**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

**FORM 10-Q**

| x                                                                                                                                                                                                     |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES   EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                            |   |                                                                                            |
| **For the  Quarterly Period Ended June 30, 2007**                                                                                                                                                     |
| ** **                                                                                                                                                                                            |
| **OR**                                                                                                                                                                                                |
|                                                                                                                                                                                                  |   |                                                                                            |
| **o**                                                                                                                                                                                                 |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES   EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                            |   |                                                                                            |
| **For the  transition period from             ****to             ** |

 

# **CommissionFile No.****000-33275**

**WARRENRESOURCES, INC.**(Exact Name of Registrant as Specified in its Charter.)

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

 

Registrant’s telephonenumber, 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 the preceding12 months and (2) has been subject to such filing requirements for the past 90days.

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 | Accelerated filer x | Non-accelerated filer o |
|--|---------------------------|---------------------|-------------------------|

 

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

Yes oNo x

The aggregate number of Registrant’s outstanding shares on August 2,2007 was 58,185,549 shares of Common Stock, $0.0001 par value.

 

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**WARRENRESOURCES, INC.**

**INDEX**
| PART I—  |   | FINANCIAL  INFORMATION                                                                                |   |   |
|---------------|--------|-------------------------------------------------------------------------------------------------------|--------|--------|
|          |   |                                                                                                  |   |   |
|          |   | Item 1. Financial  Statements                                                                         |   |   |
|          |   |                                                                                                  |   |   |
|          |   | Consolidated  Balance Sheets as of June 30, 2007 and December 31, 2006                                |   |   |
|          |   |                                                                                                  |   |   |
|          |   | Consolidated  Statements of Operations for the three and six months ended June 30, 2007 and  2006     |   |   |
|          |   |                                                                                                  |   |   |
|          |   | Consolidated  Statements of Cash Flows for six months ended June 30, 2007 and 2006                    |   |   |
|          |   |                                                                                                  |   |   |
|          |   | 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

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**PART I—FINANCIAL INFORMATION**

###### **ITEM1. FINANCIAL STATEMENTS**

**WarrenResources, Inc. and SubsidiariesCONSOLIDATED BALANCE SHEETS**

**(Unaudited)**
| ** **                                                                                                                                                                                                                                 | ** ** | **June 30,   2007** | ** **      | **December 31,   2006**           | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|-----------------|---------------------------------------------|------------|
| ** **                                                                                                                                                                                                                                 | ** ** | ** **                    | ** **      | **(Restated, see   Note B)** | ** ** |
| **ASSETS**                                                                                                                                                                                                                                 | ** ** | ** **                    | ** **      | ** **                                  | ** ** |
| Current Assets                                                                                                                                                                                                                             |       |                          |            |                                        |       |
| Cash and cash equivalents                                                                                                                                                                                                                  |       | $                             | 26,748,498      |                                        | $          | 43,021,884 |   |
| Accounts  receivable – trade                                                                                                                                                                                                          |       | 8,020,252                     |            | 5,984,259                                   |       |
| Restricted  investments in U.S. Treasury Bonds—available for sale, at fair value                                                                                                                                                      |       | 118,685                       |            | 121,855                                     |       |
| Other current  assets                                                                                                                                                                                                                      |       | 333,328                       |            | 3,309,692                                   |       |
|                                                                                                                                                                                                                                       |       |                          |            |                                        |       |
| Total current  assets                                                                                                                                                                                                                      |       | 35,220,763                    |            | 52,437,690                                  |       |
|                                                                                                                                                                                                                                       |       |                          |            |                                        |       |
| Other Assets                                                                                                                                                                                                                               |       |                          |            |                                        |       |
| Oil and gas  properties—at cost, based on full cost method of accounting, net of  accumulated depreciation, depletion and amortization                                                                                                |       | 354,175,828                   |            | 253,592,415                                 |       |
| Property and  equipment—at cost, net                                                                                                                                                                                                  |       | 2,516,737                     |            | 1,751,146                                   |       |
| Restricted  investments in U.S. Treasury Bonds—available for sale, at fair value                                                                                                                                                      |       | 1,068,170                     |            | 1,096,695                                   |       |
| Goodwill                                                                                                                                                                                                                                   |       | 3,430,246                     |            | 3,430,246                                   |       |
| Other assets                                                                                                                                                                                                                               |       | 4,439,351                     |            | 4,643,155                                   |       |
|                                                                                                                                                                                                                                       |       |                          |            |                                        |       |
| Total other  assets                                                                                                                                                                                                                        |       | 365,630,332                   |            | 264,513,657                                 |       |
|                                                                                                                                                                                                                                       | ** ** | **$**                         | **400,851,095** | ** **                                  | **$**      | **316,951,347** | ** ** |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                                                             | ** ** | ** **                    | ** **      | ** **                                  | ** ** |
| Current Liabilities                                                                                                                                                                                                                        |       |                          |            |                                        |       |
| Current  maturities of debentures and other long term liabilities                                                                                                                                                                          |       | $                             | 534,513         |                                        | $          | 506,628 |   |
| Accounts payable  and accruals                                                                                                                                                                                                             |       | 18,029,241                    |            | 22,455,043                                  |       |
|                                                                                                                                                                                                                                       |       |                          |            |                                        |       |
| Total current  liabilities                                                                                                                                                                                                                 |       | 18,563,754                    |            | 22,961,671                                  |       |
|                                                                                                                                                                                                                                       |       |                          |            |                                        |       |
| Long-Term Liabilities                                                                                                                                                                                                                      |       |                          |            |                                        |       |
| Debentures, less  current portion                                                                                                                                                                                                          |       | 2,246,400                     |            | 2,246,400                                   |       |
| Other long-term  liabilities, less current portion                                                                                                                                                                                         |       | 7,315,636                     |            | 6,766,868                                   |       |
| Line of credit                                                                                                                                                                                                                             |       | 30,000,000                    |            | —                                      |       |
|                                                                                                                                                                                                                                       |       |                          |            |                                        |       |
|                                                                                                                                                                                                                                       |       | 39,562,036                    |            | 9,013,268                                   |       |
|                                                                                                                                                                                                                                       |       |                          |            |                                        |       |
| Commitments and  Contingencies                                                                                                                                                                                                             |       |                          |            |                                        |       |
|                                                                                                                                                                                                                                       |       |                          |            |                                        |       |
| Stockholders’ Equity                                                                                                                                                                                                                  |       |                          |            |                                        |       |
| 8% convertible preferred stock, par value $.0001; authorized 10,000,000  shares, issued and outstanding, 271,436 shares in 2007 and 272,000 shares in  2006  (aggregate liquidation  preference $3,257,232 in 2007 and $3,264,000 in 2006) |       | 3,249,907                     |            | 3,252,897                                   |       |
| Common stock –  $.0001 par value; authorized, 100,000,000 shares; issued 58,185,549 in 2007  and 54,143,054 shares in 2006                                                                                                            |       | 5,819                         |            | 5,414                                       |       |
| Additional  paid-in-capital                                                                                                                                                                                                                |       | 424,612,863                   |            | 371,035,151                                 |       |
| Accumulated  deficit                                                                                                                                                                                                                       |       | (84,517,816                   | )               | (88,729,921                                 | )          |
| Accumulated  other comprehensive income, net of applicable income taxes of $74,000 in 2007  and $92,000 in 2006                                                                                                                            |       | 102,587                       |            | 140,922                                     |       |
|                                                                                                                                                                                                                                       |       | 343,453,360                   |            | 285,704,463                                 |       |
| Less common stock  in Treasury—at cost; 632,250 shares in 2007 and 2006                                                                                                                                                               |       | 728,055                       |            | 728,055                                     |       |
| Total  stockholders’ equity                                                                                                                                                                                                           |       | 342,725,305                   |            | 284,976,408                                 |       |
|                                                                                                                                                                                                                                       | ** ** | **$**                         | **400,851,095** | ** **                                  | **$**      | **316,951,347** | ** ** |

 

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)** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2007**                                                         | ** ** | **2006 **                                                 | ** ** | **2007** | ** ** | **2006 ** | ** ** |
| ** **                                                 | ** ** | ** **                                                       | ** ** | **(Restated, see   Note B)**                    | ** ** | ** ** | ** ** | **(Restated, see   Note B)** | ** ** |
| Revenues                                                   |       |                                                             |       |                                                           |       |   |   |   |   |
| Oil and gas sales                                          |       | $                                                                | 13,347,043 |                                                           | $          | 7,634,160 |   | $ | 22,828,728 |   | $ | 14,443,601 |   |
| Interest and other income                                  |       | 588,784                                                          |       | 1,153,179                                                      |       | 1,421,545 |   | 2,509,181 |   |
| Net gain (loss) on investments                             |       | (30,351                                                          | )          | 72,731                                                         |       | (22,270 | ) | 49,807 |   |
|                                                       |       | 13,905,476                                                       |       | 8,860,070                                                      |       | 24,228,003 |   | 17,002,589 |   |
|                                                       |       |                                                             |       |                                                           |       |   |   |   |   |
| Expenses                                                   |       |                                                             |       |                                                           |       |   |   |   |   |
| Lease operating expense and taxes                          |       | 5,165,860                                                        |       | 2,793,392                                                      |       | 9,180,799 |   | 5,605,421 |   |
| Depreciation, depletion and amortization                   |       | 2,582,059                                                        |       | 1,425,577                                                      |       | 4,590,303 |   | 2,824,088 |   |
| General and administrative                                 |       | 2,964,014                                                        |       | 2,357,786                                                      |       | 5,631,673 |   | 4,630,905 |   |
| Interest                                                   |       | 431,255                                                          |       | 99,030                                                         |       | 588,123 |   | 204,202 |   |
|                                                       |       | 11,143,188                                                       |       | 6,675,785                                                      |       | 19,990,898 |   | 13,264,616 |   |
|                                                       |       |                                                             |       |                                                           |       |   |   |   |   |
| Income before  provision for income taxes                  |       | 2,762,288                                                        |       | 2,184,285                                                      |       | 4,237,105 |   | 3,737,973 |   |
|                                                       |       |                                                             |       |                                                           |       |   |   |   |   |
| Deferred income tax expense                                |       | 18,000                                                           |       | 56,000                                                         |       | 25,000 |   | 123,000 |   |
|                                                       |       |                                                             |       |                                                           |       |   |   |   |   |
| Net income                                                 |       | 2,744,288                                                        |       | 2,128,285                                                      |       | 4,212,105 |   | 3,614,973 |   |
|                                                       |       |                                                             |       |                                                           |       |   |   |   |   |
| Less dividends and accretion on preferred shares           |       | 66,952                                                           |       | 45,223                                                         |       | 134,068 |   | 216,148 |   |
|                                                       |       |                                                             |       |                                                           |       |   |   |   |   |
| Net income  applicable to common stockholders              |       | $                                                                | 2,677,336  |                                                           | $          | 2,083,062 |   | $ | 4,078,037 |   | $ | 3,398,825 |   |
|                                                       |       |                                                             |       |                                                           |       |   |   |   |   |
| Earnings per  share – Basic                           |       | $                                                                | 0.05       |                                                           | $          | 0.04 |   | $ | 0.08 |   | $ | 0.06 |   |
| Earnings per  share – Diluted                         |       | 0.05                                                             |       | 0.04                                                           |       | 0.07 |   | 0.06 |   |
|                                                       |       |                                                             |       |                                                           |       |   |   |   |   |
| Weighted average  common shares outstanding – Basic   |       | 54,843,482                                                       |       | 52,830,408                                                     |       | 54,185,219 |   | 52,516,684 |   |
| Weighted average common  shares outstanding – Diluted |       | 56,140,918                                                       |       | 54,384,583                                                     |       | 55,256,293 |   | 54,341,803 |   |

 

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)** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                                                               | ** ** | **2006** | ** ** |
| ** **                                                                         | ** ** | ** **                                                                             | ** ** | **(Restated, see   Note B)** | ** ** |
| Cash flows from  operating activities:                                             |       |                                                                                   |       |   |   |
| Net income                                                                         |       | $                                                                                      | 4,212,105  |   | $ | 3,614,973 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                                                                   |       |   |   |
| Accretion of discount on available-for-sale debt  securities                       |       | (31,640                                                                                | )          | (44,556 | ) |
| Amortization and write-off of deferred bond offering  costs                        |       | 8,760                                                                                  |       | 10,013 |   |
| Depreciation, depletion and amortization                                           |       | 4,590,303                                                                              |       | 2,824,088 |   |
| Common stock cancelled                                                             |       | —                                                                                 |       | (70,670 | ) |
| Stock option expense                                                               |       | 631,936                                                                                |       | 234,835 |   |
| Deferred tax expense                                                               |       | 25,000                                                                                 |       | 123,000 |   |
| Change in assets  and liabilities:                                                 |       |                                                                                   |       |   |   |
| Increase in trading securities                                                     |       | —                                                                                 |       | (668,100 | ) |
| (Increase) decrease in accounts receivable—trade                              |       | (2,362,970                                                                             | )          | 660,951 |   |
| Decrease in accounts receivable from affiliated  partnerships                      |       | 34,890                                                                                 |       | 72,715 |   |
| Decrease in other assets                                                           |       | 3,171,409                                                                              |       | 2,624,438 |   |
| Increase (decrease) in accounts payable and accruals                               |       | 245,485                                                                                |       | (5,493,342 | ) |
|                                                                               |       |                                                                                   |       |   |   |
| Net cash provided by operating activities                                          |       | 10,525,278                                                                             |       | 3,888,345 |   |
|                                                                               |       |                                                                                   |       |   |   |
| Cash flows from  investing activities:                                             |       |                                                                                   |       |   |   |
| Purchase, exploration and development of oil and gas  properties                   |       | (56,299,909                                                                            | )          | (51,571,094 | ) |
| Purchase of property and equipment                                                 |       | (1,121,547                                                                             | )          | (193,660 | ) |
| Proceeds from U.S. Treasury Bonds—available-for-sale                          |       | —                                                                                 |       | 557,983 |   |
|                                                                               |       |                                                                                   |       |   |   |
| Net cash used in investing activities                                              |       | (57,421,456                                                                            | )          | (51,206,771 | ) |
|                                                                               |       |                                                                                   |       |   |   |
| Cash flows from  financing activities:                                             |       |                                                                                   |       |   |   |
| Proceeds from line of credit                                                       |       | 30,000,000                                                                             |       | — |   |
| Payments on debt and debentures                                                    |       | (46,458                                                                                | )          | (117,055 | ) |
| Issuance of common stock, net                                                      |       | 669,250                                                                                |       | 2,476,274 |   |
|                                                                               |       |                                                                                   |       |   |   |
| Net cash provided by financing activities                                          |       | 30,622,792                                                                             |       | 2,359,219 |   |
|                                                                               |       |                                                                                   |       |   |   |
| Net decrease in cash and cash equivalents                                          |       | (16,273,386                                                                            | )          | (44,959,207 | ) |
|                                                                               |       |                                                                                   |       |   |   |
| Cash and cash  equivalents at beginning of period                                  |       | 43,021,884                                                                             |       | 114,632,099 |   |
|                                                                               |       |                                                                                   |       |   |   |
| Cash and cash  equivalents at end of period                                        |       | $                                                                                      | 26,748,498 |   | $ | 69,672,892 |   |
|                                                                               |       |                                                                                   |       |   |   |
| Supplemental  disclosure of cash flow information                                  |       |                                                                                   |       |   |   |
| Cash paid for interest                                                             |       | $                                                                                      | 183,302    |   | $ | 194,189 |   |
| Cash paid for income taxes                                                         |       | —                                                                                 |       | — |   |
| Noncash  investing and financing activities                                        |       |                                                                                   |       |   |   |
| Accrued preferred stock dividend                                                   |       | $                                                                                      | 132,261    |   | $ | 205,634 |   |
| Common stock issued on conversion of preferred stock                               |       | 6,768                                                                                  |       | 3,951,576 |   |
| Common stock  issued for acquisition of property                                   |       | 52,404,230                                                                             |       | 6,185,389 |   |

 

The accompanying notes are an integral part of thesefinancial statements.

5

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**WARRENRESOURCES, INC. AND SUBSIDIARIES**

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

**NOTE A—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. Prior to June 30, 2007, the Company served as the managing generalpartner (the “MGP”) to affiliated partnerships and joint ventures.

The accompanyingunaudited financial statements and related notes present the Company’sconsolidated financial position as of June 30, 2007 and December 31, 2006, theconsolidated results of operations for the three months ended June 30, 2007 and2006 and consolidated cash flows for the six months ended June 30, 2007 and2006. The unaudited financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America forinterim financial information and with the instructions of Form 10-Q andArticle 10 of Regulation S-X. Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States of America for complete financial statements. In theopinion 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, 2007, are notnecessarily indicative of the results that may be expected for the fiscal yearending December 31, 2007. 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, 2006. These interim financial statements andnotes thereto should be read in conjunction with the consolidated financialstatements presented in the Company’s 2006 Annual Report on Form 10-K.

**NOTE B –CHANGE IN ACCOUNTING PRINCIPLE**

TheCompany has adopted the full cost method of accounting for its oil and gasproperties.  Previously, the Company followed the successful effortsmethod of accounting for its oil and gas activities. Warren believes thatthe full cost method is preferable for a company that is actively involved inthe exploration and development of oil and gas reserves. Additionally, the fullcost method is used by the majority of Warren’s peers and management believesthe change will improve the comparability of Warren’s financial statements withits peer group. Warren’s financialresults have been retroactively restated to reflect the full cost method ofaccounting.

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

In accordance with full cost accounting rules, Warrenis subject to a limitation on capitalized costs. The capitalized cost of oiland gas properties, net of accumulated depreciation, depletion andamortization, may not exceed the estimated future net cash flows from provedoil and gas reserves discounted at 10 percent, plus the lower of cost orfair market value of unproved properties as adjusted for related tax effects.If capitalized costs exceed this limit (the “ceiling limitation”), the excessmust be charged to expense. Warren did not have any adjustment to earnings dueto the ceiling limitation for the periods presented herein.

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

6

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A comparison of theCompany’s previously presented net income and earnings per share under thesuccessful efforts method of accounting to its results of operations disclosedherein are as follows:
|                                                        | ** ** | **Three Months  Ended  June 30,  2006** | ** ** | **Six Months  Ended  June 30,  2006** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------------|------------|
|                                                   |       |                                              |       |                                            |       |
| Net income, as  originally presented                   |       | $                                                 | 1,385,206  |                                            | $          | 2,070,236 |   |
| Basic net income  per share, as originally presented   |       | $                                                 | 0.03       |                                            | $          | 0.04 |   |
| Diluted net  income per share, as originally presented |       | $                                                 | 0.03       |                                            | $          | 0.04 |   |
|                                                   |       |                                              |       |                                            |       |
| Net income, as  adjusted                               |       | $                                                 | 2,083,062  |                                            | $          | 3,398,825 |   |
| Basic net income  per share, as adjusted               |       | $                                                 | 0.04       |                                            | $          | 0.06 |   |
| Diluted net income per  share, as adjusted             |       | $                                                 | 0.04       |                                            | $          | 0.06 |   |

 

##### **NOTEC—STOCK BASED COMPENSATION**

*StockOptions*

Compensation expenserelated to stock options and restricted stock awards recognized in operatingresults (general and administrative expenses) under SFAS No. 123R wasapproximately $632,000 and $235,000 for the six months ended June 30, 2007 and2006, respectively.

The following assumptionswere used to value stock options calculated using the Black-Scholes optionspricing model:
|                          | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------|------------|---------------------------------------------------|------------|
| ** **               | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| Dividend yield           |       | 0                                                 | %          | 0 | % |
| Expected  volatility     |       | 43.6                                              | %          | 48.2 | % |
| Risk-free  interest rate |       | 4.52                                              | %          | 4.66 | % |
| Fair value of options    |       | $                                                 | 4.00       |   | $ | 5.57 |   |
| Expected life            |       | 3.5 years                                         |       | 3.5 years |   |
|                          |            |                                                   |            |  |  |  |  |

 
| ** **                        | ** ** | **Number of Options** | ** ** | **Weighted   Average   Exercise   Price** | ** ** | **Weighted  Average   Remaining  Term (in years)** | ** ** | **Aggregate   Intrinsic Value (in thousands)** | ** ** |
|-----------------------------------|------------|----------------------------|------------|-------------------------------------------|------------|--------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| Outstanding at  December 31, 2006 |       | 2,456,783                  |       | $                                         | 8.07       |                                                         |       |                                                     |       |   |
| Granted                           |       | 554,250                    |       | 10.78                                     |       |                                                         |       |                                                     |       |
| Exercised                         |       | (146,000                   | )          | 4.58                                      |       |                                                         |       |                                                     |       |
| Forfeited or  expired             |       | (31,750                    | )          | 13.66                                     |       |                                                         |       |                                                     |       |
| Outstanding at  June 30, 2007     |       | 2,883,283                  |       | $                                         | 8.72       |                                                         | 2.70       |                                                     | $          | 9,383 |   |
|                              |       |                       |       |                                      |       |                                                         |       |                                                     |       |
| Exercisable at June 30,  2007     |       | 1,975,033                  |       | $                                         | 7.38       |                                                         | 1.96       |                                                     | $          | 8,802 |   |

 

The total intrinsic valueof options exercised during the six months ended June 30, 2007 and 2006 was$1.2 million and $0.2 million respectively.

As of June 30, 2007,total unrecognized stock-based compensation expense related to non-vested stockoptions was $4.0 million, which we expect to recognize over a weighted averageperiod of 3 years.

Cash received from stockoption exercises under all stock-based payment arrangements for the six monthsended June 30, 2007 was $0.7 million. We issue new shares of common stock tosettle option exercises.

7

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*RestrictedShares*

Restricted share activityas of  June 30, 2007 was as follows:
|                                   | ** ** | **Shares** | ** ** | **Weighted  Average  Fair Value** | ** ** |
|-----------------------------------|------------|------------|------------|----------------------------------------|------------|
| ** **                        | ** ** | ** ** | ** ** | ** **                             | ** ** |
| Outstanding at  December 31, 2006 |       | —     |       | $                                      | —     |   |
| Granted                           |       | 59,995     |       | 10.51                                  |       |
| Vested                            |       | —     |       | —                                 |       |
| Forfeited                         |       | (740       | )          | 10.51                                  |       |
| Outstanding at June 30,  2007     |       | 59,255     |       | $                                      | 10.51      |   |

 

Restricted stock awardsfor executive officers and employees vest ratably over three years. Fair valueof our restricted shares is based on our closing stock price on the date ofgrant.  As of June 30, 2007, total unrecognized stock-based compensationexpense related to non-vested restricted shares was $0.6 million, which isexpected to be recognized over a weighted average period of approximately 3years.

#### **NOTED—CHANGES IN STOCKHOLDERS’ EQUITY**

During the six monthsended June 30, 2007, holders of 564 shares of convertible preferred stockconverted into common stock on a basis of 0.50 shares of common stock for oneshare of convertible preferred stock. As of June 30, 2007, 271,436 shares ofconvertible preferred stock remain outstanding. Preferred dividends of approximately $130,000 were accrued at June 30,2007.

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 stock may be voluntarilyconverted, at the election of the holder into common stock of the Company basedon a conversion rate of 1 to 0.50.

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 the receipt of a redemption election,the Company, at its option, shall either: (1) pay the holder cash in the amountequal to the Redemption Price or (2) issue to holder shares of common stock inan amount equal to 125% of the redemption price and any accrued and unpaiddividends, based on the weighted average closing “bid” price of the Company’scommon stock for the thirty trading days immediately preceding the date of thewritten redemption election by the holder up to a maximum of 1.5 shares ofcommon stock for each one share of preferred stock redeemed. The Company isaccreting the carrying value of its preferred stock to its redemption priceusing the effective interest method with changes recorded to additional paid incapital. The accretion of preferred stock results in a reduction of earningsper 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, 2007, therewere 271,436 preferred shares outstanding that the Company may be required toredeem at the aggregate redemption price of $3,257,232 beginning July 1, 2010.As noted above, the Company could, at its option, settle the redemptionrequests in shares of its common stock.

8

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During the six monthsended June 30, 2007, employees and directors exercised a total of 146,000options at exercise prices between $4 and $9.05 per share. The Company receivedproceeds of approximately $0.7 million from these exercises.

**NOTE E—INCOME PER SHARE**

Basic income per share iscomputed by dividing net income applicable to common stockholders by theweighted average number of shares of common stock outstanding during theperiod. Diluted income  per share isbased on the assumption that stock options and warrants are converted intocommon shares using the treasury stock method and convertible bonds andpreferred stock are converted using the if-converted method. Conversion is notassumed if the results are anti-dilutive. Potential common shares for the six months ended June 30, 2007 and June30, 2006 of 207,032 and 3,344,023 respectively, relating to convertible bondsand preferred stock, were excluded from the computation of diluted income pershare because they are anti-dilutive. Potential common shares of 3,594,788,relating to stock options, warrants and restricted stock were excluded from thecomputation of diluted income per share for the six months ended June 30, 2007because they are anti-dilutive. Potential common shares of 3,442,390, relatingto stock options and warrants, respectively, were excluded from the computationof diluted income per share at for the three months ended June 30, 2006 becausethey are anti-dilutive. Stock options have a weighted average exercise price of$8.72 and $8.21 at June 30, 2007 and June 30, 2006, respectively. Anti-dilutivewarrants have a weighted average exercise price of $11.31 and $11.31 at June30, 2007 and June 30, 2006, respectively. At June 30, 2007, the convertiblebonds may be converted from the date of issuance until maturity at 100% ofprincipal amount into common stock of the Company at a price of $35 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 D).

Basic and diluted netincome per share is computed based on the following information:
|                                                     | ** ** | **Three Months  Ended  June 30, 2007** | ** ** | **Three Months   Ended   June 30, 2006   (Restated)** | ** ** | **Six Months   Ended   June 30, 2007** | ** ** | **Six Months   Ended  June 30, 2006  (Restated)** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
|                                                |       |                                                  |       |                                                                                |       |                                                            |       |                                                                  |       |
| Net income  available to shareholders               |       | $                                                     | 2,677,336  |                                                                                | $          | 2,083,062                                                       |       | $                                                                     | 4,078,038  |   | $ | 3,398,825 |   |
|                                                |       |                                                  |       |                                                                                |       |                                                            |       |                                                                  |       |
| Weighted average  shares outstanding – basic   |       | 54,843,482                                            |       | 52,830,408                                                                          |       | 54,185,219                                                      |       | 52,516,684                                                            |       |
| Effect of  dilutive securities – stock options |       | 422,901                                               |       | 455,102                                                                             |       | 270,503                                                         |       | 631,412                                                               |       |
| Effect of  dilutive securities – warrants      |       | 874,535                                               |       | 1,099,073                                                                           |       | 800,571                                                         |       | 1,193,707                                                             |       |
|                                                |       |                                                  |       |                                                                                |       |                                                            |       |                                                                  |       |
| Weighted average  shares outstanding – diluted |       | 56,140,918                                            |       | 54,384,583                                                                          |       | 55,256,293                                                      |       | 54,341,803                                                            |       |
|                                                |       |                                                  |       |                                                                                |       |                                                            |       |                                                                  |       |
| Basic net income  per share                         |       | $                                                     | 0.05       |                                                                                | $          | 0.04                                                            |       | $                                                                     | 0.08       |   | $ | 0.06 |   |
| Diluted net income per  share                       |       | $                                                     | 0.05       |                                                                                | $          | 0.04                                                            |       | $                                                                     | 0.07       |   | $ | 0.06 |   |

 

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**NOTE F—LONG-TERM DEBT**

Long-term debt consistedof the following at June 30, 2007 and December 31, 2006:
|                                                       | ** ** | **June 30, 2007** | ** ** | **December 31,   2006** | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|
|                                                  |       |                        |       |                              |       |
| Line of Credit                                        |       | $                           | 30,000,000 |                              | $          | — |   |
| 12% Secured  Convertible Bonds, due December 31, 2020 |       | 1,390,000                   |       | 1,390,000                         |       |
| 12% Secured  Convertible Bonds, due December 31, 2022 |       | 1,106,000                   |       | 1,106,000                         |       |
|                                                  |       |                        |       |                              |       |
|                                                  |       | 32,496,000                  |       | 2,496,000                         |       |
| Less current  portion                                 |       | 249,600                     |       | 249,600                           |       |
|                                                  |       |                        |       |                              |       |
| Long-term portion                                     |       | $                           | 32,246,400 |                              | $          | 2,246,400 |   |

 

On November 20, 2006, theCompany entered into a five year, $150 million credit agreement with JP MorganChase Bank (the “Credit Facility”).   TheCredit Facility provides for a revolving credit facility up to the lesser of(i) the borrowing base (ii) $150 million and (iii) the draw limit requested bythe Company.  The Credit Facility matureson November 15, 2011 and is secured by substantially all of the assets of theCompany. The borrowing base will be determined by the lenders at leastsemi-annually on each April 1 and October 1, beginning April 1, 2007 and isbased in part on the proved reserves of the Company. The Company is currentlyexploring additional sources of financing. The current borrowing base is $50million. Interest payments are made quarterly in arrears. On March 15, 2007,Warren borrowed $20 million under this facility. On June 29, 2007, Warrenborrowed an additional $10 million under this facility.  As of June 30, 2007, credit line interest ofapproximately $396,000 was accrued.

The convertible bonds maybe converted from the date of issuance until maturity at 100% of principalamount into common stock of the Company at prices ranging from $35 to $50. Eachyear the holders of the convertible bonds may tender to the Company up to 10%of the aggregate bonds issued and outstanding.

#### **NOTEG—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.

**Termination of repurchaseagreements**

For partnerships formedfrom 1999 to 2001, investor partners previously had a right to have theirinterests repurchased by the Company at a formula price seven years from thedate of the original partnership formation. During the second quarter of 2007,Warren acquired the respective oil and gas assets of all of the partnershipsformed from 2000 to 2003.  Asconsideration for the oil and gas properties acquired, Warren issued anaggregate of 3,482,074 shares of our unregistered restricted common stock tothe five separate partnerships. The restricted shares of Common Stock werevalued based upon a 20% discount from the weighted average sales price forWarren’s publicly traded Common Stock for the sixty-one (61) calendar daysended May 31, 2007. During that period, the weighted average sales price was$13.50 per share, and the 20% discounted price was $10.80 per share. Theeffective date of those acquisitions was April 1, 2007 and their closing datewas June 20, 2007.  The reservesattributable to the oil and gas properties of the five drilling partnershipsare approximately 9.9 Bcfe of proved developed producing reserves. Warren alsoattributed an estimated fair market value for related water injection wells andunproved dewatering wells that were in the partnerships.  In accordance with their five respectivepartnership agreements, the sale of substantially all of the oil and gasproperties by the five partnerships formed from 2000 to 2003 terminated anyrepurchase rights that their investor partners previously held.

10

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Also, during the secondquarter of 2007, Warren acquired the respective oil and gas assets of the twopartnerships formed in 1999.  Asconsideration, Warren paid an aggregate of $1.8 million in cash and the balanceby issuing 414,139 shares of our unregistered restricted common stock to thetwo separate partnerships. The restricted shares of Common Stock were valuedbased upon a 20% discount from the weighted average sales price for Warren’spublicly traded Common Stock for the period January 1, 2007 through March 31,2007. During that period, the weighted average sales price was $11.22 pershare, and the 20% discounted price was $8.98 per share. The effective date ofthose two acquisitions was April 1, 2007 and their closing date was June 30,2007.  In accordance with theirrespective partnership agreements, the sale of substantially all of the oil andgas properties by the two partnerships formed in 1999 terminated any repurchaserights that their investor partners previously held.
| CALCULATION OF PURCHASE  PRICE (IN MILLIONS) |   |   |   |
|----------------------------------------------|--------|--------|--------|
|                                         |   |   |   |
| Cash paid                                    |   | $      | 1.8    |   |
| Common stock  issued                         |   | 52.4   |   |
| Current  liabilities assumed:                |   | 0.7    |   |
| Total purchase  price for assets acquired    |   | $      | 54.9   |   |
|                                         |   |   |   |
| ALLOCATION OF  PURCHASE PRICE (IN MILLIONS)  |   |   |   |
| Proved oil and gas properties                |   | $      | 39.4   |   |
| Unproved oil and gas properties              |   | 15.5   |   |
|                                         |   |   |   |
| Total                                        |   | $      | 54.9   |   |

 

Thefollowing summary presents unaudited pro forma consolidated results ofoperations for the three and six months ended June 30, 2007 and 2006, as if theacquisition of the drilling partnerships had occurred as of January 1,2006.  The pro forma results are for illustrative purposes only andinclude adjustments in addition to the pre-acquisition historical results, suchas increased depreciation, depletion and amortization expense resulting fromthe allocation of fair value to oil and gas properties acquired. The unauditedpro forma information (presented in millions of dollars, except per shareamounts) is not necessarily indicative of the operating results that would haveoccurred had the acquisition been consummated at that date, nor is itnecessarily indicative of future operating results.
|                      | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------|------------|----------------------------------|------------|----------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| **Pro Forma:**  | ** ** | **June 30, 2007**      | ** ** | **June 30, 2006**      | ** ** | **June 30, 2007**    | ** ** | **June 30, 2006**    | ** ** |
| Revenues             |       | $                                | 15.0       |                             | $          | 10.9                           |       | $                              | 26.6       |   | $ | 21.5 |   |
| Net income           |       | 2.6                              |       | 2.7                              |       | 3.7                            |       | 4.6                            |       |
| Earnings per  share: |       |                             |       |                             |       |                           |       |                           |       |
| Basic—          |       | $                                | 0.04       |                             | $          | 0.05                           |       | $                              | 0.06       |   | $ | 0.08 |   |
| Diluted—        |       | $                                | 0.04       |                             | $          | 0.05                           |       | $                              | 0.06       |   | $ | 0.08 |   |

 

11

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**NOTE H—BUSINESS SEGMENTINFORMATION**

The Company has adoptedthe full cost method of accounting for its oil and gas properties. As a resultof this adoption and the buyback of the remaining drilling program interests,the Company will no longer have reporting segments for Turnkey activities, oiland gas marketing activities and well services. The Company’s operatingactivities will now be reported under one segment, oil and gas activities. Allcomparative results of operations and selected information for historicalreporting periods have been reclassified for this change.

**NOTE I—COMPREHENSIVE INCOME**

Other comprehensiveincome consists primarily of net unrealized investment gains and losses, net ofincome tax effect. Total comprehensive income for the periods is as follow:
|                               | ** ** | **2007**   | ** ** | **2006**       | ** ** |
|-------------------------------|------------|------------|------------|----------------|------------|
| ** **                    | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
|                          |       |       |       |           |       |
| Six Months  ending June 30,   |       | $          | 4,173,770  |           | $          | 3,428,962 |   |
|                          |       |       |       |           |       |
| Three Months ending  June 30, |       | $          | 2,716,433  |           | $          | 2,041,722 |   |

 

**NOTE J—GOODWILL**

The Companyaccounts for goodwill 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 threemonths ended June 30, 2007 no events occurred which would indicate that animpairment of goodwill existed.

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

**FORWARD-LOOKINGINFORMATION**

Forward-lookingstatements for 2007 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 theforward-looking statements provided herein are subject to all the risks anduncertainties incident to the acquisition, development and marketing of, andexploration for oil and gas reserves. These risks include, but are not limitedto, oil and natural gas price risk, environmental risks, drilling risk, reservequantity risk 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**

We are a growingindependent energy company engaged in the exploration and development ofdomestic onshore natural gas and oil reserves. We focus our efforts primarilyon the exploration and development of coalbed methane (“CBM”) propertieslocated in the Rocky Mountain region and on our waterflood oil recoveryprograms in the Wilmington field within the Los Angeles Basin of California. Asof June 30, 2007, we owned natural gas and oil leasehold interests inapproximately 250,020 gross (140,763 net) acres, 90% of which are undeveloped.Substantially all our undeveloped acreage is located in the Rocky Mountains.Our total net proved reserves are located on less than 10% of our net acreage.

**Liquidityand Capital Resources**

Our cash and cashequivalents decreased $16.3 million during the first six months of 2007. Thisresulted from cash used in investing activities of $57.4 million.  This was offset by cash provided by operatingactivities of $10.5 million and cash provided by financing activities of $30.6million.

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Cash used in investingactivities of primarily results from expenditures on oil and gas properties andequipment.  Cash provided by operatingactivities primarily relates to oil and gas operations.  Cash provided by financing activitiesprimarily results from proceeds received from our Credit Facility as discussedin more detail below and from the exercise of stock options and warrants.

During the first quarterof 2007, Warren submitted separate proposals to acquire the respective oil andgas assets of five drilling partnerships that Warren formed from 2000 to2003.  Warren serves as Managing GeneralPartner for these drilling partnerships. During June 2007, the drilling partnerships received approval of 51% ofthe interests of the drilling partnerships as required.  The effective date of that acquisition wasApril 1, 2007.  The independentlyevaluated December 31, 2006 PV-10 attributable to the aggregate proved oil andgas reserves of the five drilling partnerships is $33.2 million (approximately9.9 Bcfe of proved developed producing reserves) and the estimated fair marketvalue for related water injection wells is $4.4 million.  This resulted in a $37.6 million totalpurchase price for the properties of all five drilling partnerships approve thesale.  The purchase price was paid in theform of restricted shares of Warren’s common stock calculated at a discount of20% from the average publicly traded share price from April 1, 2007 to May 31,2007. The Company issued 3.5 million restricted shares to the drillingpartnerships.  Warren also acquired 21.3net coalbed methane wells that are currently not producing economical amountsof natural gas.

Also, as part ofcontractual commitments, Warren was obligated to accept requests from thepartners in two drilling partnerships formed in 1999.  The aggregate purchase price was $1.8 millionand 0.4 million restricted shares.  TheCompany acquired $3.9 million of PV-10 (approximately 1.2 Bcfe of proveddeveloped producing reserves) and $0.9 million for the estimated fair marketvalue of water injection wells.

On November 20, 2006,Warren entered into a five year, $150 million credit agreement with JP MorganChase Bank (the “Credit Facility”).   TheCredit Facility provides for a revolving credit facility up to the lesser of(i) the borrowing base (ii) $150 million and (iii) the draw limit requested bythe Company.  The Credit Facility matureson November 15, 2011.  It is secured bysubstantially all of our assets.  Theborrowing base will be determined by the lenders at least semi-annually on eachApril 1 and October 1, beginning April 1, 2007 and is based in part on theproved reserves of the Company. Interest payments are made quarterly inarrears.  The current borrowing base is$50 million. The company is subject to certain covenants under the terms of theCredit Facility which include, but are not limited to the maintenance of thefollowing financial ratios (1) minimum current ratio of 1.0 to 1.0 and (2) amaximum total net debt to annualized consolidated EBITDAX (as defined by theCredit Facility) of 3.5 to 1.0.  As ofJune 30, 2007, the Company was in compliance with all covenants. Warren hasborrowed $30 million under this facility. Warren is currently exploring additional sources of financing.

Dependingon the current level of borrowing base usage, the annual interest rate on eachbase rate borrowing under the Credit Facility will be at our option either: (a)the higher of (i) the Agent’s prime rate of interest announced from time totime, or (ii) the Federal Funds rate most recently determined by the Agent,plus 1⁄2% per annum, plus an applicable margin that ranges from 0.25% to 1.0%, or(b) Eurodollar Loan rate plus an applicable margin that ranges from 1.25% to2%. Credit line interest of approximately $0.4 million was accrued for as ofJune 30, 2007.

During the first sixmonths of 2007, the Company had net income of $4.1 million as compared to netincome of $3.4 million for the first six months of 2006. At June 30, 2007,current assets exceeded current liabilities by approximately $16.7 million.

At June 30, 2007, we hadapproximately 2.0 million vested outstanding stock options issued under ourstock based equity compensation plans. Of the total 2.0 million outstandingvested options, 139,750 options had exercise prices above the closing marketprice $11.68 of our common stock on June 30, 2007. If the options with exerciseprices below the closing market price on June 30, 2007 are exercised by theholders, we would receive $12.6 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 parvalue of 

13

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the bonds maturing on orbefore the maturity of the bonds. Such U.S. treasury bonds had a fair marketvalue of $1.2 million at June 30, 2007. The table below reflects the release of U.S. treasury bonds to usupon redemption.
| ** **                                                                      | ** ** | **Payments due by period** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations   As of June 30, 2007** | ** ** | **Total**                                 | ** ** | **Less Than  1 Year** | ** ** | **1-3  Years** | ** ** | **3-5   Years** | ** ** | **More Than 5   Years** | ** ** |
|                                                                            |       |                                      |       |   |   |   |   |   |   |   |   |
| Line of credit                                                                  |       | $                                         | 30,000,000 |   | — |   | — |   | $ | 30,000,000 |   | — |   |
| Bonds                                                                           |       | 2,496,000                                 |       | 249,600 |   | 426,816 |   | 345,721 |   | 1,473,863 |   |
| Drilling  commitments                                                           |       | 1,779,330                                 |       | 1,779,330 |   | — |   | — |   | — |   |
| Leases                                                                          |       | 312,201                                   |       | 181,048 |   | 131,153 |   | — |   | — |   |
| Total                                                                           |       | $                                         | 34,587,531 |   | $ | 2,209,978 |   | $ | 557,969 |   | $ | 30,345,721 |   | $ | 1,473,863 |   |
|                                                                                 |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**RESULTS OF OPERATIONS:**

**Three months Ended June 30, 2007Compared to Three Months Ended June 30, 2006**

*Oil and gas sales.*Revenue from oil and gas sales increased $5.7 million in the second quarter of2007 to $13.3 million, a 75% increase compared to the same quarter in2006.  This increase in productionresulted from significantly increasing our drilling activity in the WilmingtonTownlot Unit (“WTU”) in southern California. Net oil production for the three months ended June 30, 2007 and 2006 was211 Mbbls and 105 Mbbls, respectively. Net gas production for three months ended June 30, 2007 and 2006 was 250Mmcf and 258 Mmcf, respectively.  Theaverage realized price per barrel of oil for the three months ended June 30,2007 and 2006 was $57.33 and $59.35, respectively.  Additionally, the average realized price perMcf of gas for the three months ended June 30, 2007 and 2006 was $4.98 and$5.43, respectively.

*Production & exploration.*Production and exploration expense increased $2.4 million in the second quarterof 2007 to $5.2 million, an 85% increase compared to the same quarter in2006.  Primarily, this increase resultedfrom an increase in oil production. Production increased to 1.5 Bcfe for the second quarter of 2007 comparedto 888 Mmcfe for the second quarter of 2006, an increase of 71%.

*Interest and other income.*Interest and other income decreased $0.6 million in the second quarter of 2007to $0.6 million, a 49% decrease compared to the same quarter in 2006. Thisrepresents a decrease in interest earned due to lower cash and cash equivalentsduring the quarter as compared to the corresponding quarter last year.

*Depreciation, depletion andamortization .*Depreciation, depletion and amortizationexpense increased $1.1 million for the second quarter of 2007 to $2.6 million,a 81% increase compared to the corresponding quarter last year. This increaseresults from increased production and increased capitalized costs during thesecond quarter of 2007 compared to the corresponding period of 2006.  Production increased 71% during this period.

*General and administrativeexpenses.* General and administrative expenses increased $0.6million in the second quarter of 2007 to $3.0 million, a 26% increase comparedto the corresponding quarter last year. This reflects an increase in personnel as a result of increased drillingactivities.  Also, this reflects anincrease in stock option expense of $0.2 million.

*Interest expense.*Interest expense increased $0.3 million in the second quarter of 2007 to $0.4million compared to the same quarter last year. The increase results from interest expense relating to the drawdown of$30 million under our Credit Facility, as previously discussed.

**Six months Ended June 30, 2007Compared to Six Months Ended June 30, 2006**

*Oil and gas sales.*Revenue from oil and gas sales increased $8.4 million in the first six monthsof 2007 to $22.8 million, a 58% increase compared to the same period in2006.  This increase in productionresulted from significantly increasing our drilling activity in the WilmingtonTownlot Unit (“WTU”) in southern California. Net oil production for the six months ended June 30, 2007 and 2006 was373 Mbbls and 198 Mbbls, respectively. Net gas production for six months ended June 30, 2007 and 2006 was 465Mmcf and 567 Mmcf, respectively.  Theaverage realized price per barrel of oil for the six months ended June 30, 2007and 2006 was $54.38 and $56.12, 

14

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respectively.  Additionally, the average realized price perMcf of gas for the six months ended June 30, 2007 and 2006 was $5.52 and $5.89,respectively.

*Production & exploration.*Production and exploration expense increased $3.6 million in the first sixmonths of 2007 to $9.2 million, a 64% increase compared to the same period in2006.  Primarily, this increase resultedfrom an increase in oil production. Production increased to 2.7 Bcfe for the first six months of 2007compared to 1.8 Mmcfe for the first six months of 2006, an increase of 54%.

*Interest and other income.*Interest and other income decreased $1.1 million in the first six months of2007 to $1.4 million, a 43% decrease compared to the same period in 2006. Thisrepresents a decrease in interest earned due to lower cash and cash equivalentsduring the period as compared to the corresponding period last year.

*Depreciation, depletion andamortization.* Depreciation, depletion and amortizationexpense increased $1.8 million for the first six months of 2007 to $4.6million, a 63% increase compared to the corresponding period last year. Thisincrease results from increased production and increased capitalized costsduring the first six months of 2007 compared to the corresponding period of2006.  Production increased 54% duringthis period.

*General and administrativeexpenses.* General and administrative expenses increased $1.0million in the first six months of 2007 to $5.6 million, a 22% increasecompared to the corresponding period last year. This reflects an increase in personnel as a result of increased drillingactivities.  Also, this reflects anincrease in stock option expense of $0.4 million.

*Interest expense.*Interest expense increased $0.4 million in the first six months of 2007 to $0.6million compared to the same period last year. The increase results from interest expense relating to the drawdown of$30 million under our Credit Facility, as previously discussed.

**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 withaccounting principles generally accepted in the United States. The preparationof these financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses. Webelieve that certain accounting policies affect our more significant judgmentsand estimates used in the preparation of our consolidated financial statements.Our 2006 Form 10-K includes a discussion of our critical accounting policies.

*Change in Accounting Principle*

We converted from the successful efforts method ofaccounting for our oil and gas properties to the full cost method. Webelieve that the full cost method is preferable for our company as we devote asignificant portion of our time and capital budget to exploration activities.

Under full cost rules, all costs associated withproperty acquisition, exploration and development activities are capitalized.In the three month periods ended June 30, 2007 and 2006, overhead costscapitalized were approximately $35,000 and $8,000, respectively. Explorationand development costs include dry hole costs, geological and geophysical costs,direct overhead related to exploration and development activities and othercosts incurred for the purpose of finding oil and gas reserves. Proceedsreceived from disposals are credited against accumulated cost except when thesale represents a significant disposal of reserves, in which case a gain orloss is recognized. The sum of net capitalized costs and estimated futuredevelopment and dismantlement costs are depleted on the equivalentunit-of-production method, based on proved oil and gas reserves as determinedby independent petroleum engineers.

In accordance with full cost accounting rules, we willbe subject to a limitation on capitalized costs. The capitalized cost of oiland gas properties, net of accumulated depreciation, depletion and amortization,may not exceed the estimated future net cash flows from proved oil and gasreserves discounted at 10 percent, plus the lower of cost or fair marketvalue of unproved properties as adjusted for related tax effects. Ifcapitalized costs exceed this limit (the 

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“ceiling limitation”), the excess must be charged toexpense. For the three-month periods ended June 30, 2007 and 2006, the Companydid not have any charges associated with its ceiling test.

The costs of certain unevaluated oil and gas propertiesand exploratory wells being drilled are not included in the costs subject toamortization. We will assesses costs not being amortized for possibleimpairments or reductions in value and if a reduction in value has occurred,the portion of the carrying cost in excess of the current value is transferredto costs subject to amortization.

Certain reclassifications have been made to the priorperiod’s financial statements to conform to the full cost presentation.

**Item 3. *Quantitative andQualitative Disclosure About Market Risk***

## *Commodity Risk*

**Our major market risk exposure is the commodity pricingapplicable to our natural gas and oil production. Realized commodity pricesreceived for our production are primarily driven by the prevailing worldwideprice for crude oil and spot prices applicable to natural gas. The effects ofprice volatility are expected to continue as we do not hedge any of our futureproduction.**

## *Interest Rate Risk*

**We have exposure to changes in interest rates from ourfloating rate debt under our Credit Facility with JP Morgan Chase. All of ourconvertible debt has fixed interest rates, so consequently we are not exposedto cash flow risk from market interest rate changes on this convertible debt.We also hold investments in U.S. treasury bonds available for sale, whichrepresents securities held in escrow accounts on behalf of purchasers ofcertain bonds.  Additionally, we may holdU.S. treasury bonds trading securities, which predominantly represent U.S.treasury bonds released from escrow accounts. The fair market value of these securities will generally increase if thefederal discount rate decreases and decrease if the federal discount rateincreases.**

## *Inflation and Changes in Prices*

#### The generallevel of inflation affects our costs. Salaries and other general and administrative expenses are impacted byinflationary trends and the supply and demand of qualified professionals andprofessional services.  Inflation andprice fluctuations affect the costs associated with exploring for and producingnatural gas and oil, which have a material impact on our financial performance.

*Forward-LookingStatements and Risk*

Certain statements inthis report, including statements of the future plans, objectives, and expectedperformance of the company, are forward-looking statements that are dependentupon certain events, risks and uncertainties that may be outside the company’scontrol, and which could cause actual results to differ materially from thoseanticipated. Some of these include, but are not limited to, the market pricesof oil and gas, economic and competitive conditions, exploration risks such asdrilling unsuccessful wells, higher-than-expected costs, potential liabilityfor remedial actions under existing or future environmental regulations and litigation,potential liability resulting from pending or future litigation,  environmental and regulatory uncertaintiesthat could delay or prevent drilling, and not successfully completing, or anymaterial delay of, any development of new or existing fields, expansion, orcapital expenditure, legislative and regulatory changes, financial marketconditions, political and economic uncertainties of foreign governments, futurebusiness decisions, and other uncertainties, all of which are difficult topredict. Forward-looking statements are generally accompanied by words such as “estimate”,“project”, “predict”, “will”, “anticipate”, “plan”, “intend”, “believe”, “expect”or similar expressions that convey the uncertainty of future events oroutcomes. You should not place undue reliance on these forward-lookingstatements, which speak only as of the date of this report. Unless legallyrequired, Warren does not undertake any obligation to update anyforward-looking statements, as a result of new information, future events orotherwise. Certain risks that may affect Warren’s results of operations andfinancial position appear in Part 1, Item 1A “Risk Factors” of Warren’s 2006Annual Report on Form 10-K.

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There are numerousuncertainties inherent in estimating quantities of proved oil and gas reservesand in projecting future rates of production and the timing of developmentexpenditures. The total amount or timing of actual future production may varysignificantly from reserves and production estimates. The drilling ofexploratory wells can involve significant risks, including those related totiming, success rates and cost overruns. Lease and rig availability, complexgeology and other factors can affect these risks. Fluctuations in oil andnatural gas prices or a prolonged continuation of low prices may adverselyaffect the company’s financial position, results of operations and cash flows

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

Our management,under the supervision and with the participation of our Chief Executive Officer(“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness ofour disclosure controls and procedures as defined in Securities and ExchangeCommission (“SEC”) Rule 13a-15(e) and 15d-15(e) as of the end of the period coveredby this report.  Based upon thatevaluation, management  has concludedthat our  disclosure  controls and  procedures  are effective  to ensure  that information  we are required to disclose in reports thatwe file or submit under the Securities Exchange Act is communicated tomanagement, including the CEO and CFO, as appropriate to allow timelydecisions  regarding required disclosureand is  recorded,  processed, summarized  and  reported within the time periods specified 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.

## **PART II—OTHER INFORMATION**

**Item 1. *Legal Proceedings***

We are a party to legalactions arising in the ordinary course of our business.  In the opinion of our management, based inpart on consultation with legal counsel, the liability, if any, under theseclaims is either adequately covered by insurance or would not have a materialadverse effect on us.

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

Our business has manyrisks. Factors that could materially adversely affect our business, financialcondition, operating results or liquidity and the trading price of our commonstock are described under “Risk Factors” in Item 1A of our annual reporton Form 10-K for the year ended December 31, 2006. This information shouldbe considered carefully, together with other information in this report andother reports and materials we file with the Securities and ExchangeCommission. Additional risks and uncertainties not currently known to us orthat we currently deem to be immaterial also may materially adversely affectour business, financial condition and/or operating results.

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

a.             On June 20, 2007  inconnection with the acquisition of certain oil and gas properties from fiveaffiliated Delaware limited  partnerships (the “Sellers”), Warren issuedan aggregate of 3,482,074 shares of our unregistered restricted common stock (“CommonStock”) to the five separate Sellers. The restricted shares of Common Stockwere valued based upon a 20% discount from the weighted average sales price forWarren’s publicly traded Common Stock for the sixty-one (61) calendar daysended May 31, 2007. During that period, the weighted average sales price was$13.50 per share, and the 20% discounted price was $10.80 per share. The CommonStock was issued pursuant to the private placement exceptions from registrationprovided in Regulation D, Rule 506, under Section 4(2) of the Securities Act of1933, as amended (the “Act”). Each of the five Sellers has represented toWarren that such Seller is an “accredited investor” as defined in Rule 501 ofRegulation D promulgated by the SEC 

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under the Act and that such Seller has such knowledgeand experience in financial and business matters that it is capable ofevaluating the merits and risks of the transaction described herein.

On June 30, 2007 in connection with the acquisition ofcertain oil and gas properties from two affiliated Delawarelimited partnerships, Warren issued as partial consideration an aggregateof 414,139 shares of our unregistered restricted Common Stock to the twoseparate Sellers. The restricted shares of Common Stock were valued based upona 20% discount from the weighted average sales price for Warren’s publiclytraded Common Stock for the period January 1, 2007 through March 31, 2007.During that period, the weighted average sales price was $11.22 per share, andthe 20% discounted price was $8.98 per share. The Common Stock was issuedpursuant to the private placement exceptions from registration provided inRegulation D, Rule 506, under Section 4(2) of the Securities Act of 1933, asamended (the “Act”). Each of the five Sellers has represented to Warren thatsuch Seller is an “accredited investor” as defined in Rule 501 of Regulation Dpromulgated by the SEC under the Act and that such Seller has such knowledgeand experience in financial and business matters that it is capable ofevaluating the merits and risks of the transaction described herein.

Subject to certain limitations, we also grantedcertain future registration rights to the Sellers in which we have agreedcommencing in September 2007, but no sooner than 75 days from the closing, tofile at Seller’s request a registration statement with the U.S. Securities andExchange Commission (the “SEC”), which request has been made. We also agreed touse our reasonable efforts to cause the registration statement to be declaredeffective within one (1) year after the closing of the Properties acquisition.

b.     Not applicable

c.     Not applicable

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

Not applicable.

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

On May16, 2007, we held our Annual Meeting of Stockholders in New York, New York. Atthe meeting, the following two matters were considered and approved:

(a)Proposal that Anthony L. Coelho, Dominick D’Alleva, James M. McConnell and EspyPrice be elected as directors for a term expiring at the 2010 annual meeting,or until their successors are duly elected:
| Anthony Coelho         | 45,675,441 | FOR    | 588,247 WITHHOLD |
|------------------------|------------|--------|------------------|
|                   |       |   |             |
| Dominick D’Alleva | 45,859,769 | FOR    | 403,919 WITHHOLD |
|                   |       |   |             |
| James M. McConnell     | 45,825,672 | FOR    | 438,016 WITHHOLD |
|                   |       |   |             |
| Espy Price             | 45,829,600 | FOR    | 434,088 WITHHOLD |

 

(b) Proposal to ratify the appointment of GrantThornton LLP as the Company’s auditors for 2007:
| 45,965,393   FOR | 173,720   AGAINST | 124,575  ABSTAIN |
|----------------------------|------------------------|----------------------------|

 

**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**                                                                                                                                 |
|       |       |                                                                                                                                            |
| 18.1       |       | Preferability letter received from Grant Thornton  LLP, dated August 1 2007                                                                     |
| 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 2, 2007 |   | By:                                   | /s/ Timothy A. Larkin |   |
|                 |   |                                  | Timothy A. Larkin |
|                 |   |                                  | *Executive Vice President,* |
|                 |   |                                  | *Chief Financial Officer and* |
|                 |   |                                  | *Principal Accounting Officer* |

 

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