $12.50 per share. The Company received proceeds ofapproximately $2.5 million from these two exercises.

 

During the first quarterof 2006, the investor partners of the 1998 drilling partnerships voted toapprove the sale of all of the oil and gas assets of the drilling partnershipsto us. As a result, the Company issued 383,072 restricted shares of commonstock under Regulation D (restricted for at least one year) with a value of$5.5 million in exchange for both producing and non-producing properties. The numberof shares issued was determined based upon a 20% discount from the weightedaverage sales price for Warren’s publicly traded common stock for theforty-five (45) calendar days ending March 31, 2006. The Company booked thetransaction based on the undiscounted weighted average price of its commonstock for the forty-five (45) calendar days ending March 31, 2006. The Company alsoissued 44,691 shares to an individual in exchange for his interest in onedrilling partnership during the three months ended March 31, 2006. These shareswere valued at $680,644 based on the price of our stock on the date ofissuance.

 

Also, during the threemonths ended March 31, 2006, the Company acquired all minority interests in the1994 thru 1997 drilling partnerships for approximately $1.4 million in cash.The minority interest relating to these partnerships was recorded as areduction in the cost basis of the assets acquired.

 

9

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**NOTE 4—INCOME (LOSS) PER SHARE**

 

Basic income (loss) pershare is computed by dividing net income (loss) applicable to commonstockholders by the weighted average number of shares of common stockoutstanding during the period. Diluted income (loss) per share is based on theassumption that stock options and warrants are converted into common sharesusing the treasury stock method and convertible bonds and preferred stock areconverted using the if-converted method. Conversion is not assumed if theresults are anti-dilutive. Potential common shares for the three and six monthsended June 30, 2006 and June 30, 2005 of 424,211 and 3,344,023 respectively,relating to convertible bonds and preferred stock, were excluded from thecomputation of diluted income (loss) per share because they are anti-dilutive. Potentialcommon shares of 446,250 and 6,414,958, relating to stock options and warrants,respectively, were excluded from the computation of diluted income (loss) pershare for the six months ended June 30, 2006 and June 30, 2005 because they areanti-dilutive. Additionally, potential common shares of 446,250 and 6,414,958,relating to stock options and warrants, respectively, were excluded from thecomputation of diluted income (loss) per share for the three months ended June30, 2006 and June 30, 2005 because they are anti-dilutive. Stock options have aweighted average exercise price of $8.21 and $6.45 at June 30, 2006 and June 30,2005, respectively. Anti-dilutive warrants have a weighted average exerciseprice of $11.31 and $11.17 at June 30, 2006 and June 30, 2005, respectively. AtJune 30, 2006, the convertible bonds may be converted from the date of issuanceuntil maturity at 100% of principal amount into common stock of the Company atprices ranging from $25 to $50. The preferred stock may be converted at thediscretion of the holder or upon meeting certain conditions at the discretionof the Company (see Note 3).

 

Basic and diluted netincome per share is computed based on the following information:

 
| ** **                                         | ** ** | **Three Months  Ended  June 30, 2006** | ** ** | **Six Months  Ended  June 30, 2006** | ** ** |
|----------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
|                                               |       |                                   |       |                                 |       |
| Net income available to shareholders               |       | $                                      | 1,385,206  |                                 | $          | 2,070,236 |   |
|                                               |       |                                   |       |                                 |       |
| Weighted average shares outstanding - basic        |       | 52,830,408                             |       | 52,516,684                           |       |
| Effect of dilutive securities – stock options |       | 455,102                                |       | 631,412                              |       |
| Effect of dilutive securities – warrants      |       | 1,099,073                              |       | 1,193,707                            |       |
|                                               |       |                                   |       |                                 |       |
| Weighted average shares outstanding - diluted      |       | 54,384,583                             |       | 54,341,803                           |       |
|                                               |       |                                   |       |                                 |       |
| Basic and diluted net income per share             |       | $                                      | 0.03       |                                 | $          | 0.04 |   |

 

**NOTE 5—LONG-TERM DEBT**

 

Theconvertible bonds may be converted from the date of issuance until maturity at100% of principal amount into common stock of the Company at prices rangingfrom $25 to $50. Each year the holders of the convertible bonds may tender tothe Company up to 10% of the aggregate bonds issued and outstanding.

 

Bondsoutstanding are as follows:

 
| ** **                                           | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
|                                                 |       |               |       |                   |       |
| 12% Secured Convertible Bonds, due December 31, 2020 |       | $                  | 1,395,000  |                   | $          | 1,470,000 |   |
| 12% Secured Convertible Bonds, due December 31, 2022 |       | 1,136,000          |       | 1,136,000              |       |
|                                                 |       |               |       |                   |       |
|                                                 |       | 2,531,000          |       | 2,606,000              |       |
| Less current portion                                 |       | 253,100            |       | 260,600                |       |
|                                                 |       |               |       |                   |       |
| Long-term portion                                    |       | $                  | 2,277,900  |                   | $          | 2,345,400 |   |

 

10

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#### **NOTE6—CONTINGENCIES**

 

**Litigation**

 

We are a party to legalactions arising in the ordinary course of our business. In the opinion of ourmanagement, based in part on consultation with legal counsel, the liability, ifany, under these claims is either adequately covered by insurance or would nothave a material adverse effect on the Company’s financial condition or resultsof operations.

 

**Repurchase Agreements**

 

Forrepurchase agreements relating to partnerships formed from 1999 to 2001,investor partners have a right to have their interests repurchased by theCompany at a formula price seven years from the date of the originalpartnership formation. In determining the amount of the repurchase obligation,the obligation is computed based on the lesser of a formula purchase price orthe estimated cash flows discounted at 10% (“PV-10”) from proved developed andundeveloped reserves of each partnership. At June 30, 2006, the formula purchaseprice with respect to these partnerships was approximately $74.5 million.However, this amount is limited to approximately $36.4 million based on thePV-10 of the assets in these partnerships at December 31, 2005. This limitationdoes not include reserves for 1.7 net wells remaining to be drilled or 49 netwells awaiting to be placed on production on behalf of these seven drilling partnerships,and will fluctuate due to the variables in determining discounted cash flows,such as price changes, reserve revisions, etc. In the event of repurchase, theCompany receives the investor’s interest in the partnership and the investor’spro rata share of the partnerships reserves and related future cash flows.

 

**NOTE 7—BUSINESS SEGMENTINFORMATION**

 

The Company’s operatingactivities can be divided into four major segments: turnkey contracts, oil andgas marketing, oil and gas exploration and production operations and wellservices. The Company drills oil and natural gas wells for Company-sponsoreddrilling partnerships and retains an interest in each well. Also, the Companymarkets natural gas for affiliated drilling partnerships. The Company chargesCompany-sponsored drilling partnerships and other third parties competitiveindustry rates for well operations and gas gathering. Segment information is asfollows:

 
| ** **                    | ** ** | **Three Months Ended**  | ** ** | **Six Months Ended**    | ** ** |
|-------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                    | ** ** | **June 30,  2006**      | ** ** | **June 30,  2005**      | ** ** | **June 30,  2006** | ** ** | **June 30,  2005** | ** ** |
| ** **                    |       |                    |       |                    |       |   |   |   |   |
| **Revenue**                   |       |                    |       |                    |       |   |   |   |   |
| Turnkey Contracts             |       | $                       | 119,913    |                    | $          | 1,324,538 |   | $ | 546,510 |   | $ | 3,603,855 |   |
| Oil and Gas Marketing         |       | 503,369                 |       | 2,310,421               |       | 1,518,414 |   | 4,506,495 |   |
| Oil and Gas Operations        |       | 7,634,160               |       | 3,018,765               |       | 14,443,601 |   | 5,195,352 |   |
| Well Services                 |       | 209,632                 |       | 284,636                 |       | 457,921 |   | 825,295 |   |
| Other                         |       | 1,225,910               |       | 1,027,350               |       | 2,558,988 |   | 1,951,511 |   |
|                          |       |                    |       |                    |       |   |   |   |   |
|                          |       | $                       | 9,692,984  |                    | $          | 7,965,710 |   | $ | 19,525,434 |   | $ | 16,082,508 |   |
|                          |       |                    |       |                    |       |   |   |   |   |
| ** **                    | ** ** | **June 30,  2006** | ** ** | **June 30,  2005** | ** ** | **June 30,  2006** | ** ** | **June 30,  2005** | ** ** |
| ** **                    |       |                    |       |                    |       |   |   |   |   |
| **Operating Income / (Loss)** |       |                    |       |                    |       |   |   |   |   |
| Turnkey Contracts             |       | $                       | (772       | )                       | $          | (447,475 | ) | $ | (305,695 | ) | $ | (216,362 | ) |
| Oil and Gas Marketing         |       | 18,702                  |       | 32,068                  |       | 41,741 |   | 63,050 |   |
| Oil and Gas Operations        |       | 2,746,277               |       | 121,752                 |       | 5,124,165 |   | 885,247 |   |
| Well Services                 |       | 44,792                  |       | 112,994                 |       | (2,402 | ) | 459,264 |   |
| Other                         |       | (1,322,571              | )          | (1,283,529              | )          | (2,448,425 | ) | (4,101,461 | ) |
|                          |       |                    |       |                    |       |   |   |   |   |
|                          |       | $                       | 1,486,428  |                    | $          | (1,464,190 | ) | $ | 2,409,384 |   | $ | (2,910,262 | ) |

 

11

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**NOTE 8—COMPREHENSIVE INCOME (LOSS)**

 

Other comprehensive income(loss) consists primarily of net unrealized investment gains and losses, net ofincome tax effect. Total comprehensive income (loss) for the periods are asfollow:

 
| ** **                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
|                         |       |     |       |     |       |
| Six Months ending June 30,   |       | $        | 2,100,373  |     | $          | (3,110,825 | ) |
|                         |       |     |       |     |       |
| Three Months ending June 30, |       | $        | 1,343,865  |     | $          | (1,212,587 | ) |

 

**NOTE 9—GOODWILL**

 

The Company accounts forgoodwill under SFAS No. 142, *Goodwill and OtherIntangible Assets,*and only adjusts the carrying amount of goodwillor indefinite life intangible assets upon an impairment. During the three monthsended June 30, 2006 no events occurred which would indicate that an impairmentof goodwill existed.

 

**Item 2. *Management’s Discussion and Analysis of Financial Conditions and Resultsof Operations***

 

**FORWARD-LOOKINGINFORMATION**

 

Forward-lookingstatements for 2006 and later periods are made in this document. Suchstatements represent estimates by management based on the Company’s historicaloperating trends, its proved oil and gas reserves and other informationcurrently available to management. The Company cautions that the forward-lookingstatements provided herein are subject to all the risks and uncertaintiesincident to the acquisition, development and marketing of, and exploration foroil and gas reserves. These risks include, but are not limited to, oil andnatural gas price risk, environmental risks, drilling risk, reserve quantityrisk and operations and production risk. For all the above reasons, actualresults may vary materially from the forward-looking statements and there is noassurance that the assumptions used are necessarily the most likely to occur.

 

**OVERVIEW:**

 

During 2005, we began totransition ourselves from being a provider of turnkey contract services intomore of a traditional exploration and production company. As a result, oil andgas sales and production and exploration expense have become more material duringthe transition. Additionally, turnkey contract revenues and expenses havebecome less material.

 

Our future successdepends upon the development of our core acreage. During 2006 and subsequentyears, we plan to continue to develop our core acreage, which includes ourcoalbed methane (“CBM”) acreage in the Atlantic Rim and Pacific Rim in theWashakie Basin in Wyoming. Additionally, our core acreage includes oursecondary recovery water flood projects in the Wilmington Townlot Unit and theNorth Wilmington Townlot Unit in southern California. As of June 30, 2006, weowned natural gas and oil leasehold interests in approximately 269,557 gross (149,825net) acres. Substantially all of our undeveloped acreage is located in theRocky Mountains. Our total net proved reserves are located on less than 10% ofour net acreage.

 

**LIQUIDITYAND CAPITAL RESOURCES:**

 

During December 2005, wesold 6.9 million shares in a secondary offering raising net proceeds of $95.0million.

 

Our cash and cashequivalents decreased $45 million during the first six months of 2006. Cashused in investing activities of $49.8 million results primarily fromexpenditures on oil and gas properties. Cash provided by operating activitiesof $2.4 million primarily relates to increased profits relating to higher oiland gas production offset by a

 

12

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decrease in accounts payable and accruals of $5.5 million. Cashprovided by financing activities of $2.4 million results from the exercise ofstock options and warrants.

 

Currentlyour assets are unencumbered, except for restricted investments in US TreasuryBonds which secure our bonds. As a result the Company may seek to obtain bankfinancing to fund future activities.

 

Another commitment offunds relates to the drilling partnerships. Our deferred revenue balancerelating to our drilling commitments totaled $1.1 million at June 30, 2006. Thiscommitment approximates 1.7 net wells, primarily in the Washakie Basin, to bedrilled on behalf of our drilling partnerships formed in 2003 and prior.

 

During the first quarterof 2006, effective as of the last drilling partnership distribution date in thefourth quarter of 2005 and closing on March 31, 2006, the investor partners ofthe 1998 drilling partnerships voted to approve the sale of all of the oil andgas assets of the drilling partnerships to us. The aggregate purchase price was$8.2 million. As a result, net of our interest, the Company issued 383,072 sharesof restricted common stock and paid $2.7 million in cash in exchange for bothproducing and non-producing properties. The number of shares issued wasdetermined based upon a 20% discount from the weighted average sales price forWarren’s publicly traded common stock for the forty-five (45) calendar daysending March 31, 2006. The Company booked the transaction based on theundiscounted weighted average price of its common stock for the forty-five (45)calendar days ending March 31, 2006. The Company received oil and gasproperties having a PV-10 value of approximately $7.6 million as determined byWilliamson Petroleum Consultants, Inc., as well as some unproved properties.

 

Additionally during thefirst quarter of 2006, we purchased for cash the remaining minority oil and gasinterests not already owned by Warren from the drilling program LLC’soriginally formed between 1994 and 1997 based upon their PV-10 value asdetermined by Williamson Petroleum Consultants, Inc., independent petroleumengineers. We paid an aggregate cash purchase price of $1.1 million. Theremaining minority interest relating to these partnerships was recorded as areduction in the cost basis of the assets acquired.

 

The Company had netincome of $1.4 million (including preferred dividends and accretion of $0.1million) for the second quarter of 2006, as compared to a net loss of $3.0million (including preferred dividends of $1.6 million) for the comparableperiod of 2005. At June 30, 2006, current assets exceeded current liabilitiesby approximately $61.9 million. We expect our cash and cash equivalents, cashflows from operating activities and bank financings to be sufficient to fundour operations for more than the next twelve months.

 

At June 30, 2006, we hadapproximately 2.4 million vested outstanding stock options issued under ourstock based equity compensation plans. Of the total 2.4 million outstandingvested options, only 20,000 options had exercise prices above the closingmarket price ($14.36) of our common stock on June 30, 2006. If the options withexercise prices below the closing market price on June 30, 2006 are exercisedby the holders, we would receive $16.9 million in cash.

 

*Contractual Obligations*

 

The contractualobligations table below assumes the maximum amount is tendered each year. Thetable does not give effect to the conversion of any bonds to common stock whichwould reduce payments due. All bonds are secured at maturity by zero couponU.S. treasury bonds deposited into an escrow account equaling the par valueof the bonds maturing on or before the maturity of the bonds. The table belowreflects the release of U.S. treasury bonds to us upon redemption.

 
| ** **                                       | ** ** | **Payments due by period** | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|
| **Contractual Obligations  As of June 30, 2006** | ** ** | **Total**                  | ** ** | **Less Than  1 Year** | ** ** | **1-3  Years** | ** ** | **3-5  Years** | ** ** | **More Than  5 Years** | ** ** |
|                                             |       |                       |       |   |   |   |   |   |   |   |   |
| Bonds                                            |       | $                          | 2,531,000  |   | $ | 253,100 |   | $ | 432,801 |   | $ | 350,569 |   | $ | 1,494,530 |   |
| Drilling Commitments                             |       | 1,670,055                  |       | 1,670,055 |   | — |   | — |   | — |   |
| Leases                                           |       | 496,774                    |       | 109,053 |   | 304,775 |   | 82,946 |   | — |   |
| **Total**                                        |       | $                          | 4,697,829  |   | $ | 2,032,208 |   | $ | 737,576 |   | $ | 433,515 |   | $ | 1,494,530 |   |

 

13

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The contractualobligation schedule above does not reflect $2.5 million principal amount ofzero coupon U.S. treasury bonds held by us in escrow to secure therepayment of the bonds upon maturity. Such U.S. treasury bonds had a fairmarket value of $1.1 million at June 30, 2006.

 

**Off-Balance Sheet Arrangements**

 

Under the terms of ourdrilling partnerships formed from 1999 to 2001, investors have the right totender their interest back to the drilling partnership and other programinvestors during the period seven years after the date of the partnership’sformation. The tender rights were included to make such partnerships moreattractive to potential investor partners, thereby enabling the Company toobtain more capital to drill more oil and gas wells. To the extent that aninvestor tenders a drilling partnership interest for sale and the drilling partnershipand other investors elect not to repurchase the withdrawing partner’s interest,we will be required to repurchase the interest from the investor. The price ofour repurchase is fixed by the drilling partnership agreement to be the lowerof the PV-10 value of the assets of the partnership and a formula based on theamount of the investor’s cash investment reduced by the amount of any cashdistributions received. As of June 30, 2006, based on the December 31, 2005reserve reports of the respective seven drilling partnerships, the aggregatePV-10 value of the assets in these partnerships is $36.4 million. Because thisPV-10 value is less than the formula price of $74.5 million at June 30, 2006,the maximum repurchase price obligation at June 30, 2006 was $36.4 millionbased on the December 31, 2005 reserve report. This PV-10 value would be higherif current prices for crude oil and natural gas were to increase when we drillthe remaining 1.7 net wells or place receive additional proved reserves for the49 net wells that were waiting to be placed on production as of December 31,2005. In the event of repurchase, we receive the investor’s interest in the partnership,which includes the investor’s beneficial share of the partnership’s reservesand related future net cash flows. There are no known events that would resultin termination of the material benefits of our off-balance sheet arrangementsexcept for a decrease in oil and gas pricing that occurs after an acquisition.The only material off-balance sheet benefit of this arrangement is theacquisition of proved reserves. To the extent that we acquire interests fortheir PV-10 value based on this arrangement, and declining oil and natural gasprices, or other factors, render those interests less valuable, a materialreduction in the benefits of this arrangement to the Company would occur.

 

The table below presentsthe projected timing of our maximum potential repurchase commitment associatedwith these partnerships as of June 30, 2006:

 
| ** **                                  | ** ** | **Amount of repurchase commitment per period** | ** ** |
|---------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                  | ** ** | **Total**                                      | ** ** | **Less Than  1 Year** | ** ** | **1-3  Years** | ** ** | **3-5  Years** | ** ** | **More Than  5 Years** | ** ** |
| ** **                                  | ** ** | **(in thousands)**                             | ** ** |
|                                        |       |                                           |       |   |   |   |   |   |   |   |   |
| Maximum potential repurchase commitment (1) |       | $                                              | 36,439     |   | $ | 4,530 |   | $ | 31,909 |   | $ | — |   | $ | — |   |
|                                             |            |                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)                      Based on thepartnership reserves taken from the Williamson partnership reserve report as ofDecember 31, 2005 and using pricing at that date. This report does not include provedreserves for remaining 1.7 net wells or additional proved reserves for the 49net wells that were waiting to be placed on production as of December 31, 2005.

 

Commencing January 1,2007, we are obligated to purchase drilling partnership interests in twodrilling programs formed in 1999, if requested by the investor. This obligationis calculated using the PV-10 value of the assets in these programs as of December31, 2006. At December 31, 2005, this obligation was estimated at $4.5 million. Asa result, the following factors may affect the liquidity and capital resourcesof the Company:

 

•                  Anincrease in the price of oil and natural gas, or an increase in the amount ofproved reserves (from drilling the remaining 1.7 net wells that are scheduledto be drilled for these drilling partnerships during 2006, from the 49 netwells that were waiting to be placed on production as of December 31, 2005, orfrom other factors) may increase the PV-10 value of the drilling partnershipsand, as a result, increase the price of our repurchase. After the acquisitionof the

 

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drilling partnershipinterests, oil and natural gas prices may decline resulting in a decline in theexpected future net cash flow or fair market value of the assets acquired inthe repurchase and a possible recording of impairment expense.

 

•                  Ifour existing working capital is inadequate to fund the repurchase of drilling partnershipinterests, we may be unable to obtain financing, or obtain financing on termsacceptable to us, to purchase the drilling partnership interests at their PV-10value.

 

**RESULTS OF OPERATIONS:**

 

**Threemonths Ended June 30, 2006 Compared to Three Months Ended June 30, 2005**

** **

*Oil and gas sales.*Revenue from oil and gas sales increased $4.7 million in the second quarter of2006 to $7.6 million, a 161% increase compared to the same quarter in 2005. Thisincrease in production resulted from significantly increasing our drillingactivity in the Wilmington Townlot Unit (“WTU”) in southern California. Additionally,this increase results from acquiring the North Wilmington Unit (“NWU”) which isadjacent to the WTU. Prior to July 2005, all wells were syndicated to ourdrilling partnerships which resulted in lower working interest percentagesallocated us. Net oil production for the three months ended June 30, 2006 and2005 was 105 Mbbls and 34 Mbbls, respectively. Net gas production for threemonths ended June 30, 2006 and 2005 was 258 and 258 Mmcf, respectively. Theaverage realized price per barrel of oil for the three months ended June 30,2006 and 2005 was $59.35 and $40.94, respectively. Additionally, the averagerealized price per Mcf of gas for the three months ended June 30, 2006 and 2005was $5.43 and $5.93, respectively.

 

*Production & exploration.*Production and exploration expense increased $1.2 million in the second quarterof 2006 to $3.2 million, a 59% increase compared to the same quarter in 2005. Primarily,this increase resulted from an increase in production of oil and gas. Productionincreased to 888 Mmcfe for the second quarter of 2006 compared to 463 Mmcfe forthe second quarter of 2005, an increase of 92%. Additionally, we incurredincreases in lease operating expenses related to the Wilmington Field inCalifornia. The Company has incurred significant start up, repair andmaintenance costs associated with the implementation of our drilling plan.

 

*Turnkey contract revenue andexpenses.* Turnkey contract revenue decreased $1.2 million inthe second quarter of 2006 to $0.1 million, a 91% decrease compared to thecorresponding quarter of the preceding year. Additionally, turnkey contractexpense decreased $1.7 million during the second quarter to $0.1 million, a 95%decrease compared to the same period in 2005 The drilling activity on behalf of the drilling partnerships was lessactive during the first quarter of 2006 compared to the corresponding quarterof 2005. Net income from turnkey activities was $25 thousand for the secondquarter of 2006. This compares to a net loss of $0.4 million for thecorresponding quarter in 2005.

 

*Oil and gas sales and costs frommarketing activities.* Oil and gas sales from marketingactivities decreased $1.8 million in the second quarter of 2006 to $0.5million, a 78% decrease compared to the same period last year. Cost of oil andgas marketing activities decreased $1.8 million in the quarter to $0.5 million,a 79% decrease compared to the same quarter in 2005. The decrease results fromacquiring the assets in our 1998 drilling partnerships. Additionally, weacquired all of the remaining assets in our drilling partnerships formedbetween 1994 and 1997. Gas production from the wells in the drilling partnershipsin which we earn a marketing fee for the three months ended June 30, 2006 and2005 was 0.1 Mmcfe and 4.0 Mmcfe, respectively. The average price per Mcfeduring the second quarter of 2006 and 2005 was $6.20 and $5.40, respectively. Thegross profit from marketing activities for the second quarter of 2006 was $19thousand as compared to $32 thousand in the same period last year.

 

*Well services activities.*Well services revenue decreased $0.1 million in the second quarter of 2006 to$0.2 million, a 26% decrease compared to the corresponding quarter of thepreceding year. Well services expense was flat compared with the prior year. Revenuedecreased because we acquired all investor’s interests in oil and gasproperties in our 1998 drilling partnership, resulting in a reduction inoverhead income.

 

Net income from wellservices activities was $45 thousand for the second quarter of 2006. Thiscompared to net profit of $113 thousand for the corresponding quarter of lastyear. The decrease in net income during 2006 results from the decrease in wellservices revenue discussed above.

 

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*Net gain on investments.*Netgain on investments was $73 thousand for the second quarter of 2006 compared toa net gain of $329 thousand for the same period of 2005. Primarily, investmentsrepresent zero coupon U.S. treasury bonds. Fluctuations in net gain or loss oninvestments resulted from changes in long-term interest rates on the securitiessold during the period.

 

*Interest and other income.*Interest and other income increased $0.5 million in the second quarter of 2006to $1.2 million, a 65% increase compared to the same quarter in 2005. Thisrepresents an increase in interest earned on cash and cash equivalents.

 

*Depreciation, depletion, amortizationand impairment.* Depreciation, depletion, amortization andimpairment expense increased $0.8 million for the second quarter of 2006 to $1.7million, a 90% increase compared to the corresponding quarter last year. Thisincrease results from increased production during the second quarter of 2006compared to the corresponding period of 2005. Production increased 92% duringthis period.

 

*General and administrativeexpenses.* General and administrative expenses increased $0.9million in the second quarter of 2006 to $2.4 million, a 61% increase comparedto the corresponding quarter last year. This reflects a decrease in theallocation of certain general and administrative expenses to turnkey expensesduring 2006. Additionally, this results from an increase in personnel as aresult of increased drilling activities. Lastly, expenses relating to theissuance of stock options were $0.2 million in the second quarter of 2006compared to $0 in the corresponding period of 2005.

 

*Interest expense.*Interest expense decreased $0.3 million in the second quarter of 2006 to $0.2million, a 63% decrease compared to the same quarter last year. The Companyreduced long term debt by approximately $44 million during 2005. As a result,interest expense decreased significantly.

 

*Retirement of debt.*Retirement of debt expense was $0.3 million during the second quarter of 2005. Thisexpense represents a premium paid on the redemption of bonds and the write offof unamortized deferred offering costs associated with the retired bonds duringthe second quarter of 2005.

 

**Sixmonths Ended June 30, 2006 Compared to Three Months Ended June 30, 2005**

 

*Oil and gas sales.*Revenue from oil and gas sales increased $9.3 million in the second quarter of2006 to $14.4 million, a 183% increase compared to the same quarter in 2005. Thisincrease in production resulted from significantly increasing our drillingactivity in the Wilmington Townlot Unit (“WTU”) in southern California. Additionally,this increase results from acquiring the North Wilmington Unit (“NWU”) which isadjacent to the WTU. Prior to July 2005, all wells were syndicated to ourdrilling partnerships which resulted in lower working interest percentagesallocated us. Net oil production for the six months ended June 30, 2006 and2005 was 198 Mbbls and 64 Mbbls, respectively. Net gas production for sixmonths ended June 30, 2006 and 2005 was 567 and 501 Mmcf, respectively. Theaverage realized price per barrel of oil for the six months ended June 30, 2006and 2005 was $56.12 and $38.01, respectively. Additionally, the averagerealized price per Mcf of gas for the six months ended June 30, 2006 and 2005was $5.89 and $5.29, respectively.

 

*Production & exploration.*Production and exploration expense increased $3.5 million in the second quarterof 2006 to $6.2 million, a 130% increase compared to the same quarter in 2005. Thisincrease resulted from an increase in production. Production increased to 1.8 Bcfefor the first six months of 2006 compared to 0.9 Bcfe for the comparable periodof 2005, an increase of 100%. Additionally, we incurred increases in leaseoperating expenses related to the Wilmington Field in California. The Companyhas incurred significant start up, repair and maintenance costs associated withthe implementation of our drilling plan.

 

*Turnkey contract revenue andexpenses.* Turnkey contract revenue decreased $3.1 million inthe first six months of 2006 to $0.5 million, an 85% decrease compared to thecorresponding period of the preceding year. Additionally, turnkey contractexpense decreased $3.0 million during the first six months of 2006 to $0.8million, a 79% decrease compared to the same period in 2005  The drilling activity on behalf of thedrilling partnerships was less active during the first six months of 2006compared to the corresponding quarter of 2005.

 

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Net lossfrom turnkey activities was $0.3 million and $0.2 million for the first sixmonths of 2006 and 2005, respectively. The net loss from turnkey activitiesduring 2006 results from higher than anticipated drilling costs.

 

*Oil and gas sales and costs frommarketing activities.* Oil and gas sales from marketingactivities decreased $3.0 million in the first six months of 2006 to $1.5million, a 66% decrease compared to the same period last year. Cost of oil andgas marketing activities decreased $3.0 million in the first six months of 2006to $1.5 million, a 67% decrease compared to the same period in 2005. Thedecrease results from acquiring the assets in our 1998 drilling partnerships. Additionally,we acquired all of the remaining assets in our drilling partnerships formedbetween 1994 and 1997. Gas production from the wells in the drillingpartnerships in which we earn a marketing fee for the six months ended June 30,2006 and 2005 was 0.2 Bcfe and 1.0 Bcfe, respectively. The average price perMcfe during the first six months of 2006 and 2005 was $7.54 and $4.42,respectively.

 

The gross profit frommarketing activities for the first six months of 2006 was $42 thousand ascompared to $63 thousand in the same period last year.

 

*Well services activities.*Well services revenue decreased $0.4 million in the first six months of 2006 to$0.5 million, a 45% decrease compared to the corresponding period of the precedingyear. Well services expense increased $0.1 million in the first six months to$0.5 million. The decrease in well services revenue results from drilling morewells for our own account and not charging our personnel to third parties. Additionally,revenue decreased because we acquired all investor’s interests in oil and gasproperties in our 1994 through 1998 drilling partnerships, resulting in areduction in overhead income.

 

Net loss from wellservices activities was $2 thousand for the first six months of 2006. Thiscompared to net profit of $459 thousand for the corresponding period of lastyear. The increase in net loss during 2006 results from the decrease in wellservices revenue discussed above.

 

*Net gain on investments.*Netgain on investments was $50 thousand for the first six months of 2006 comparedto a net gain of $361 thousand for the same period of 2005. Primarily,investments represent zero coupon U.S. treasury bonds. Fluctuations in net gainor loss on investments resulted from changes in long-term interest rates on thesecurities sold during the period.

 

*Interest and other income.*Interest and other income increased $0.9 million in the first six months of2006 to $2.5 million, a 58% increase compared to the same period in 2005. Thisrepresents an increase in interest earned on cash and cash equivalents.

 

*Depreciation, depletion,amortization and impairment.* Depreciation, depletion,amortization and impairment expense increased $1.5 million for the first sixmonths of 2006 to $3.2 million, a 92% increase compared to the correspondingquarter last year. This increase results from increased production during thefirst six months of 2006 compared to the corresponding period of 2005. Productionincreased 98% during this period.

 

*General and administrativeexpenses.* General and administrative expenses increased $1.7million in the first six months of 2006 to $4.7 million, a 58% increasecompared to the corresponding period last year. This reflects a decrease in theallocation of certain general and administrative expenses to turnkey expensesduring 2006. Additionally, this results from an increase in personnel as aresult of increased drilling activities. Lastly, expenses relating to theissuance of stock options were $0.2 million in the first six months of 2006compared to $0 in the corresponding period of 2005.

 

*Interest expense.*Interest expense decreased $1.2 million in the first six months of 2006 to $0.4million, a 77% decrease compared to the same period last year. The Companyreduced long-term debt by approximately $44 million during 2005. As a result,interest expense decreased significantly.

 

*Retirement of debt.*Retirement of debt expense was $1.5 million during the first six months of 2005.This expense represents a premium paid on the redemption of bonds and the writeoff of unamortized deferred offering costs associated with the retired bondsduring 2005.

 

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**CRITICAL ACCOUNTING POLICIES**

 

Our discussion andanalysis of our financial condition and results of operations are based onconsolidated financial statements that have been prepared in accordance with accountingprinciples generally accepted in the United States. The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues and expenses. We believethat certain accounting policies affect our more significant judgments andestimates used in the preparation of our consolidated financial statements. Our2005 Form 10-K, includes a discussion of our critical accounting policies.

 

**Item 3. *Quantitative and Qualitative Disclosure About Market Risk***

 

## ***Commodity Risk***

 

**Ourmajor market risk exposure is the commodity pricing applicable to our naturalgas and oil production. Realized commodity prices received for our productionare primarily driven by the prevailing worldwide price for crude oil and spotprices applicable to natural gas. The effects of price volatility are expectedto continue as we do not hedge any of our future production.**

 

## ***Interest Rate Risk***

 

**Wehold investments in U.S. treasury bonds available for sale, which representssecurities held in escrow accounts on behalf of the drilling partnerships andpurchasers of certain bonds. Additionally, we hold U.S. treasury bonds tradingsecurities, which predominantly represent U.S. treasury bonds released fromescrow accounts. The fair market value of these securities will generallyincrease if the federal discount rate decreases and decrease if the federaldiscount rate increases. All of our convertible debt has fixed interest rates,so consequently we are not exposed to cash flow risk from market interest ratechanges on this debt.**

 

## ***Inflation and Changes in Prices***

 

#### **The general level of inflationaffects our costs. Salaries and other general and administrative expenses areimpacted by inflationary trends and the supply and demand of qualifiedprofessionals and professional services. Inflation and price fluctuationsaffect the costs associated with exploring for and producing natural gas andoil, which have a material impact on our financial performance.**

 

#### **Item4. *Evaluation of Disclosure Controls and Procedures***

 

Our management, under thesupervision and with the participation of our Chief Executive Officer (“CEO”)and Chief Financial Officer (“CFO”), has evaluated the effectiveness of ourdisclosure controls and procedures as defined in Securities and ExchangeCommission (“SEC”) Rule 13a-15(e) and 15d-15(e) as of the end of the periodcovered by this report. Based upon that evaluation, management has concludedthat our disclosure controls and procedures are effective to ensure thatinformation we are required to disclose in reports that we file or submit underthe Securities Exchange Act is communicated to management, including the CEOand CFO, as appropriate to allow timely decisions regarding required disclosureand is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms.

 

In addition, there havebeen no changes in our internal controls over financial reporting or in otherfactors that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

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## **PARTII—OTHER INFORMATION**

 

**Item 1. *Legal Proceedings***

 

We are a party to legalactions arising in the ordinary course of our business. In the opinion of ourmanagement, based in part on consultation with legal counsel, the liability, ifany, under these claims is either adequately covered by insurance or would nothave a material adverse effect on us.

 

**Item 1A. *Risk Factors***

 

For information regardingrisk factors, please refer to Item 1A in the Company’s Annual Report onForm 10-K for the year ended December 31, 2005.

 

**Item 2. *Unregistered Sales of Equity Securities and Use of Proceeds***

 

a.                     Notapplicable

 

b.                    Notapplicable

 

c.                     Notapplicable

 

**Item 3. *Defaults upon Senior Securities***

 

Notapplicable.

 

**Item 4. *Submission of Matters to a Vote of Security Holders***

 

1.On May 17, 2006, we held our Annual Meeting of Stockholders. At the meeting,the following two matters were considered and approved:

 

(a) Proposal that LloydDavies, Leonard Dececchis and Thomas Noonan be elected as directors for a termexpiring at the 2009 annual meeting, or until their successors are dulyelected:

 
| Lloyd Davies      |   | 42,353,198 |   | FOR |   | 654,524 |   | WITHHOLD |
|-------------------|--------|------------|--------|-----|--------|---------|--------|----------|
| Leonard DeCecchis |   | 42,877,837 |   | FOR |   | 129,885 |   | WITHHOLD |
| Thomas Noonan     |   | 42,224,835 |   | FOR |   | 782,887 |   | WITHHOLD |

 

(b)Proposal to ratify the appointment of Grant Thornton LLP as the Company’sauditors for 2006:

 
| 42,713,666   FOR         |   | 211,411   |   | AGAINST |   | 82,645 |   | ABSTAIN |
|----------------------------------------------------------------------------|--------|---------------------|--------|---------|--------|--------|--------|---------|

 

2.Effective as of June 30, 2006, the 8% preferred stockholders agreed by greaterthan the requisite 66.67% majority to amend their Articles Supplementary filedwith the State of Maryland to allow for a dividend on the preferred stock to bepaid in kind with Warren Resources’ common stock for the dividends accrued forthe four quarters ended June 30, 2006, which amount equals $.96 per share, or $589,429in the aggregate. Therefore, in lieu of paying cash, Warren plans to issue atotal of 46,669 shares of its common stock as a preferred dividend for the fourquarters ended June 30, 2006, after these common shares are registered under aForm S-3 registration statement.

 

**Item 5. *Other Information***

 

Not applicable.

 

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**Item 6. *Exhibits***

 
| **a)** | ** ** | **Exhibits**                                                                                                                                                                                                     |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                                                                             |
|   |       | Exhibits not  incorporated by reference to a prior filing are designated by an (*) and are  filed herewith; all exhibits not so designated are incorporated herein by  reference to a prior filing as indicated. |

 
| **Exhibit** | ** ** | ** **                                                                                                                                      |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                                                                                                 |
|        |       |                                                                                                                                            |
| 31.1*       |       | Certification  of Chief Executive Officer pursuant to Rule 13a-15(e)/15d-15(e)                                                                  |
| 31.2*       |       | Certification  of Chief Financial Officer pursuant to Rule 13a-15(e)/15d-15(e)                                                                  |
| 32.1*       |       | Certification  of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as  adopted by Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2*       |       | Certification  of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as  adopted by Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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| * |   | Filed  herewith. |
|---|--------|------------------|

 

 

**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                 |     |     | WARREN RESOURCES, INC. |
|----------------------|----------|----------|------------------------|
|                 |     |     | (Registrant)           |
|                 |     |     |                   |   |
|                 |     |     |                   |   |
| Date: August 3, 2006 |     |     |                   | /s/ Timothy A. Larkin |   |
|                 |     |     | By:                    | Timothy A. Larkin |
| * *             | * * | * * | * *               | *Executive Vice President,* |
| * *             | * * | * * | * *               | *Chief Financial Officer and* |
| * *             | * * | * * | * *               | *Principal Accounting Officer* |

 

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