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** **

 

** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

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

 

**For theQuarterly Period Ended June 30, 2008**

 

# **OR**

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

** **

**For thetransition period from              to             **

 

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

# ** **

**WARREN RESOURCES, INC.**

(Exact Name ofRegistrant as Specified in its Charter.)

 

| **Maryland**                                                     | ** ** | **11-3024080**                           |
|------------------------------------------------------------------|------------|------------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification Number) |
|                                                             |       |                                     |
| **1114  Avenue of the Americas,****New York, NY**                | ** ** | **10036**                                |
| (Address of  Principal Executive Offices)                        |       | (Zip Code)                               |

 

Registrant’stelephone number, including area code:

**(212)697-9660**

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13and 15 (d) of the Securities Exchange Act of 1934 during the preceding 12months and (2) has been subject to such filing requirements for the past90 days.

 

Yes xNo o

 

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

 
| Large accelerated filer  o |   | Accelerated filer x |   | Non-accelerated filer o |   | Smaller reporting company o |
|----------------------------|--------|---------------------|--------|-------------------------|--------|-----------------------------|

 

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

 

Yes o No x

 

Theaggregate number of Registrant’s outstanding shares on August 5, 2008 was58,805,881 shares of Common Stock, $0.0001 par value.

 

 

 

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**WARRENRESOURCES, INC.**

 

**TABLE OFCONTENTS**

 
| PART I—  |   | FINANCIAL INFORMATION                                                                                 |   |   |
|--------------------|--------|-------------------------------------------------------------------------------------------------------|--------|--------|
|               |   |                                                                                                  |   |   |
|               |   | Item 1. Financial Statements  (Unaudited)                                                             |   |   |
|               |   |                                                                                                  |   |   |
|               |   | Consolidated Balance Sheets  as of June 30, 2008 and December 31, 2007                      |   |   |
|               |   |                                                                                                  |   |   |
|               |   | Consolidated Statements of  Operations for the three and six months ended June 30, 2008 and 2007 |   |   |
|               |   |                                                                                                  |   |   |
|               |   | Consolidated Statements of  Cash Flows for six months ended June 30, 2008 and 2007               |   |   |
|               |   |                                                                                                  |   |   |
|               |   | 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. 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                                                                                            |   |   |

 

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**PART I—FINANCIAL INFORMATION**

 

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

 

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

**(Unaudited)**

 
| ** **                                                                                                                                                                                                                                                                                 | ** ** | **June 30,  2008** | ** **      | **December 31,  2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|-----------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                                                                                 |       |                    |            |                        |       |
| Current Assets                                                                                                                                                                                                                                                                             |       |                    |            |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                                                 |       | $                       | 20,646,145      |                        | $          | 12,815,406 |   |
| Accounts  receivable – trade                                                                                                                                                                                                                                                          |       | 16,321,437              |            | 8,256,199                   |       |
| Restricted  investments in U.S. Treasury Bonds—available for sale, at fair value                                                                                                                                                                                                      |       | 91,925                  |            | 131,625                     |       |
| Other current  assets                                                                                                                                                                                                                                                                      |       | 1,262,751               |            | 1,634,826                   |       |
|                                                                                                                                                                                                                                                                                       |       |                    |            |                        |       |
| Total current  assets                                                                                                                                                                                                                                                                      |       | 38,322,258              |            | 22,838,056                  |       |
|                                                                                                                                                                                                                                                                                       |       |                    |            |                        |       |
| Other Assets                                                                                                                                                                                                                                                                               |       |                    |            |                        |       |
| Oil and gas  properties—at cost, based on full cost method of accounting, net of  accumulated depreciation, depletion and amortization (includes unproved  properties excluded from amortization of $72,209,017 and $66,240,101 as of  June 30, 2008 and December 31, 2007) |       | 453,560,966             |            | 406,063,309                 |       |
| Property and  equipment—at cost, net                                                                                                                                                                                                                                                  |       | 2,191,331               |            | 2,422,702                   |       |
| Restricted  investments in U.S. Treasury Bonds—available for sale, at fair value                                                                                                                                                                                                      |       | 827,324                 |            | 1,184,629                   |       |
| Goodwill                                                                                                                                                                                                                                                                                   |       | 3,430,246               |            | 3,430,246                   |       |
| Other assets                                                                                                                                                                                                                                                                               |       | 4,012,163               |            | 4,566,649                   |       |
|                                                                                                                                                                                                                                                                                       |       |                    |            |                        |       |
| Total other  assets                                                                                                                                                                                                                                                                        |       | 464,022,030             |            | 417,667,535                 |       |
| ** **                                                                                                                                                                                                                                                                                 | ** ** | **$**                   | **502,344,288** | ** **                  | **$**      | **440,505,591** | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                             |       |                    |            |                        |       |
| Current  Liabilities                                                                                                                                                                                                                                                                       |       |                    |            |                        |       |
| Current  maturities of debentures and other long term liabilities                                                                                                                                                                                                                          |       | $                       | 311,652         |                        | $          | 608,038 |   |
| Accounts payable  and accruals                                                                                                                                                                                                                                                             |       | 30,284,477              |            | 34,343,819                  |       |
|                                                                                                                                                                                                                                                                                       |       |                    |            |                        |       |
| Total current  liabilities                                                                                                                                                                                                                                                                 |       | 30,596,129              |            | 34,951,857                  |       |
|                                                                                                                                                                                                                                                                                       |       |                    |            |                        |       |
| Long-Term  Liabilities                                                                                                                                                                                                                                                                     |       |                    |            |                        |       |
| Debentures, less  current portion                                                                                                                                                                                                                                                          |       | 1,535,400               |            | 2,232,900                   |       |
| Other long-term  liabilities, less current portion                                                                                                                                                                                                                                         |       | 8,789,336               |            | 7,639,485                   |       |
| Line of credit                                                                                                                                                                                                                                                                             |       | 82,400,000              |            | 46,152,498                  |       |
|                                                                                                                                                                                                                                                                                       |       |                    |            |                        |       |
|                                                                                                                                                                                                                                                                                       |       | 92,724,736              |            | 56,024,883                  |       |
|                                                                                                                                                                                                                                                                                       |       |                    |            |                        |       |
| Commitments and  Contingencies                                                                                                                                                                                                                                                             |       |                    |            |                        |       |
|                                                                                                                                                                                                                                                                                       |       |                    |            |                        |       |
| Stockholders’  Equity                                                                                                                                                                                                                                                                 |       |                    |            |                        |       |
| 8% convertible preferred stock, par value $.0001; authorized 10,000,000  shares, issued and outstanding, 107,055 shares in 2008 and 224,370 shares in  2007 (aggregate liquidation preference $1,284,660 in 2008 and $2,692,440 in  2007)                                                  |       | 1,282,920               |            | 2,688,236                   |       |
| Common stock -  $.0001 par value; authorized, 100,000,000 shares; issued 58,801,297 in 2008  and 58,191,901 shares in 2007                                                                                                                                                                 |       | 5,880                   |            | 5,819                       |       |
| Additional  paid-in-capital                                                                                                                                                                                                                                                                |       | 428,512,332             |            | 424,722,529                 |       |
| Accumulated  deficit                                                                                                                                                                                                                                                                       |       | (50,158,684             | )               | (77,324,451                 | )          |
| Accumulated  other comprehensive income, net of applicable income taxes of $72,000 in 2008  and $108,000 in 2007                                                                                                                                                                           |       | 109,030                 |            | 164,773                     |       |
|                                                                                                                                                                                                                                                                                       |       | 379,751,478             |            | 350,256,906                 |       |
|                                                                                                                                                                                                                                                                                       |       |                    |            |                        |       |
| Less common  stock in Treasury—at cost; 632,250 shares in 2008 and 2007                                                                                                                                                                                                               |       | 728,055                 |            | 728,055                     |       |
| Total  stockholders’ equity                                                                                                                                                                                                                                                           |       | 379,023,423             |            | 349,528,851                 |       |
| ** **                                                                                                                                                                                                                                                                                 | ** ** | **$**                   | **502,344,288** | ** **                  | **$**      | **440,505,591** | ** ** |

 

The accompanyingnotes are an integral part of these financial statements.

 

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

** **
| ** **                                                 | ** ** | **Three Months Ended  June 30, (Unaudited)** | ** ** | **Six Months Ended  June 30, (Unaudited)** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2008**                                                         | ** ** | **2007**                                                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues                                                   |       |                                                             |       |                                                           |       |   |   |   |   |
| Oil and gas  sales                                         |       | $                                                                | 34,235,822 |                                                           | $          | 13,347,043 |   | $ | 57,719,515 |   | $ | 22,828,728 |   |
| Interest and  other income                                 |       | 224,206                                                          |       | 588,784                                                        |       | 568,980 |   | 1,421,545 |   |
| Net gain (loss)  on investments                            |       | —                                                           |       | (30,351                                                        | )          | 93,346 |   | (22,270 | ) |
|                                                       |       | 34,460,028                                                       |       | 13,905,476                                                     |       | 58,381,841 |   | 24,228,003 |   |
|                                                       |       |                                                             |       |                                                           |       |   |   |   |   |
| Expenses                                                   |       |                                                             |       |                                                           |       |   |   |   |   |
| Lease operating  expense and taxes                         |       | 6,519,354                                                        |       | 5,165,860                                                      |       | 12,383,248 |   | 9,180,799 |   |
| Depreciation,  depletion and amortization                  |       | 4,512,098                                                        |       | 2,582,059                                                      |       | 8,425,633 |   | 4,590,303 |   |
| General and  administrative                                |       | 4,485,957                                                        |       | 2,964,014                                                      |       | 7,798,190 |   | 5,631,673 |   |
| Interest                                                   |       | 1,230,782                                                        |       | 431,255                                                        |       | 2,573,003 |   | 588,123 |   |
|                                                       |       | 16,748,191                                                       |       | 11,143,188                                                     |       | 31,180,074 |   | 19,990,898 |   |
|                                                       |       |                                                             |       |                                                           |       |   |   |   |   |
| Income before  provision for income taxes                  |       | 17,711,837                                                       |       | 2,762,288                                                      |       | 27,201,767 |   | 4,237,105 |   |
|                                                       |       |                                                             |       |                                                           |       |   |   |   |   |
| Deferred income  tax expense                               |       | 9,000                                                            |       | 18,000                                                         |       | 36,000 |   | 25,000 |   |
|                                                       |       |                                                             |       |                                                           |       |   |   |   |   |
| Net income                                                 |       | 17,702,837                                                       |       | 2,744,288                                                      |       | 27,165,767 |   | 4,212,105 |   |
|                                                       |       |                                                             |       |                                                           |       |   |   |   |   |
| Less dividends  and accretion on preferred shares          |       | 20,960                                                           |       | 66,952                                                         |       | 53,852 |   | 134,068 |   |
|                                                       |       |                                                             |       |                                                           |       |   |   |   |   |
| Net income  applicable to common stockholders              |       | $                                                                | 17,681,877 |                                                           | $          | 2,677,336 |   | $ | 27,111,915 |   | $ | 4,078,037 |   |
|                                                       |       |                                                             |       |                                                           |       |   |   |   |   |
| Earnings per  share – Basic                           |       | $                                                                | 0.30       |                                                           | $          | 0.05 |   | $ | 0.47 |   | $ | 0.08 |   |
| Earnings per  share – Diluted                         |       | 0.30                                                             |       | 0.05                                                           |       | 0.46 |   | 0.07 |   |
|                                                       |       |                                                             |       |                                                           |       |   |   |   |   |
| Weighted average  common shares outstanding – Basic   |       | 58,027,083                                                       |       | 54,843,482                                                     |       | 57,804,809 |   | 54,185,219 |   |
| Weighted average  common shares outstanding – Diluted |       | 59,011,546                                                       |       | 56,140,918                                                     |       | 58,678,293 |   | 55,256,293 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

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**WarrenResources, Inc. and Subsidiaries**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                         | ** ** | **For the six months ended  June 30, (Unaudited)** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2008**                                                                         | ** ** | **2007** | ** ** |
| Cash flows from  operating activities:                                             |       |                                                                             |       |   |   |
| Net income                                                                         |       | $                                                                                | 27,165,768 |   | $ | 4,212,105 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                                                             |       |   |   |
| Accretion of  discount on available-for-sale debt securities                       |       | (28,149                                                                          | )          | (31,640 | ) |
| Amortization and  write-off of deferred bond offering costs                        |       | 85,205                                                                           |       | 8,760 |   |
| Gain on sale of  US treasury bonds – available for sale                       |       | (93,346                                                                          | )          | — |   |
| Depreciation,  depletion and amortization                                          |       | 8,425,633                                                                        |       | 4,590,303 |   |
| Stock option  expense                                                              |       | 1,085,745                                                                        |       | 631,936 |   |
| Deferred tax  expense                                                              |       | 36,000                                                                           |       | 25,000 |   |
| Change in assets  and liabilities:                                                 |       |                                                                             |       |   |   |
| Increase in  accounts receivable—trade                                        |       | (8,065,238                                                                       | )          | (2,328,080 | ) |
| Decrease in  other assets                                                          |       | 841,357                                                                          |       | 3,171,409 |   |
| Increase in  accounts payable and accruals                                         |       | 868,997                                                                          |       | 245,485 |   |
|                                                                               |       |                                                                             |       |   |   |
| Net cash  provided by operating activities                                         |       | 30,321,972                                                                       |       | 10,525,278 |   |
|                                                                               |       |                                                                             |       |   |   |
| Cash flows from  investing activities:                                             |       |                                                                             |       |   |   |
| Purchase,  exploration and development of oil and gas properties                   |       | (59,044,973                                                                      | )          | (56,299,909 | ) |
| Purchase of  property and equipment                                                |       | (93,635                                                                          | )          | (1,121,547 | ) |
| Proceeds from  U.S. Treasury Bonds—available-for-sale                         |       | 426,757                                                                          |       | — |   |
|                                                                               |       |                                                                             |       |   |   |
| Net cash used in  investing activities                                             |       | (58,711,851                                                                      | )          | (57,421,456 | ) |
|                                                                               |       |                                                                             |       |   |   |
| Cash flows from  financing activities:                                             |       |                                                                             |       |   |   |
| Proceeds from  line of credit                                                      |       | 36,247,502                                                                       |       | 30,000,000 |   |
| Payments on debt  and debentures                                                   |       | (826,323                                                                         | )          | (46,458 | ) |
| Issuance of  common stock, net                                                     |       | 2,757,971                                                                        |       | 669,250 |   |
| Repurchase of  preferred stock, net                                                |       | (1,958,532                                                                       | )          | — |   |
|                                                                               |       |                                                                             |       |   |   |
| Net cash  provided by financing activities                                         |       | 36,220,618                                                                       |       | 30,622,792 |   |
|                                                                               |       |                                                                             |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                              |       | 7,830,739                                                                        |       | (16,273,386 | ) |
|                                                                               |       |                                                                             |       |   |   |
| Cash and cash equivalents  at beginning of period                                  |       | 12,815,406                                                                       |       | 43,021,884 |   |
|                                                                               |       |                                                                             |       |   |   |
| Cash and cash  equivalents at end of period                                        |       | $                                                                                | 20,646,145 |   | $ | 26,748,498 |   |
|                                                                               |       |                                                                             |       |   |   |   |   |
| Supplemental  disclosure of cash flow information                                  |       |                                                                             |       |   |   |
| Cash paid for  interest                                                            |       | $                                                                                | 1,994,938  |   | $ | 183,302 |   |
| Cash paid for  income taxes                                                        |       | —                                                                           |       | — |   |
| Noncash  investing and financing activities                                        |       |                                                                             |       |   |   |
| Accrued  preferred stock dividend                                                  |       | $                                                                                | 51,388     |   | $ | 132,261 |   |
| Common stock  issued on conversion of preferred stock                              |       | —                                                                           |       | 6,768 |   |
| Common stock  issued for acquisition of property                                   |       | —                                                                           |       | 52,404,230 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

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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 forthe purpose 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 and New Mexico. In addition, theCompany previously served as the managing general partner (the “MGP”) andturnkey drilling contractor to affiliated partnerships and joint ventures.

 

Theaccompanying unaudited financial statements and related notes present theCompany’s consolidated financial position as of June 30, 2008 and December 31,2007, the consolidated results of operations for the three and six months endedJune 30, 2008 and 2007 and consolidated cash flows for the six monthsended June 30, 2008 and 2007. The unaudited financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States of America for interim financial information and with theinstructions of Form 10-Q and Article 10 of Regulation S-X.Accordingly, they do not include all of the information and footnotes requiredby accounting principles generally accepted in the United States of America forcomplete financial statements. In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for a fairpresentation have been included. Operating results for the six months ended June 30,2008, are not necessarily indicative of the results that may be expected forthe fiscal year ending December 31, 2008. The accounting policies followedby the Company are set forth in Note A to the Company’s financial statementsincluded in Form 10-K for the year ended December 31, 2007. Theseinterim financial statements and notes thereto should be read in conjunctionwith the consolidated financial statements presented in the Company’s 2007Annual Report on Form 10-K.

 

##### **NOTE B**—STOCK BASED COMPENSATION

##### ** **

*Stock Options*

 

Compensation expense related to stock options andrestricted stock awards recognized in operating results (general andadministrative expenses) under SFAS No. 123R was approximately $1.1million and $632,000 for the six months ended June 30, 2008 and 2007,respectively.

 

Thefollowing assumptions were used to value stock options calculated using theBlack-Scholes options pricing model:

 
| ** **               | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------|------------|---------------------------------------------------|------------|
| ** **               | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| Dividend yield           |       | 0                                                 | %          | 0 | % |
| Expected  volatility     |       | 48.1                                              | %          | 43.6 | % |
| Risk-free  interest rate |       | 2.02                                              | %          | 4.52 | % |
| Fair value of  options   |       | $                                                 | 4.20       |   | $ | 4.00 |   |
| Expected life            |       | 3.5 years                                         |       | 3.5 years |   |
|                          |            |                                                   |            |  |  |  |  |

 
| ** **                             | ** ** | ** **          | ** ** | **Weighted** | ** ** | **Weighted**                  | ** ** | ** **               | ** ** |
|----------------------------------------|------------|---------------------|------------|--------------|------------|-------------------------------|------------|--------------------------|------------|
| ** **                             | ** ** | ** **          | ** ** | **Average**  | ** ** | **Average**                   | ** ** | **Aggregate**            | ** ** |
| ** **                             | ** ** | **Number**          | ** ** | **Exercise** | ** ** | **Remaining**                 | ** ** | **Intrinsic Value** | ** ** |
| ** **                             | ** ** | **of Options** | ** ** | **Price**    | ** ** | **Term (in years)** | ** ** | **(in thousands)**  | ** ** |
| Outstanding at  December 31, 2007 |       | 2,775,750           |       | $            | 8.88       |                          |       |                     |       |   |
| Granted                                |       | 450,250             |       | 11.32        |       |                          |       |                     |       |
| Exercised                              |       | (589,951            | )          | 4.67         |       |                          |       |                     |       |
| Forfeited or  expired                  |       | (47,083             | )          | 11.63        |       |                          |       |                     |       |
| Outstanding at  June 30, 2008     |       | 2,588,966           |       | $            | 10.21      |                          | 2.61       |                     | $          | 11,576 |   |
|                                   |       |                |       |         |       |                          |       |                     |       |
| Exercisable at  June 30, 2008     |       | 1,624,377           |       | $            | 9.41       |                          | 1.76       |                     | $          | 8,756 |   |

 

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Thetotal intrinsic value of options exercised during the six months ended June 30,2008 and 2007 was $5.1 million and $1.2 million respectively.

 

As of June 30,2008, total unrecognized stock-based compensation expense related to non-vestedstock options was $5.1 million, which we expect to recognize over a weightedaverage period of 2 years.

 

*RestrictedShares*

 

Restricted share activityas of June 30, 2008 was as follows:

 
| ** **                             | ** ** | **Shares** | ** ** | **Weighted  Average  Fair Value** | ** ** |
|----------------------------------------|------------|------------|------------|----------------------------------------|------------|
| ** **                             | ** ** | ** ** | ** ** | ** **                             | ** ** |
| Outstanding at  December 31, 2007 |       | 58,330     |       | $                                      | 10.51      |   |
| Granted                                |       | 112,857    |       | 11.15                                  |       |
| Vested                                 |       | (19,445    | )          | 10.51                                  |       |
| Forfeited                              |       | —     |       | —                                 |       |
| Outstanding at  June 30, 2008     |       | 151,742    |       | $                                      | 10.99      |   |

 

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, 2008, total unrecognized stock-basedcompensation expense related to non-vested restricted shares was $1.5 million,which is expected to be recognized over a weighted average period ofapproximately 2.4 years.

 

#### **NOTE C**—CHANGES INSTOCKHOLDERS’ EQUITY

#### ** **

During the six monthsended June 30, 2008, the Company redeemed 117,315 shares of convertiblepreferred stock for a price of $12 per share, plus accrued dividends of $1.44per share. As of June 30, 2008, 107,055 shares of convertible preferredstock remain outstanding.  Preferreddividends of approximately $213,000 were accrued at June 30, 2008.

 

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 one share of preferred stock for 0.50 shares of commonstock.

 

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 theamount equal to the Redemption Price or (2) issue to the holder shares ofcommon stock in an amount equal to 125% of the redemption price and any accruedand unpaid dividends, based on the weighted average closing “bid” price of theCompany’s common stock for the thirty trading days immediately preceding thedate of the written redemption election by the holder up to a maximum of 1.5shares of common stock for each one share of preferred stock redeemed. TheCompany is accreting the carrying value of its preferred stock to itsredemption price using the effective interest method with changes recorded toadditional paid in capital. The accretion of preferred stock results in areduction of earnings per share applicable to common stockholders.

 

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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.

 

Duringthe six months ended June 30, 2008, employees and directors exercised atotal of 589,951 options at exercise prices between $4 and $10.51 per share.The Company received proceeds of approximately $2.8 million from theseexercises. We issue new shares of common stock to settle option exercises.

 

**NOTE D—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 is based on the assumption that stock optionsand warrants are converted into common shares using the treasury stock methodand convertible bonds and preferred stock are converted using the if-convertedmethod. Conversion is not assumed if the results are anti-dilutive.  Potential common shares for the six monthsended June 30, 2008 and June 30, 2007 of 48,743 and 207,032respectively, relating to convertible bonds and preferred stock, were excludedfrom the computation of diluted income per share because they areanti-dilutive. Potential common shares of 1,110,492 and 3,442,390 respectively,relating to stock options, warrants and restricted stock were excluded from thecomputation of diluted income per share for the six months ended June 30,2008 and 2007, respectively, because they are anti-dilutive. Stock options havea weighted average exercise price of $10.21 and $8.72 at June 30, 2008 andJune 30, 2007, respectively. At June 30, 2008, the convertible bondsmay be converted from the date of issuance until maturity at 100% of principalamount 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 C).

 

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

 
| ** **                                            | ** ** | **Three Months  Ended  June 30, 2008** | ** ** | **Three Months  Ended  June 30, 2007** | ** ** | **Six Months  Ended  June 30, 2008** | ** ** | **Six Months  Ended  June 30, 2007** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
|                                                  |       |                                                  |       |                                                  |       |                                                |       |                                                |       |
| Net income  available to shareholders                 |       | $                                                     | 17,681,877 |                                                  | $          | 2,677,336                                           |       | $                                                   | 27,111,915 |   | $ | 4,078,037 |   |
|                                                  |       |                                                  |       |                                                  |       |                                                |       |                                                |       |
| Weighted average  shares outstanding - basic          |       | 58,027,083                                            |       | 54,843,482                                            |       | 57,804,809                                          |       | 54,185,219                                          |       |
| Effect of  dilutive securities – stock options   |       | 473,361                                               |       | 874,535                                               |       | 436,706                                             |       | 800,571                                             |       |
| Effect of  dilutive securities – preferred stock |       | 53,528                                                |       | —                                                |       | 53,528                                              |       | —                                              |       |
| Effect of  dilutive securities – warrants        |       | 457,575                                               |       | 422,901                                               |       | 383,250                                             |       | 270,503                                             |       |
|                                                  |       |                                                  |       |                                                  |       |                                                |       |                                                |       |
| Weighted average  shares outstanding - diluted        |       | 59,011,546                                            |       | 56,140,918                                            |       | 58,678,293                                          |       | 55,256,293                                          |       |
|                                                  |       |                                                  |       |                                                  |       |                                                |       |                                                |       |
| Basic net income  per share                           |       | $                                                     | 0.30       |                                                  | $          | 0.05                                                |       | $                                                   | 0.47       |   | $ | 0.08 |   |
| Diluted net  income per share                         |       | $                                                     | 0.30       |                                                  | $          | 0.05                                                |       | $                                                   | 0.46       |   | $ | 0.07 |   |

 

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**NOTE E—LONG-TERM LIABILITIES**

 

Long-termliabilities consisted of the following for the balance sheets dated:

 
| ** **                             | ** ** | **June 30, 2008** | ** ** | **December 31,  2007** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                                   |       |                        |       |                        |       |
| Line of credit                         |       | $                           | 82,400,000 |                        | $          | 46,152,498 |   |
| Debentures                             |       | 1,706,000                   |       | 2,481,000                   |       |
| Debt  collateralized by treasury stock |       | 543,463                     |       | 594,786                     |       |
| Asset retirement  obligations          |       | 6,563,769                   |       | 5,581,481                   |       |
| Litigation  provision                  |       | 1,823,156                   |       | 1,823,156                   |       |
|                                   |       |                        |       |                        |       |
|                                   |       | 93,036,388                  |       | 56,632,921                  |       |
| Less current  portion                  |       | 311,652                     |       | 608,038                     |       |
|                                   |       |                        |       |                        |       |
| Long-term  portion                     |       | $                           | 92,724,736 |                        | $          | 56,024,883 |   |

#### ** **

On November 19,2007, the Company entered into a five year, $250 million credit agreement withMerrill Lynch Capital (now owned by GE Capital Corporation). The CreditFacility provides for a revolving credit line up to the lesser of (i) theborrowing base, (ii) $250 million or (iii) the draw limit requestedby the Company. The Credit Facility matures on November 19, 2012. It issecured by substantially all of our assets. The borrowing base will be determinedby the lenders at least semi-annually on each April 1 and October 1and is based in part on the proved reserves of the Company. The currentborrowing base is $120 million with an over-advance of $15 million,representing an immediate availability of $135 million. Interest payments aremade quarterly in arrears. During the first quarter of 2008 the Company drewdown approximately $36 million under this facility, leaving $52.6 million ofavailable credit. Credit line interest of approximately $0.6 million wasaccrued for as of June 30, 2008.

 

The Company is subject tocertain covenants under the terms of the Credit Facility which include, but arenot limited to the maintenance of the following financial ratios (1) minimumcurrent ratio (including unused borrowing base in current assets) of 1.0 to 1.0and (2) a minimum annualized consolidated EBITDAX (as defined by theCredit Facility) to net interest expense to of 2.5 to 1.0.  As of June 30, 2008, the Company hasborrowed $82.4 million under the Credit Facility and was in compliance with allcovenants.

 

Depending on the currentlevel of borrowing base usage, the annual interest rate on each base rateborrowing under the Credit Facility will be at our option either: (a) thehigher of (i) the Agent’s prime rate of interest announced from time totime, or (ii) the Federal Funds rate most recently determined by theAgent, plus 0.5% per annum, plus an applicable margin that ranges from 0.25% to1.0%, or (b) Eurodollar Loan rate plus an applicable margin that rangesfrom 1.25% to 2.0%.

 

Theconvertible bonds may be converted from the date of issuance until maturity at100% of principal amount into common stock of the Company at prices rangingfrom $35 to $50. Each year the holders of the convertible bonds may tender tothe Company up to 10% of the aggregate bonds issued and outstanding. During thethree months ended March 31, 2008, the Company offered bond holders apremium of 33% to tender their bonds. This offer resulted in the redemption ofbonds having a face value of $775,000. The early redemption resulting from thisredemption was $256,000 and is reflected in interest expense.

 

#### **NOTEF—CONTINGENCIES**

#### ** **

*Stateof California v. Warren E&P, Inc., et al.*    OnJanuary 30, 2008, the Los Angeles city attorney filed a complaint againstWarren E&P, Inc., a subsidiary of the Company, and six of itsindividual employees and independent contractors in the Superior Court ofCalifornia, County of Los Angeles. The complaint alleges eight misdemeanorviolations concerning four alleged events in Wilmington, California during2007. The complaint 

 

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asserts one count offailing to report the discharge or threatened discharge of oil into marinewaters for an event occurring on or about March 7, 2007; one count offailing to prepare and implement an oil spill contingency plan; four counts ofviolating the California Fish and Game Code by placing petroleum or itsby-products in or at a place where they can pass into waters of the state; andtwo similar violations of the California Clean Water Act. The complaint allegesall eight counts against Warren E&P, Inc. and one to four countsagainst each of the individuals.

 

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

 

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

 

In 2005, Warren recordeda provision for $1.8 million relating to a contingent liability that we mayface as a result of a lawsuit originally filed in 1998 by Gotham InsuranceCompany in the 81st Judicial District Court of Frio County, Texas seekinga refund of approximately $1.8 million paid by Gotham and other insurersfor a well blow-out policy that occurred in 1997. After several appeals to theTexas Court of Appeals and the Texas Supreme Court, the case has been remandedto the trial court for further proceedings which are expected to occur in 2008.

 

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

 

**NOTE G–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:

 
| ** **                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |
| Six Months  ending June 30,   |       | $        | 27,110,024 |     | $          | 4,173,770 |   |
|                               |       |     |       |     |       |
| Three Months  ending June 30, |       | $        | 17,687,255 |     | $          | 2,716,433 |   |

 

**NOTE H –RECENTLY ISSUED ACCOUNTING STANDARDS**

 

Effective January 1,2008, we implemented Financial Accounting Standards Board (FASB) Statementof Financial Accounting Standards (SFAS) No. 157, “Fair ValueMeasurements,” which defines fair value, establishes a framework for itsmeasurement and expands disclosures about fair value measurements. We electedto implement this Statement with the one-year deferral permitted by FASB StaffPosition (FSP) 157-2 for nonfinancial assets and nonfinancial liabilitiesmeasured at fair value, except those that are recognized or disclosed on arecurring basis (at least annually). The deferral applies to nonfinancialassets and liabilities measured at fair value in a business combination;impaired properties, plant and equipment; intangible assets and goodwill; andinitial recognition of asset retirement obligations and restructuring costs forwhich we use fair value. We do not expect any significant impact to ourconsolidated financial statements when we implement SFAS No. 157 for theseassets and liabilities.

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities—Including an amendment of FASB Statement No. 115.”This Statement permits the election to carry financial instruments and certainother items similar to financial instruments at fair value on the balancesheet, with all changes in fair value reported in earnings. By electing thefair value option in conjunction with a derivative, an entity can achieve anaccounting result similar to a fair value hedge without having to comply withcomplex hedge 

 

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accounting rules. Weadopted this Statement effective January 1, 2008. During the first quarterof 2008, we did not make the fair value election for any financial instrumentsnot already carried at fair value in accordance with other accountingstandards, so the adoption of SFAS No. 159 did not impact our consolidatedfinancial statements.

 

The Financial AccountingStandards Board revised Statement of Financial Accounting Standards No. 141(Revised 2007) “Business Combinations” (SFAS 141R) in 2007. The revisionbroadens the application of SFAS 141 to cover all transactions and events inwhich an entity obtains control over one or more other businesses. ThisStatement applies prospectively to business combinations for which theacquisition date is on or after the beginning of the first annual reportingperiod beginning on or after December 15, 2008. An entity may not apply itbefore that date. Warren does not expect that the adoption of this Standardwill have an impact on the financial statements.

 

In December 2007,the Financial Accounting Standards Board issued Statement of Financial AccountingStandards No. 160 “Noncontrolling Interest in Consolidated FinancialStatements — an Amendment of ARB 51” (SFAS 160). SFAS 160 clarifies that anoncontrolling interest in a subsidiary is an ownership interest in theconsolidated entity that should be reported as equity in the consolidatedfinancial statements. It also requires consolidated net income to be reportedat amounts that include the amounts attributable to both the parent and thenoncontrolling interest, and requires disclosure, on the face of theconsolidated statement of income, of the amounts of consolidated net incomeattributable to the parent and to the noncontrolling interest. SFAS 160 iseffective for fiscal years, and interim periods within those fiscal years,beginning on or after December 15, 2008. Earlier adoption is prohibited.Warren does not expect that the adoption of this Standard will have an impacton the financial statements.

 

In March 2008, theFinancial Accounting Standards Board issued Statement of Financial AccountingStandards No. 161 “Disclosures about Derivative Instruments and HedgingActivities — An Amendment of FASB Statement No. 133” (SFAS 161), thatrequires new and expanded disclosures regarding hedging activities. Thesedisclosures include, but are not limited to, a proscribed tabular presentationof derivative data; financial statement presentation of fair values on a grossbasis, including those that currently qualify for netting under FASBInterpretation No. 39; and specific footnote narrative regarding how and whyderivatives are used. The disclosures are required in all interim and annualreports. SFAS 161 is effective for fiscal and interim periods beginning after November 15,2008. Warren does not expect that the adoption of this Standard will have animpact on the financial statements.

 

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

 

**FORWARD-LOOKINGINFORMATION**

 

*TheCompany has made in this report, and may from time to time otherwise make inother public filings, press releases and discussions with Company management,forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of1934 concerning the Company’s operations, economic performance and financialcondition. These forward-looking statements include information concerningfuture production and reserves, schedules, plans, timing of development,contributions from oil and gas properties, and those statements preceded by,followed by or that otherwise include the words “believes,” “expects,” “anticipates,”“intends,” “estimates,” “projects,” “target,” “goal,” “plans,” “objective,” “should”or similar expressions or variations on such expressions. For such statements,the Company claims the protection of the safe harbor for forward-lookingstatements contained in the Private Securities Litigation Reform Act of 1995.Although the Company believes that the expectations reflected in suchforward-looking statements are reasonable, it can give no assurance that suchexpectations will prove to have been correct. Important factors that couldcause actual results to differ materially from the Company’s expectationsinclude, but are not limited to, the Company’s assumptions about energymarkets, production levels, reserve levels, operating results, competitiveconditions, technology, the availability of capital resources, capitalexpenditures and other contractual obligations, the supply and demand for andthe price of oil, natural gas and other products or services, the weather,inflation, the availability of goods and services, drilling risks, futureprocessing volumes and pipeline throughput, general economic conditions, eitherinternationally or nationally or in the jurisdictions in which the Company orits subsidiaries are doing business, legislative or regulatory changes,including changes in environmental regulation, environmental risks andliability under federal, state and foreign environmental laws and regulations,potential environmental obligations, the securities or capital markets, ourability to repay debt and other factors discussed in “Risk Factors” and in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”included in the Company’s 2007 Annual Report on Form 10-K, this Form 10-Qand in the Company’s other public*

 

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*filings,press releases and discussions with Company management. Warren undertakes noobligation to publicly update or revise any forward-looking statements.*

 

**Overview**

 

We are a growingindependent energy company engaged in the exploration and development ofdomestic onshore oil and natural gas reserves. We focus our efforts primarilyon our waterflood oil recovery programs and horizontal drilling in theWilmington field within the Los Angeles Basin of California and on theexploration and development of coalbed methane (“CBM”) properties located inthe Rocky Mountain region. As of June 30, 2008, we owned natural gas andoil leasehold interests in approximately 230,000 gross, 129,000 net acres, 89%of which are undeveloped. Substantially all our undeveloped acreage is locatedin the Rocky Mountains.

 

**Liquidityand Capital Resources**

** **

Our cashand cash equivalents increased $7.8 million during the first six months of2008. This resulted from cash provided by financing activities of $36.2 millionand cash provided by operating activities of $30.4 million.  This was partially offset by cash used ininvesting activities of $58.7 million.

 

Cash used in investingactivities 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 November 2007,Warren entered into a five year, $250 million credit agreement with MerrillLynch Capital (now owned by GE Capital Corporation) on behalf of a syndicate offive participating banks (the “Credit Facility”).   The Credit Facility provides for a revolvingcredit facility up to the lesser of (i) the borrowing base (ii) $250million or (iii) the draw limit requested by the Company.  The Credit Facility matures on November 19,2012.  It is secured by substantially allof our assets.  The borrowing base willbe determined by the lenders at least semi-annually on or about April 1and October 1 of each year, and is based in part on the proved reserves ofthe Company. Interest payments are made quarterly in arrears.  The current borrowing base is $120 millionwith an overadvance of $15 million, representing an immediate availability of$135 million. The Company is subject to certain covenants under the terms ofthe Credit Facility which include, but are not limited to the maintenance ofthe following financial ratios (1) minimum current ratio (including unusedborrowing base in current assets) of 1.0 to 1.0 and (2) a minimumannualized consolidated EBITDAX (as defined by the Credit Facility) to netinterest expense to of 2.5 to 1.0.  As ofJune 30, 2008, the Company has borrowed $82.4 million under the CreditFacility and was in compliance with all covenants.

 

Depending on the currentlevel of borrowing base usage, the annual interest rate on each base rateborrowing under the Credit Facility will be at our option either: (a) thehigher of (i) the Agent’s prime rate of interest announced from time totime, or (ii) the Federal Funds rate most recently determined by theAgent, plus 0.5% per annum, plus an applicable margin that ranges from 0.25% to1.0%, or (b) Eurodollar Loan rate plus an applicable margin that rangesfrom 1.25% to 2.0%. Credit line interest of approximately $0.6 million wasaccrued for as of June 30, 2008.

 

During the first sixmonths of 2008, the Company had net income of $27.1 million as compared to netincome of $4.1 million for the first six months of 2007.  At June 30, 2008, current assetsexceeded current liabilities by approximately $7.7 million.

 

At June 30, 2008, wehad approximately 1.6 million vested outstanding stock options issued under ourstock based equity compensation plans. Of the total 1.6 million outstandingvested options, 20 thousand options had exercise prices above the closingmarket price $14.68 of our common stock on June 30, 2008. If the optionswith exercise prices below the closing market price on June 30, 2008 areexercised by the holders, we would receive $15.0 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 

 

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secured at maturity byzero coupon U.S. treasury bonds deposited into an escrow account equalingthe par value of the bonds maturing on or before the maturity of the bonds.Such U.S. treasury bonds had a fair market value of $0.9 million at June 30,2008.  The table below does not reflectthe release of escrowed U.S. treasury bonds to us upon redemption.

 
| ** **                                                                | ** ** | **Payments due by period** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations  As of June 30, 2008** | ** ** | **Total**                                 | ** ** | **Less Than  1 Year** | ** ** | **1-3  Years** | ** ** | **3-5  Years** | ** ** | **More Than  5 Years** | ** ** |
|                                                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Line of credit                                                            |       | $                                         | 82,400,000 |   | — |   | — |   | $ | 82,400,000 |   | — |   |
| Bonds                                                                     |       | 1,706,000                                 |       | 170,600 |   | 291,726 |   | 236,298 |   | 1,007,376 |   |
| Drilling  commitments                                                     |       | 3,569,850                                 |       | 3,569,850 |   | — |   | — |   | — |   |
| Leases                                                                    |       | 3,429,050                                 |       | 323,884 |   | 1,288,924 |   | 1,241,618 |   | 574,624 |   |
| Total                                                                     |       | $                                         | 91,104,900 |   | $ | 4,064,334 |   | $ | 1,580,650 |   | $ | 83,877,916 |   | $ | 1,582,000 |   |
|                                                                           |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**RESULTS OF OPERATIONS:**

 

**Three months Ended June 30, 2008 Compared toThree Months Ended June 30, 2007**

** **

*Oil and gas sales.*Revenue from oil and gas sales increased $20.9 million in the second quarter of2008 to $34.2 million, a 157% increase compared to the same quarter in2007.  This increase resulted fromsignificantly increasing our drilling activity in the Wilmington Townlot Unitin southern California and in the Atlantic Rim Project in Wyoming.  Net oil production for the three months endedJune 30, 2008 and 2007 was 252 Mbbls and 211 Mbbls, respectively.  Net gas production for the three months endedJune 30, 2008 and 2007 was 657 Mmcf and 250 Mmcf, respectively.  The average realized price per barrel of oilfor the three months ended June 30, 2008 and 2007 was $112.25 and $57.33,respectively.  Additionally, the averagerealized price per Mcf of gas for the three months ended June 30, 2008 and2007 was $9.05 and $4.98, respectively.

 

*Lease operating expense.*Lease operating expense for the second quarter increased 26% to $6.5 million($3.01 per Mcfe) compared to $5.2 million ($3.40 per Mcfe) in the secondquarter of 2007. Primarily, this increase resulted from an increase inproduction.  Total production increasedto 2.2 Bcfe for the second quarter of 2008 compared to 1.5 Bcfe for the secondquarter of 2007, an increase of 43%.

 

*Interest and other income.*Interest and other income decreased $0.4 million in the second quarter of 2008to $0.2 million, a 62% decrease compared to the same quarter in 2007. Thisrepresents a decrease in interest earned due to lower cash and cash equivalentsbalances and lower interest rates during the quarter as compared to thecorresponding quarter last year.

 

*Depreciation, depletion and amortization..*Depreciation, depletion and amortization expense increased$1.9 million for the second quarter of 2008 to $4.5 million, a 75% increasecompared to the corresponding quarter last year. This increase results fromincreased production and increased capitalized costs during the second quarterof 2008 compared to the corresponding period of 2007.  Production increased 43% during this period.

 

*General and administrativeexpenses.* General and administrative expenses increased $1.9million in the second quarter of 2008 to $4.5 million, a 51% increase comparedto the corresponding quarter last year. This reflects an increase in personnel as a result of increased drillingactivities.  Also, this reflects anincrease in the annual bonus accrual of $0.8 million and an increase in stockoption expense of $0.2 million.

 

*Interest expense.*Interest expense increased $0.8 million in the second quarter of 2008 to $1.2million compared to the same quarter last year. The increase results from interest expense relating to the drawdownunder our Credit Facility.

 

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**Six months Ended June 30, 2008 Compared to SixMonths Ended June 30, 2007**

** **

*Oil and gas sales.*Revenue from oil and gas sales increased $34.9 million in the first twoquarters of 2008 to $57.7 million, a 153% increase compared to the same periodin 2007.  This increase resulted fromsignificantly increasing our drilling activity in the Wilmington Townlot Unitin southern California and the Atlantic Rim Project in Wyoming.  Net oil production for the six months ended June 30,2008 and 2007 was 495 Mbbls and 373 Mbbls, respectively.  Net gas production for the six months ended June 30,2008 and 2007 was 1.1 Bcf and 0.5 Bcf, respectively.  The average realized price per barrel of oilfor the six months ended June 30, 2008 and 2007 was $98.95 and $54.38,respectively.  Additionally, the averagerealized price per Mcf of gas for the six months ended June 30, 2008 and2007 was $8.19 and $5.52, respectively.

 

*Lease operating expense.*Lease operating expense for the first the six months of 2008 increased 35% to$12.4 million ($3.07 per Mcfe) compared to $9.2 million ($3.40 per Mcfe) in thefirst six months of 2007. Primarily, this increase resulted from an increase inproduction.  Total production increasedto 4.0 Bcfe for the six months ended June 30, 2008 compared to 2.7 Bcfefor the same period of 2007, an increase of 49%.

 

*Interest and other income.*Interest and other income decreased $0.9 million during the six months ended June 30,2008 to $0.6 million, a 60% decrease compared to the same period in 2007. Thisrepresents a decrease in interest earned due to lower cash and cash equivalentsbalances and lower interest rates during the first two quarters of 2008 ascompared to the corresponding period last year.

 

*Depreciation, depletion andamortization.*Depreciation, depletion and amortizationexpense increased $3.8 million for the first two quarters of 2008 to $8.4million, an 84% increase compared to the corresponding period last year. Thisincrease results from increased production and increased capitalized costsduring the six months ended June 30, 2008 compared to the correspondingperiod of 2007.  Production increased 49%during this period.

 

*General and administrative expenses.*General and administrative expenses increased $2.2 million in the first twoquarter of 2008 to $7.8 million, a 38% increase compared to the correspondingquarter last year.  This reflects anincrease in personnel as a result of increased drilling activities.  Also, this reflects an annual bonus accrualof $0.8 million and an increase in stock option expense of $0.5 million.

 

*Interest expense.*Interest expense increased $2.0 million in the first two quarters of 2008 to$2.6 million compared to the same period last year.  The increase results from interest expenserelating to the drawdown under our Credit Facility.

 

**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 2007 Form 10-K includes a discussion of our critical accountingpolicies.

 

**Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk**

 

***Energy PriceRisk***

 

The Company’s mostsignificant market risk is the pricing for natural gas and crude oil.Management expects energy prices to remain volatile and unpredictable. Ifenergy prices decline significantly, revenues and cash flow would significantlydecline. Below is a sensitivity analysis of the Company’s commodity pricerelated derivative instruments.

 

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***Commodity Risk***

 

In 2007 we entered into afinancial derivative put contract to hedge our exposure to commodity price riskassociated with anticipated future crude oil production. Currently, we haveused floor price put agreements to hedge approximately 700 barrels per day(Bbl/d) of crude oil. We believe we will have more predictability of our crudeoil revenues as a result of these financial derivative contracts.

 

The following tablesummarizes our open financial derivative positions as of June 30, 2008related to crude oil production.

 
| **Product** | ** ** | **Type** | ** ** | **Remaining  Contract Period** | ** ** | **Volume** | ** ** | **Price per  Mcf or Bbl** | ** ** | **Fair Value** | ** ** |
|-------------|------------|----------|------------|-------------------------------------|------------|------------|------------|------------------------------------------|------------|---------------------|------------|
| Oil         |       | Put      |       | July 2008-Dec 2008        |       | 700 Bbl/d  |       | $                                        | 70.00      |                | $          | 4,828 |   |
|             |            |          |            |                                     |            |            |            |                                          |            |                     |            |  |  |

 

The Company has notelected to designate the aforementioned derivative as a hedge. The change infair value resulted in approximately $134,000 of net losses recorded to oil andgas revenue for the six months ended June 30, 2008. Our remaininganticipated production for 2008 and beyond is subject to commodity pricefluctuations.

 

***Interest Rate Risk***

 

**We have exposure to changes in interest rates from ourfloating rate debt under our Credit Facility with GE Capital Corporation. All ofour convertible debt has fixed interest rates, so consequently we are notexposed to cash flow risk from market interest rate changes on this convertibledebt. 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.**

** **

***Financial Instruments***

 

Our financial instrumentsconsist of cash and cash equivalents, U.S. treasury bonds and other long-termliabilities. The carrying amounts of cash and cash equivalents, U.S. treasurybonds and other long-term liabilities, approximate fair market value due to thehighly liquid nature of these short-term instruments or they are reported atfair value.

 

***Inflation and Changes in Prices***

 

The general level ofinflation affects our costs. Salaries and other general and administrativeexpenses are impacted by inflationary trends and the supply and demand ofqualified professionals and professional services. Inflation and pricefluctuations 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 liability forremedial actions under existing or future environmental regulations andlitigation, potential liability resulting from pending or futurelitigation,  environmental and regulatoryuncertainties that could delay or prevent drilling, and not successfully completing,or any material delay of, any development of new or existing fields, expansion,or capital 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’s2007 Annual 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.

 

#### **Item 4. **Controls and Procedures

#### ** **

***Evaluation ofDisclosure 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 ofthe period covered by this report.  Basedupon that evaluation, management  hasconcluded that our  disclosure  controls and  procedures  are effective to ensure  thatinformation  we are required to disclosein reports that we file or submit under the Securities Exchange Act iscommunicated to management, including the CEO and CFO, as appropriate to allowtimely decisions  regarding requireddisclosure and is  recorded,  processed, summarized  and  reported within the time periods specified in the SEC’s rules and forms.

 

***Changes inInternal Control over Financial Reporting***

 

There have been nochanges in our internal controls over financial reporting or in other factorsduring the quarter ended June 30, 2008, that have materially affected, orare reasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

## **PART II—OTHERINFORMATION**

## ** **

**Item 1. *Legal Proceedings***

 

*Stateof California v. Warren E&P, Inc., et al.*    OnJanuary 30, 2008, the Los Angeles city attorney filed a complaint againstWarren E&P, Inc., a subsidiary of the Company, and six of itsindividual employees and independent contractors in the Superior Court ofCalifornia, County of Los Angeles. The complaint alleges eight misdemeanorviolations concerning four alleged events in Wilmington, California during2007. The complaint asserts one count of failing to report the discharge orthreatened discharge of oil into marine waters for an event occurring on orabout March 7, 2007; one count of failing to prepare and implement an oilspill contingency plan; four counts of violating the California Fish and GameCode by placing petroleum or its by-products in or at a place where they canpass into waters of the state; and two similar violations of the CaliforniaClean Water Act. The complaint alleges all eight counts against Warren E&P, Inc.and one to four counts against each of the individuals.

 

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

 

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

 

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

 

**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, 2007. This informationshould be considered carefully, together with other information in this report,our press releases and other reports and materials we file with the Securitiesand Exchange Commission. Additional risks and uncertainties not currently knownto us or that we currently deem to be immaterial also may materially adverselyaffect our business, financial condition and/or operating results.

 

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

** **

a.      Not applicable

 

b.    Not applicable

 

c.    Not applicable

 

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

 

Notapplicable.

 

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

 

On May 21, 2008, theCompany held its Annual Meeting of Stockholders in New York, New York. At themeeting, the following two matters were considered and approved:

 

(a) Proposal thatChet Borgida, Michael R. Quinlan and Norman F. Swanton be elected as directorsfor a term expiring at the 2011 annual meeting, or until their successors areduly elected:

 
| Chet Borgida       |   | 49,664,920 |   | FOR    |   | 921,634   |   | WITHHOLD |
|--------------------|--------|------------|--------|--------|--------|-----------|--------|----------|
|               |   |       |   |   |   |      |   |     |
| Michael R. Quinlan |   | 49,436,237 |   | FOR    |   | 1,150,317 |   | WITHHOLD |
|               |   |       |   |   |   |      |   |     |
| Norman F. Swanton  |   | 49,502,368 |   | FOR    |   | 1,084,186 |   | WITHHOLD |

 

(b) Proposal toratify the appointment of Grant Thornton LLP as the Company’s auditors for2008:

 
| 49,890,231 |   | FOR |   | 577,877 |   | AGAINST |   | 118,446 |   | ABSTAIN |
|------------|--------|-----|--------|---------|--------|---------|--------|---------|--------|---------|

 

**Item 5. *Other Information***

 

Not applicable.

 

**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 |

 

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|   |   | so designated are  incorporated herein by reference to a prior filing as indicated. |
|--------|--------|-------------------------------------------------------------------------------------|

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

 

----

| * |   | 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) |
|-----------------------------|--------|--------------------------------------|
|                        |   |                                 |
|                        |   |                                 | /s/ Timothy A. Larkin |
|                        |   |                                 |   |
| Date: August 6 ,  2008 |   | By:                                  | Timothy A. Larkin*Executive Vice President,  Chief Financial Officer and  Principal Accounting Officer* |

 

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