**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **ý**                                                                                                                                                                | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES  EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------|
|                                                                                                                                                                      |
| **For the Quarterly Period Ended  September 30, 2003**                                                                                                                    |
|                                                                                                                                                                      |
| **OR**                                                                                                                                                                    |
|                                                                                                                                                                      |
| **o**                                                                                                                                                                     | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES  EXCHANGE ACT OF 1934** |
|                                                                                                                                                                      |
| **For the transition period  from           to           ** |
|                                                                                                                                                                      |
| **Commission  File No. 000-33275**                                                                                                                                        |

 

**WARREN RESOURCES, INC.**

(Exact Name ofRegistrant as Specified in its Charter.)

 

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

 

Registrant’stelephone number, including area code:

**(212) 697-9660**

 

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

Yes ýNo o

 

Theaggregate number of Registrant’s outstanding shares on November 6th, 2003 was17,349,070 shares of Common Stock, $0.0001 par value.

 

 

----

 

**WARREN RESOURCES, INC.**

 

**INDEX**

 
| PART I—   | FINANCIAL INFORMATION                                                                                |
|----------------|------------------------------------------------------------------------------------------------------|
|           |                                                                                                 |
|           | Item 1. Financial  Statements                                                                        |
|           |                                                                                                 |
|           | Balance sheets as of  September 30, 2003 and December 31, 2002                                       |
|           |                                                                                                 |
|           | Statements of  operations for the three and nine months ended September 30, 2003 and 2002            |
|           |                                                                                                 |
|           | Statements of  cash flows for the nine months ended September 30, 2003 and 2002                      |
|           |                                                                                                 |
|           | Notes to  financial statements                                                                       |
|           |                                                                                                 |
|           | Item 2. Management’s  discussion and analysis of financial conditions and results of operations |
|           |                                                                                                 |
|           | Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                  |
|           |                                                                                                 |
|           | Item 4. Evaluation of  Disclosure Controls and Procedures                                            |
|           |                                                                                                 |
| PART  II— | OTHER  INFORMATION                                                                                   |
|           |                                                                                                 |
|           | Item 1. Legal Proceedings                                                                            |
|           |                                                                                                 |
|           | Item 2. Changes in  Securities                                                                       |
|           |                                                                                                 |
|           | Item 3.  Defaults upon Senior Securities                                                             |
|           |                                                                                                 |
|           | Item  4. Submission of Matters to a Vote of Security Holders                                         |
|           |                                                                                                 |
|           | Item 5. Other Information                                                                            |
|           |                                                                                                 |
|           | Item 6.  Exhibits and Report on Form 8-K                                                             |
|           |                                                                                                 |
|           | Signatures                                                                                           |

 

2

----

 

**PART I—FINANCIAL INFORMATION**

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

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

** **
|                                                                                                                                                                                                                                              |   | **September  30,  2003** |            | **December  31,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|-----------------|-------------------------|--------|
|                                                                                                                                                                                                                                              |   | **(Unaudited)**          |            |                    |   |
| **ASSETS**                                                                                                                                                                                                                                        |   |                     |            |                    |   |
| CURRENT  ASSETS                                                                                                                                                                                                                                   |   |                     |            |                    |   |
| Cash  and cash equivalents                                                                                                                                                                                                                        |   | $                        | 19,026,485      |                    | $      | 23,184,936 |   |
| Accounts  receivable – trade                                                                                                                                                                                                                 |   | 8,092,101                |            | 6,895,483               |   |
| Accounts  receivable from affiliated partnerships                                                                                                                                                                                                 |   | 340,560                  |            | 921,252                 |   |
| Trading  securities                                                                                                                                                                                                                               |   | 814,761                  |            | 78,383                  |   |
| Restricted  investments in U.S. Treasury Bonds–available-for-sale, at fair value  (amortized cost of $1,011,376 in 2003 and $683,513 in 2002)                                                                                                |   | 1,149,392                |            | 810,822                 |   |
| Other  current assets                                                                                                                                                                                                                             |   | 1,603,644                |            | 2,053,248               |   |
|                                                                                                                                                                                                                                              |   |                     |            |                    |   |
| Total  current assets                                                                                                                                                                                                                             |   | 31,026,943               |            | 33,944,124              |   |
|                                                                                                                                                                                                                                              |   |                     |            |                    |   |
| OTHER  ASSETS                                                                                                                                                                                                                                     |   |                     |            |                    |   |
| Oil  and gas properties—at cost, based on successful efforts method of accounting,  net of accumulated depletion and amortization                                                                                                            |   | 83,102,130               |            | 48,684,362              |   |
| Property  and equipment—at cost, net                                                                                                                                                                                                         |   | 601,949                  |            | 751,479                 |   |
| Restricted  investments in U.S. Treasury Bonds—available for sale, at fair value  (amortized cost of $10,073,525 in 2003 and $7,571,860 in 2002)                                                                                             |   | 11,548,646               |            | 9,058,851               |   |
| Deferred  bond offering costs (net of accumulated amortization of $3,568,411 in 2003  and $3,051,046 in 2002)                                                                                                                                     |   | 2,872,657                |            | 3,390,022               |   |
| Goodwill                                                                                                                                                                                                                                          |   | 3,430,246                |            | 3,430,246               |   |
| Other  assets                                                                                                                                                                                                                                     |   | 6,070,918                |            | 5,365,435               |   |
| Restricted  Cash                                                                                                                                                                                                                                  |   | —                   |            | 3,637,775               |   |
|                                                                                                                                                                                                                                              |   |                     |            |                    |   |
| Total  other assets                                                                                                                                                                                                                               |   | 107,626,546              |            | 74,318,170              |   |
|                                                                                                                                                                                                                                              |   |                     |            |                    |   |
|                                                                                                                                                                                                                                              |   | **$**                    | **138,653,489** |                    | **$**  | **108,262,294** |   |
|                                                                                                                                                                                                                                              |   |                     |            |                    |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                                    |   |                     |            |                    |   |
| CURRENT  LIABILITIES                                                                                                                                                                                                                              |   |                     |            |                    |   |
| Current  maturities of debentures                                                                                                                                                                                                                 |   | $                        | 4,909,470       |                    | $      | 5,466,970 |   |
| Current  maturities of other long-term liabilities                                                                                                                                                                                                |   | 270,512                  |            | 178,980                 |   |
| Accounts  payable and accrued expenses                                                                                                                                                                                                            |   | 4,267,206                |            | 3,822,809               |   |
| Deferred  income—turnkey drilling contracts with affiliated partnerships                                                                                                                                                                     |   | 29,443,117               |            | 32,265,725              |   |
|                                                                                                                                                                                                                                              |   |                     |            |                    |   |
| Total  current liabilities                                                                                                                                                                                                                        |   | 38,890,305               |            | 41,734,484              |   |
|                                                                                                                                                                                                                                              |   |                     |            |                    |   |
| LONG-TERM  LIABILITIES                                                                                                                                                                                                                            |   |                     |            |                    |   |
| Debentures,  less current portion                                                                                                                                                                                                                 |   | 44,185,230               |            | 49,202,730              |   |
| Other  long-term liabilities, less current portion                                                                                                                                                                                                |   | 1,556,100                |            | 1,353,129               |   |
|                                                                                                                                                                                                                                              |   |                     |            |                    |   |
|                                                                                                                                                                                                                                              |   | 45,741,330               |            | 50,555,859              |   |
|                                                                                                                                                                                                                                              |   |                     |            |                    |   |
| MINORITY  INTEREST                                                                                                                                                                                                                                |   | 13,429,418               |            | 8,970,078               |   |
|                                                                                                                                                                                                                                              |   |                     |            |                    |   |
| STOCKHOLDERS’  EQUITY                                                                                                                                                                                                                        |   |                     |            |                    |   |
| 8% convertible preferred stock, par value $.00001;  authorized 20,000,000 shares, issued and outstanding, 4,965,814 shares in  2003 and 1,784,197 shares in 2002  (aggregate  liquidation preference $59,589,768 in 2003 and $21,410,364 in 2002) |   | 57,932,875               |            | 20,955,838              |   |
| Common  Stock - $.0001 par value; authorized, 100,000,000 shares; issued 17,349,070  in 2003 and 17,581,996 shares in 2002)                                                                                                                       |   | 1,735                    |            | 1,758                   |   |
| Additional  paid-in-capital                                                                                                                                                                                                                       |   | 49,528,469               |            | 52,424,147              |   |
| Accumulated  deficit                                                                                                                                                                                                                              |   | (67,112,933              | )               | (66,529,795             | )      |
| Accumulated  other comprehensive income, net of applicable income taxes of $646,000 in  2003 and $646,000 in 2002                                                                                                                                 |   | 970,345                  |            | 971,508                 |   |
|                                                                                                                                                                                                                                              |   | 41,320,491               |            | 7,823,456               |   |
| Less  common stock in Treasury—at cost; 632,250 shares in 2003 and 707,691 shares  in 2002                                                                                                                                                   |   | 728,055                  |            | 821,583                 |   |
| Total  shareholders’ equity                                                                                                                                                                                                                  |   | 40,592,436               |            | 7,001,873               |   |
|                                                                                                                                                                                                                                              |   | **$**                    | **138,653,489** |                    | **$**  | **108,262,294** |   |

 

The accompanyingnotes are an integral part of these financial statements

 

3

----

 

**WarrenResources, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OFOPERATIONS**

 
|                                                                           |   | **Three  Months Ended  September 30, (Unaudited)** |         | **Nine  Months Ended  September 30, (Unaudited)** |   |
|--------------------------------------------------------------------------------|--------|----------------------------------------------------|--------------|---------------------------------------------------|--------|
|                                                                           |   | **2003**                                           |         | **2002**                                          |   | **2003** |   | **2002** |   |
| **REVENUES**                                                                   |   |                                               |         |                                              |   |   |   |   |   |
| Turnkey  contracts with affiliated partnerships                                |   | $                                                  | 2,399,536    |                                              | $      | 2,468,774 |   | $ | 4,276,208 |   | $ | 8,842,756 |   |
| Oil  and gas sales from marketing activities                                   |   | 1,360,088                                          |         | 2,334,584                                         |   | 4,149,612 |   | 9,121,277 |   |
| Well  services                                                                 |   | 321,744                                            |         | 373,663                                           |   | 823,164 |   | 1,506,466 |   |
| Oil  and gas sales                                                             |   | 1,411,699                                          |         | 146,350                                           |   | 4,244,192 |   | 344,441 |   |
| Net  gain (loss) on investments                                                |   | (69,804                                            | )            | 208,784                                           |   | 56,526 |   | 471,963 |   |
| Interest  and other income                                                     |   | 235,269                                            |         | 262,089                                           |   | 987,514 |   | 1,152,813 |   |
| Gain  on sale of assets                                                        |   | 515,000                                            |         | —                                            |   | 515,000 |   | — |   |
|                                                                           |   | 6,173,532                                          |         | 5,794,244                                         |   | 15,052,216 |   | 21,439,716 |   |
|                                                                           |   |                                               |         |                                              |   |   |   |   |   |
| **EXPENSES**                                                                   |   |                                               |         |                                              |   |   |   |   |   |
| Turnkey  contracts                                                             |   | 2,042,655                                          |         | 1,830,119                                         |   | 3,277,295 |   | 6,474,053 |   |
| Cost  of marketed oil and gas purchased from affiliated partnerships           |   | 1,335,914                                          |         | 2,294,532                                         |   | 4,066,993 |   | 9,002,326 |   |
| Well  services                                                                 |   | 118,592                                            |         | 147,062                                           |   | 448,367 |   | 721,051 |   |
| Production  & exploration                                                  |   | 612,817                                            |         | (815,478                                          | )      | 2,565,233 |   | 974,941 |   |
| Depreciation,  depletion and amortization                                      |   | 286,362                                            |         | 377,586                                           |   | 805,657 |   | 2,094,203 |   |
| General  and administrative                                                    |   | 746,372                                            |         | 2,017,970                                         |   | 2,911,258 |   | 4,451,307 |   |
| Interest                                                                       |   | 95,814                                             |         | 1,484,395                                         |   | 1,334,248 |   | 4,427,963 |   |
| Contingent  repurchase obligation                                              |   | —                                             |         | —                                            |   | — |   | (3,064,661 | ) |
|                                                                           |   | 5,238,526                                          |         | 7,336,186                                         |   | 15,409,051 |   | 25,081,183 |   |
|                                                                           |   |                                               |         |                                              |   |   |   |   |   |
| Income  (Loss) before provision for income taxes                               |   | 935,006                                            |         | (1,541,942                                        | )      | (356,835 | ) | (3,641,467 | ) |
|                                                                           |   |                                               |         |                                              |   |   |   |   |   |
| Deferred  income tax expense (benefit)                                         |   | 194,000                                            |         | (453,000                                          | )      | — |   | (539,000 | ) |
|                                                                           |   |                                               |         |                                              |   |   |   |   |   |
| Net  Income (Loss) before minority interest and change in accounting principle |   | 741,006                                            |         | (1,088,942                                        | )      | (356,835 | ) | (3,102,467 | ) |
|                                                                           |   |                                               |         |                                              |   |   |   |   |   |
| Minority  Interest                                                             |   | (76,040                                            | )            | —                                            |   | (138,085 | ) | — |   |
|                                                                           |   |                                               |         |                                              |   |   |   |   |   |
| Net  Income (Loss) before change in accounting principle                       |   | 664,966                                            |         | (1,088,942                                        | )      | (494,920 | ) | (3,102,467 | ) |
|                                                                           |   |                                               |         |                                              |   |   |   |   |   |
| Cumulative  Effect of Change in Accounting Principle                           |   | —                                             |         | —                                            |   | (88,218 | ) | — |   |
|                                                                           |   |                                               |         |                                              |   |   |   |   |   |
| Net  Income (Loss)                                                             |   | 664,966                                            |         | (1,088,942                                        | )      | (583,138 | ) | (3,102,467 | ) |
|                                                                           |   |                                               |         |                                              |   |   |   |   |   |
| Less  dividends on preferred shares                                            |   | 1,036,235                                          |         | —                                            |   | 2,772,303 |   |   |   |
|                                                                           |   |                                               |         |                                              |   |   |   |   |   |
| Net  Loss Applicable to Common Stockholders                                    |   | **$**                                              | **(371,269** | **)**                                             | **$**  | **(1,088,942** | **)** | **$** | **(3,355,441** | **)** | **$** | **(3,102,467** | **)** |
|                                                                           |   |                                               |         |                                              |   |   |   |   |   |
| Basis  and Diluted Loss per Common Share                                       |   |                                               |         |                                              |   |   |   |   |   |
| Loss  Before Accounting Change                                                 |   | $                                                  | (0.02        | )                                                 | $      | (0.06 | ) | $ | (0.19 | ) | $ | (0.18 | ) |
| Cumulative  Effect of Change in Accounting Principle                           |   | —                                             |         | —                                            |   | (0.01 | ) | — |   |
| Net  Loss                                                                      |   | $                                                  | (0.02        | )                                                 | $      | (0.06 | ) | $ | (0.20 | ) | $ | (0.18 | ) |
|                                                                           |   |                                               |         |                                              |   |   |   |   |   |
| Weighted  Average Common Shares Outstanding                                    |   | 16,853,777                                         |         | 17,535,227                                        |   | 16,865,276 |   | 17,534,745 |   |

 

The accompanyingnotes are an integral part of these financial statements

 

4

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

** **
|                                                                         |   | **For the  nine months ended  September 30, (Unaudited)** |       |
|------------------------------------------------------------------------------|--------|-----------------------------------------------------------|------------|
|                                                                         |   | **2003**                                                  |       | **2002** |   |
| Cash  flows from operating activities:                                       |   |                                                      |       |   |   |
| Net  loss                                                                    |   | $                                                         | (583,138   | ) | $ | (3,102,467 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |   |                                                      |       |   |   |
| Accretion  of discount on available-for-sale debt securities                 |   | (415,372                                                  | )          | (390,227 | ) |
| Amortization  and write-off of deferred bond offering costs                  |   | 517,365                                                   |       | 366,014 |   |
| Gain  on sale of US treasury bonds—available for sale                   |   | (121,495                                                  | )          | (28,104 | ) |
| Depreciation,  depletion and amortization                                    |   | 805,657                                                   |       | 2,094,203 |   |
| Deferred  tax benefit                                                        |   | —                                                    |       | (539,000 | ) |
| Leases  contributed to partnerships                                          |   | —                                                    |       | 254,332 |   |
| Gain  on sale of assets                                                      |   | (515,000                                                  | )          | — |   |
| Change  in assets and liabilities:                                           |   |                                                      |       |   |   |
| (Increase)  Decrease in trading securities                                   |   | (736,378                                                  | )          | 205,989 |   |
| Decrease  in accounts receivable—trade                                  |   | 3,827,222                                                 |       | 2,147,677 |   |
| (Increase)  Decrease in accounts receivable from affiliated partnerships     |   | 580,692                                                   |       | (174,308 | ) |
| (Increase)  Decrease in other assets                                         |   | (255,879                                                  | )          | 857,417 |   |
| Decrease  in accounts payable and accrued expenses                           |   | (591,836                                                  | )          | (3,848,383 | ) |
| Decrease  in deferred income from affiliated partnerships                    |   | (2,822,608                                                | )          | (8,410,507 | ) |
| Decrease  in contingent repurchase obligation to affiliated partnerships     |   | —                                                    |       | (3,318,993 | ) |
| Increase  (Decrease) in other long term liabilities                          |   | (571,159                                                  | )          | 435,000 |   |
|                                                                         |   |                                                      |       |   |   |
| Net  cash used in operating activities                                       |   | (881,929                                                  | )          | (13,451,357 | ) |
|                                                                         |   |                                                      |       |   |   |
| Cash  flows from investing activities:                                       |   |                                                      |       |   |   |
| Purchases  of U.S. Treasury Bonds—available-for-sale                    |   | —                                                    |       | (14,906 | ) |
| Purchases  of oil and gas properties                                         |   | (6,325,689                                                | )          | (3,819,925 | ) |
| Purchase  of property and equipment                                          |   | (7,459                                                    | )          | (1,780 | ) |
| Proceeds  from the sale of oil and gas properties, net of selling fees       |   | —                                                    |       | 4,175,552 |   |
| Proceeds  from the sale of property and equipment, net of selling fees       |   | 52,353                                                    |       | — |   |
| Proceeds  from U.S. Treasury Bonds—available-for-sale                   |   | 1,345,116                                                 |       | 781,893 |   |
|                                                                         |   |                                                      |       |   |   |
| Net  cash provided by (used in) investing activities                         |   | (4,935,679                                                | )          | 1,120,834 |   |
|                                                                         |   |                                                      |       |   |   |
| Cash  flows from financing activities:                                       |   |                                                      |       |   |   |
| Payments  on other long-term debt                                            |   | (1,542,939                                                | )          | (2,538,924 | ) |
| Issuance  of preferred stock, net                                            |   | 4,968,034                                                 |       | 815,430 |   |
| Dividends  paid on preferred stock                                           |   | (1,735,998                                                | )          | — |   |
| Repurchase  of common stock                                                  |   | (29,940                                                   | )          | (2,624 | ) |
|                                                                         |   |                                                      |       |   |   |
| Net  cash provided by (used in) financing activities                         |   | 1,659,157                                                 |       | (1,726,118 | ) |
|                                                                         |   |                                                      |       |   |   |
| Net  Decrease in cash and cash equivalents                                   |   | (4,158,451                                                | )          | (14,056,641 | ) |
| Cash  and cash equivalents at beginning of period                            |   | 23,184,936                                                |       | 22,923,605 |   |
|                                                                         |   |                                                      |       |   |   |
| Cash  and cash equivalents at end of period                                  |   | $                                                         | 19,026,485 |   | $ | 8,866,964 |   |
|                                                                         |   |                                                      |       |   |   |
| Supplemental  disclosure of cash flow information                            |   |                                                      |       |   |   |
| Cash  paid for interest, net of amount capitalized                           |   | $                                                         | 816,883    |   | $ | 4,027,364 |   |
| Cash  paid for income taxes                                                  |   | —                                                    |       | — |   |

 

The accompanyingnotes are an integral part of these financial statements

** **

**5**

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** **

**WARRENRESOURCES, INC. AND SUBSIDIARIES**

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**SEPTEMBER30, 2003**

 

**NOTE 1—ORGANIZATION**

 

Warren Resources, Inc.(the “Company”), was formed on June 12, 1990 under the laws of the state of NewYork for the purpose of acquiring and developing oil and gas properties. OnSeptember 5th, 2002, the Company changed its state of incorporation toDelaware. As a result, all shares of the Company’s stock were converted intoshares of the Delaware corporation. The Company’s properties are primarilylocated in New Mexico, Texas, Wyoming and California. In addition, the Companyserves as the managing general partner (the “MGP”) to affiliated partnershipsand joint ventures.

 

Theaccompanying unaudited financial statements and related notes present theCompany’s consolidated financial position as of September 30, 2003 and December31, 2002, the results of operations for the three and nine months endedSeptember 30, 2003 and 2002 and cash flows for the nine months ended September30, 2003 and 2002. The unaudited financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesof America for interim financial information and with the instructions of Form10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all ofthe information and footnotes required by accounting principles generallyaccepted in the United States of America for complete financial statements. Inthe opinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary for a fair presentation have been included.Operating results for the three and nine months ended September 30, 2003 arenot necessarily indicative of the results that may be expected for the fiscalyear ending December 31, 2003. Certain reclassifications have been made to the2002 amounts to conform to the 2003 presentation. The accounting policiesfollowed by the Company are set forth in Note A to the Company’s financialstatements in Form 10-K for the year ended December 31, 2002. These interimfinancial statements and notes thereto should be read in conjunction with ourannual consolidated financial statements presented in our 2002 Annual Report onForm 10-K.

 

##### **NOTE 2**—STOCK OPTIONS

 

At September 30, 2003,the Company had stock-based compensation plans. The Company accounts for thoseplans under the recognition and measurement principles of Accounting PrinciplesBoard (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” andrelated interpretations. The following table illustrates the effect on net lossand loss per share if the Company had applied the fair-value recognition provisionsof Financial Accounting Standards Board (FASB) Statement No. 123, “Accountingfor Stock-Based Compensation,” to stock-based employee compensation:

 
|                                                                                                                                          |   | **Three  months ended September 30,** |    | **Nine  months ended September 30,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|---------|--------------------------------------|--------|
|                                                                                                                                          |   | **2003**                              |    | **2002**                             |   | **2003** |   | **2002** |   |
|                                                                                                                                          |   |                                  |    |                                 |   |   |   |   |   |
| Net  Income (Loss), as reported                                                                                                               |   | $                                     | 664,966 |                                 | $      | (1,088,942 | ) | $ | (583,138 | ) | $ | (3,102,467 | ) |
|                                                                                                                                          |   |                                  |    |                                 |   |   |   |   |   |
| Deduct:  Total stock-based employee compensation expense determined under  fair-value-based method for all awards, net of related tax effects |   | $                                     | (1,520  | )                                    | $      | (102,420 | ) | $ | (547,278 | ) | $ | (307,260 | ) |
|                                                                                                                                          |   |                                  |    |                                 |   |   |   |   |   |
| Pro  forma Net Income (Loss)                                                                                                                  |   | $                                     | 663,446 |                                 | $      | (1,191,362 | ) | $ | (1,130,416 | ) | $ | (3,409,727 | ) |
|                                                                                                                                          |   |                                  |    |                                 |   |   |   |   |   |
| Basic  and Diluted Income (Loss) Per Share:                                                                                                   |   |                                  |    |                                 |   |   |   |   |   |
| As  Reported -                                                                                                                                |   | $                                     | 0.04    |                                 | $      | (0.06 | ) | $ | (0.03 | ) | $ | (0.18 | ) |
| Pro  Forma -                                                                                                                                  |   | $                                     | 0.04    |                                 | $      | (0.07 | ) | $ | (0.07 | ) | $ | (0.19 | ) |

 

6

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#### **NOTE3—MANAGEMENT’S PLANS**

 

The Company had a netprofit of $665 thousand for the quarter ended September 30, 2003, as comparedto a loss of $1.1 million for the corresponding quarter ending September 30,2002. At September 30, 2003, current liabilities exceeded current assets byapproximately $7.9 million. During 2002, the Company raised $5.4 million forits drilling programs compared to $18.1 million and $46.5 million in 2001 and2000, respectively. As a result, the Company’s turnkey revenue and total grossprofit in 2003 will be less than in 2002 and 2001 and the number of theCompany’s oil and gas properties developed through partnership arrangementswill be reduced.

 

In order to improveoperations and liquidity and meet its cash flow needs, the company has orintends to do the following:

 

•                  Raiseadditional capital through the sale of preferred and common stock.

 

•                  Obtaina credit facility based in part on the value of our proven reserves.

 

•                  Continueto privately place drilling programs, which based on prior experiencemanagement anticipates raising approximately $6.0 million in 2003.

 

•                  Generateturnkey profit and operating cash flow from turnkey drilling contracts equal toapproximately 25% of the total amount of total turnkey price.

 

•                  Reducefixed overhead expenses and primarily conduct developmental drilling operationsin our two main target areas, coalbed methane properties in Wyoming and oilformations in the Wilmington field in California.

 

•                  Increaseoil and gas revenues by exchanging preferred stock for interests in producingproperties.

 

•                  Use$2.0 million of deferred drilling credits from Anadarko Petroleum Corporationto develop our acreage in the Washakie Basin, Wyoming.

 

As a result ofthese plans, management believes that it will generate sufficient cash flows tomeet its current obligations in 2003.

 

**NOTE 4—REPURCHASE OBLIGATION**

 

CertainCompany sponsored oil and gas partnerships provide investor partners a right totender their interest to the Company for repurchase at specified future dates.In the event the Company does repurchase the investor interest, the Companywill be entitled to receive any future cash flows from the underlying oil andgas properties. The determination of whether a contingent repurchase obligationexists is based upon the estimated discounted present value of future netrevenues of proved developed and undeveloped reserves of each partnership, netof future capital costs and the Company’s working interest, from reservestudies prepared by petroleum engineers compared to the formula purchase price.A contingent repurchase obligation expense and liability of $3,318,993 wasrecognized at December 31, 2001 based on oil and gas pricing at March 15, 2002.During the first quarter of 2002, the Company assigned additional provedundeveloped reserves located in the Wilmington Unit to various partnerships tosatisfy the liability relating to its contingent repurchase obligation. Basedupon this calculation using prices at March 31, 2002, the liability relating tothe Company’s contingent repurchase obligation was extinguished. As a result, again of approximately $3,065,000 was recognized for the three-month period endingMarch 31, 2002. As a result of the recapitalization of thirteen of our drillingprograms in 2003 and during the fourth quarter of 2002 (See Note 15), webelieve that we will have no excess liability for an amount to be paid inexcess of the fair value received resulting from a repurchase obligation in thefuture.

 

**NOTE 5—PLUGGING AND ABANDONMENT LIABILITY**

 

In June 2001, theFinancial Accounting Standard Board issued SFAS No. 143, “Accounting for AssetRetirement Obligations” which requires entities to record the fair value of aliability for an asset retirement obligation in the period in which it isincurred and a corresponding increase in the carrying amount of the relatedlong-lived asset. This statement is effective for fiscal years beginning afterJune 15, 2002. The Company adopted SFAS No. 143 on January 1, 2003 and recordeda net asset of $557,000, a related liability of $645,000 (using a 10% discountrate) and

 

7

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a cumulative effect onchange in accounting principle on prior years of $88,000. The new standard had no material impact on incomebefore the cumulative effect of adoption in the first quarter of 2003, norwould it have had a material impact on the quarterly results for 2002 assumingan adoption of this accounting standard on a proforma basis. During thethree and nine months ending September 30, 2003 the asset retirement liabilitywas increased by approximately $18,000 and $60,000 respectively, as a result ofaccretion and recorded as interest expense. During the nine months endedSeptember 30, 2003 there has been no significant changes in cash flowassumptions for the liability or liabilities incurred or settled during theperiod. The Company has treasury bills held in escrow with a fair market of$2,731,000 which are legally restricted for potential plugging and abandonmentliability in the Wilmington field.

 

#### **NOTE6**—CHANGES INSHAREHOLDERS’ EQUITY

 

For the nine months endedSeptember 30, 2003, dividends on preferred shares were approximately $2.8million and were treated as a reduction in additional paid in capital. Duringthe nine months ended September 30, 2003 the Company bought and retired 157,485shares of its common stock for approximately $30,000. The company also retired75,441 shares of treasury stock with a cost of approximately $93,528.

 

As of September 30, 2003,4,965,814 shares of convertible preferred stock were issued and outstanding,with accrued dividends of $1,036,235. The Company has incurred cumulativeissuance costs of approximately $1.7 million in relation to these shares. Forthe nine months ended September 30, 2003, the Company issued 3,181,617preferred shares, 1,952,151 relating to the recapitalization of our drillingprograms, 343,514 relating to bond conversions and 885,952 for cashconsideration of approximately $10.6 million. The preferred stock pays an 8%cumulative dividend, payable quarterly. The holders of the preferred stock arenot entitled to vote except as defined by the agreement or as provided by applicablelaw.  The preferred stock may bevoluntary converted at the election of the holder, commencing one year afterthe date of issuance.  Each outstandingredeemable convertible preferred share is convertible into common stock of theCompany based on the table below.  Theconversion rate is subject to adjustment from time to time as defined by theagreement.

 

| **Period**                          |   | **Common to  Preferred** |   |
|-------------------------------------|--------|--------------------------|--------|
| Until  June 30, 2004                |   | 1 to 1                   |   |
| July  1, 2004 through June 30, 2006 |   | .75 to 1                 |   |
| July  1, 2006 through redemption    |   | .50 to 1                 |   |

 

Additionally, commencingseven years after the date of issuance, holders of the preferred stock mayelect to require the Company to redeem their preferred stock at a redemptionprice equal to the liquidation value of $12.00 per share, plus accrued butunpaid dividends, if any (“Redemption Price”). Upon the receipt of a redemption election, the Company, at its option,shall either: (1) pay the holder cash in the amount equal to the RedemptionPrice or (2) issue to holder shares of common stock 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.

 

**NOTE 7—LOSS PER SHARE**

 

Basic loss per share iscomputed by dividing net loss by the weighted average number of shares ofcommon stock outstanding during the period. Diluted loss per share is based onthe assumption that stock options are converted into common shares using thetreasury stock method and convertible bonds, debentures and preferred stock areconverted using the if-converted method. Conversion is not assumed if theresults are anti-dilutive.  Potentialcommon shares at September 30, 2003 and September 30, 2002, of 10,404,758 and5,881,026, respectively, relating to convertible bonds, debentures andpreferred stock and 2,289,012 and 1,770,000, respectively, relating toincentive stock options, were excluded from the computation of diluted loss pershare because they are anti-dilutive. Incentive stock options have a weightedaverage exercise price of $5.04 and $4.51 at September 30, 2003 and September30, 2002, respectively. The Convertible Bonds and Debentures may be convertedfrom the date of issuance until maturity at 100% of principal amount intocommon stock of the Company at prices ranging from $5 to $50.  The preferred stock may be converted at thediscretion of the holder (See note 6).

 

8

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**NOTE 8—LONG TERM DEBT**

 

TheConvertible Bonds and Debentures may be converted from the date of issuanceuntil maturity at 100% of principal amount into common stock of the Company atprices ranging from $5 to $50. Each year the holders of the ConvertibleDebentures may tender to the Company up to 10% of the aggregate Debentureissued.

 
|                                                               |   | **September  30,  2003** |       | **December  31,  2002** |   |
|--------------------------------------------------------------------|--------|--------------------------|------------|-------------------------|--------|
|                                                               |   |                     |       |                    |   |
| 12%  Sinking Fund Debentures, due December 31, 2007                |   | $                        | 10,116,000 |                    | $      | 14,376,000 |   |
| 12%  Secured Convertible Debentures, due December 31, 2009         |   | 790,000                  |       | 790,000                 |   |
| 12%  Secured Convertible Bonds, due December 31, 2010              |   | 1,715,000                |       | 1,715,000               |   |
| 13.02%  Sinking Fund Convertible Debentures, due December 31, 2010 |   | 14,770,200               |       | 14,780,200              |   |
| 13.02%  Sinking Fund Convertible Debentures, due December 31, 2015 |   | 11,837,500               |       | 12,137,500              |   |
| 12%  Secured Convertible Bonds, due December 31, 2016              |   | 1,395,000                |       | 1,460,000               |   |
| 12%  Sinking Fund Convertible Debentures, due December 31, 2017    |   | 5,650,000                |       | 6,590,000               |   |
| 12%  Secured Convertible Bonds, due December 31, 2020              |   | 1,635,000                |       | 1,635,000               |   |
| 12%  Secured Convertible Bonds, due December 31, 2022              |   | 1,186,000                |       | 1,186,000               |   |
|                                                               |   |                     |       |                    |   |
|                                                               |   | 49,094,700               |       | 54,669,700              |   |
| Less:  Current Portion                                             |   | 4,909,470                |       | 5,466,970               |   |
|                                                               |   |                     |       |                    |   |
| Long  Term Portion                                                 |   | $                        | 44,185,230 |                    | $      | 49,202,730 |   |

 

#### **NOTE9**—CAPITALIZEDINTEREST

 

Interestof approximately $1,603,000 and $454,000 was capitalized during the threemonths ended September 30, 2003 and 2002, respectively, relating to ourCalifornia and Wyoming properties. Interest of approximately $4,134,000 and$1,362,000 was capitalized for the nine months ended September 30, 2003 and2002, respectively, relating to the same properties.

 

**NOTE 10—INCOME TAXES**

 

For the periods endedSeptember 30, 2003 and 2002, the Company’s effective income tax rate differedfrom the federal statutory rate due to changes in the valuation allowance fordeferred tax assets.

#### ** **

#### **NOTE11—LITIGATION**

 

On September 28, 1999,Magness Petroleum Company, our joint venture partner in the Wilmington Field,filed a complaint against Warren, Warren E&P, and certain Warrensubsidiaries in the Superior Court of Los Angeles County, alleging that we hadbreached our joint venture agreement with Magness and an alleged oral agreementregarding advance payment of expenses for drilling and completionoperations.  Magness sought dissolutionof the joint venture, an accounting and a declaratory judgment as to the rightsof the parties under the joint venture agreement.  We were successful in enforcing the arbitration provision in thejoint venture agreement and entered into an agreement with Magness to submitthe matter for arbitration by the Judicial Arbitration Mediation Services, or“JAMS,” before the Honorable Keith J. Wisot, a retired Los Angeles SuperiorCourt Judge.  Judge Wisot, as thearbitrator, ruled that the joint venture agreement is a valid enforceableagreement, declined to dissolve the joint venture, denied Magness’ claims forbreach of contract, and held that he and JAMS would retain jurisdiction toenforce the Final Award. On August 8, 2001, Magness filed a demand with theAmerican Arbitration Association, or “AAA,” reasserting its claims fordissolution of the joint venture and breach of contract. Subsequently Warrensought to enforce the original Final Award render by Judge Wisot in the JAMSarbitration. After a procedural

 

9

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determination of properarbitration forum that was eventually determined by the California Court ofAppeals in December 2002 and a Motion for Clarification filed in January 2003before the California Superior Court, in September 2003 the California SuperiorCourt ordered that JAMS will hear Warren’s motion to enforce the Final Awardcovering unauthorized direct labor charges and tangible costs and AAA will hearMagness’s new theory of dissolution of the Joint Venture and Warren’s drillingrights if the Joint Venture is not dissolved and Warren’s claims for damagesfor preventing resumption of drilling activities. The respective arbitratorshave not set any conferences or hearings to hear the recently assigned mattersbefore JAMS or AAA. Accordingly, pending final resolution, further developmentof the Wilmington Field will be curtailed.

 

In 1998, Warren E&Pwas sued in the 81st Judicial District Court of Frio County, Texasby Stricker Drilling Company, Inc. and Manning Safety Systems to recover thevalue of lost equipment based on a well blow out.  Warren was later joined in the suit as a defendant.  As a result of the lawsuit, Gotham InsuranceCompany, Warren E&P’s well blow-out insurer, intervened.  The suit was settled in 1999 with allparties except Gotham.  Gotham paid over$1.7 million under the insurance policy and now seeks a refund of approximately$1.5 million of monies paid, denying coverage, and alleging fraud andmisrepresentation and a failure of Warren E&P to act with due diligence andpursuant to safety regulations.  WarrenE&P countersued for the remaining proceeds under the policy coverage.  In the summer and fall of 2000, summaryjudgments were entered for Warren E&P on essentially all claims except itsbad faith claims against Gotham. Gotham’s claims against Warren E&P and Warren were rejected.  Final judgment was rendered on May 14, 2001in Warren E&P’s favor for the remaining policy proceeds, interest andattorney fees.  Gotham appealed thefinal judgment to the San Antonio Court of Appeals seeking a refund ofapproximately $1.5 million.  The case onappeal was orally argued on March 28, 2002. On July 23, 2003, a three judgepanel of the San Antonio Court of Appeals rendered its decision in favor ofGotham on all points, except for the amount of restitution owed by WarrenE&P and related parties, reversing the earlier summary judgment entered bythe trial court for Warren E&P. Although the three judge panel of the SanAntonio Court of Appeals acknowledged that Gotham asked for the Court to renderits judgment in Gotham’s favor on its restitution claims, Gotham gave noparticulars, and therefore the Court of Appeals remanded Gotham’s restitutionclaims to the trial court for further proceedings consistent with its opinion.Although the ultimate resolution is uncertain, counsel has advised WarrenE&P that it believes the three judge panel of the San Antonio Court ofAppeals committed numerous errors of fact and law, primarily relying on theirerroneous conclusion that Warren E&P as operator of the oil well incurredno loss. Accordingly, Warren E&P is appealing the San Antonio Court ofAppeals panel decision to the Texas Supreme Court, which may be accepted andheard by the Texas Supreme Court at their discretion.

 

Warren is party tovarious other matters of litigation arising in the normal course of business.Management believes that the ultimate outcome of the matters will not have amaterial effect on the Company’s financial condition or results of operations.

 

**NOTE 12—BUSINESS SEGMENT INFORMATION**

 

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

 
|                    |   | **Three  Months Ended**  |      | **Nine  Months Ended**   |   |
|-------------------------|--------|--------------------------|-----------|--------------------------|--------|
|                    |   | **September  30,  2003** |      | **September  30,  2002** |   | **September  30,  2003** |   | **September  30,  2002** |   |
|                    |   |                     |      |                     |   |   |   |   |   |
| **Revenue**             |   |                     |      |                     |   |   |   |   |   |
| Turnkey  Contracts      |   | $                        | 2,399,536 |                     | $      | 2,468,774 |   | $ | 4,276,208 |   | $ | 8,842,756 |   |
| Oil  and Gas Marketing  |   | 1,360,088                |      | 2,334,584                |   | 4,149,612 |   | 9,121,277 |   |
| Oil  and Gas Operations |   | 1,926,699                |      | 146,350                  |   | 4,759,192 |   | 344,441 |   |
| Well  Services          |   | 321,744                  |      | 373,663                  |   | 823,164 |   | 1,506,466 |   |
| Other                   |   | 165,465                  |      | 470,873                  |   | 1,044,040 |   | 1,624,776 |   |
|                    |   |                     |      |                     |   |   |   |   |   |
|                    |   | $                        | 6,173,532 |                     | $      | 5,794,244 |   | $ | 15,052,216 |   | $ | 21,439,716 |   |

 

10

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|                         |   | **September  30,  2003** |    | **September  30,  2002** |   | **September  30,  2003** |   | **September  30,  2002** |     |
|------------------------------|--------|--------------------------|---------|--------------------------|--------|--------------------------|--------|--------------------------|----------|
|                         |   |                     |    |                     |   |                     |   |                     |     |
| **Operating  Income (Loss)** |   |                     |    |                     |   |                     |   |                     |     |
| Turnkey  Contracts           |   | $                        | 328,692 |                     | $      | 611,842                  |   | $                        | 919,667  |   | $ | 5,357,552 |   |
| Oil  and Gas Marketing       |   | 24,174                   |    | 40,052                   |   | 82,619                   |   | 118,951                  |     |
| Oil  and Gas Operations      |   | 1,062,792                |    | 621,008                  |   | 1,495,779                |   | (2,567,587               | )        |
| Well  Services               |   | 203,152                  |    | 227,202                  |   | 374,797                  |   | 710,756                  |     |
| Other                        |   | (683,804                 | )       | (3,042,046               | )      | (3,229,697               | )      | (7,261,139               | )        |
|                         |   |                     |    |                     |   |                     |   |                     |     |
|                         |   | $                        | 935,006 |                     | $      | (1,541,942               | )      | $                        | (356,835 | ) | $ | (3,641,467 | ) |

 

**NOTE 13—NEW ACCOUNTING PRONOUNCEMENTS**

 

In November 2002, FASBInterpretation 45, *Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others*(FIN 45), was issued. FIN 45 requires a guarantor entity, at the inception of aguarantee covered by the measurement provisions of the interpretation, torecord a liability for the fair value of the obligation undertaken in issuingthe guarantee. The Company previously did not record a liability whenguaranteeing obligations unless it became probable that the Company would haveto perform under the guarantee. FIN 45 applies prospectively to guarantees theCompany issues or modifies subsequent to December 31, 2002, but has certaindisclosure requirements effective for interim and annual periods ending afterDecember 15, 2002. The Company has historically issued guarantees only on alimited basis and FIN 45 has not had a material effect on its 2003 financialstatements. Disclosures required by FIN 45 are not required because the Companydoes not have any existing guarantees at September 30, 2003.

 

In January 2003, the FASBissued FASB Interpretation 46 (FIN 46), *Consolidation of Variable Interest Entities*.FIN 46 clarifies the application of Accounting Research Bulletin 51, *ConsolidatedFinancial Statements*, for certain entities that do not havesufficient equity at risk for the entity to finance its activities withoutadditional subordinated financial support from other parties or in which equityinvestors do not have the characteristics of a controlling financial interest(“variable interest entities”). Variable interest entities within the scope ofFIN 46 will be required to be consolidated by their primary beneficiary. Theprimary beneficiary of a variable interest entity is determined to be the partythat absorbs a majority of the entity’s expected losses, receives a majority ofits expected returns, or both. FIN 46 applies immediately to variable interestentities created after January 31, 2003, and to variable interest entities inwhich an enterprise obtains an interest after that date. It applies in thefirst fiscal year or interim period beginning after June 15, 2003, to variableinterest entities in which an enterprise holds a variable interest that itacquired before February 1, 2003. The Company has determined that the adoptionof the provisions of FIN 46 will not have an impact on it’s financial conditionor results of operations relating to drilling programs formed in 1998 andafter.

 

In May 2003, the FASBissued Statement 150, Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity. Statement 150 changes theclassification in the statement of financial position of certain commonfinancial instruments from either equity or mezzanine presentation toliabilities and requires an issuer of those financial statements to recognizechanges in fair value or redemption amount, as applicable, in earnings.Statement 150 is effective for the first interim period beginning after June15, 2003 (for the Company in the third quarter of 2003). The Company hasdetermined that Statement 150 will not have an impact on it's financialcondition or results of operations.

 

11

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**NOTE 14—COMPREHENSIVE INCOME (LOSS)**

 

Other comprehensiveincome (loss) consists primarily of net unrealized investment gains and losses,net of income tax effect. Total comprehensive income (losses) for the periodsare as follow:

 
|                               |   | **2003** |     | **2002** |   |
|------------------------------------|--------|----------|----------|----------|--------|
|                               |   |     |     |     |   |
| Nine  Months ending September 30,  |   | $        | (584,301 | )        | $      | (2,292,786 | ) |
|                               |   |     |     |     |   |
| Three  Months ending September 30, |   | $        | 372,747  |     | $      | (409,221 | ) |

 

**NOTE 15—CONSENT SOLICITAION**

 

In late 2002, each of thethirteen drilling programs formed from 1994 through 1997 commenced a VoteSolicitation of their partners to: (i) obtain the requisite 2/3rds affirmativeapproval of their respective partners to convert their drilling program from aDelaware limited partnership to an LLC wherein all LLC members would havelimited liability, including Warren, and (ii) allow partners to select whetherthey wanted to be (a) a standard member in the LLC with substantially the samerights and obligations that they had as partners in their respective drillingfund, or (b) a preferred member in the LLC having certain preferential rightsby consenting to Warren’s contribution of additional capital to the LLC uponconversion (the “Recapitalization”) in the form of its unregistered PreferredShares in an amount equal to between 110% to 120% of the potential repurchaseprice of consenting partner’s interests calculated as of December 31, 2002. Forits additional capital contribution, Warren received additional standardmembership interests in the LLC and was specially allocated a prorata interestas a standard member in the wells and oil leases formerly allocable to thepartners who elected to become Preferred Members. Election by a partner tobecome a preferred member terminated any repurchase rights they may have hadunder the original partnership’s buy/sell agreements. At December 31, 2002, sixof the thirteen programs obtained the requisite approval to convert to LLCs andwere consolidated in the financial statements for the year ended December 31,2002. At March 31, 2003, all thirteen programs obtained the requisite votes toconvert to LLCs and on average 72.9% of the program members elected to becomepreferred members in their LLC. As a result of the recapitalizations, theCompany issued an aggregate of 3,229,716 Preferred Shares to the LLCs in 2002 and2003. During the first quarter the Company issued 1,641,628 preferred shares tothe remaining 7 LLCs as a capital contribution, with an estimated fair value of$19,699,536 and received its prorata share of additional standard membershipinterests in the LLCs. The fair value of the Preferred Shares was based onactual cash sales to independent parties in this time period. Due to theincrease in control of these thirteen affiliated partnerships, the Company hasconsolidated these entities for financial reporting purposes at September 30,2003. The Company accounted for the remaining 7 LLCs as a purchase transactionwith the estimated fair value of the assets and liabilities assumed in theacquisition as follows:

 

| Estimated  fair value of assets acquired |   |       |       |
|------------------------------------------|--------|------------|------------|
| Current  assets                          |   | $          | 3,512      |   |
| Oil  and gas properties                  |   | 28,342,950 |       |
|                                     |   |       |       |
| Total  fair value of assets              |   | 28,346,462 |       |
|                                     |   |       |       |
| Liabilities  assumed                     |   |       |       |
| Accounts  payable                        |   | 144,122    |       |
| Minority  Interest                       |   | 8,502,804  |       |
|                                     |   |       |       |
| Total  liabilities assumed               |   | 8,646,926  |       |
|                                     |   |       |       |
| Cost  of acquisition                     |   | $          | 19,699,536 |   |

 

12

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Thefollowing summarizes pro forma unaudited results of operations for the periodsended September 30, 2003 and 2002 as if these acquisitions had been consummatedimmediately prior to January 1, 2002. These pro forma results are notnecessarily indicative of future results.

 
|                                              |   | **Pro Forma  (unaudited)**            |      | **Pro Forma  (unaudited)**           |   |
|---------------------------------------------------|--------|---------------------------------------|-----------|--------------------------------------|--------|
|                                              |   | **Three  months ended September 30,** |      | **Nine  months ended September 30,** |   |
|                                              |   | **2003**                              |      | **2002**                             |   | **2003** |   | **2002** |   |
|                                              |   |                                  |      |                                 |   |   |   |   |   |
| Revenues                                          |   | $                                     | 6,173,532 |                                 | $      | 6,881,848 |   | $ | 17,375,299 |   | $ | 24,702,526 |   |
|                                              |   |                                  |      |                                 |   |   |   |   |   |
| Net  Income (Loss)                                |   | $                                     | 664,966   |                                 | $      | (939,613 | ) | $ | 68,365 |   | $ | (2,654,480 | ) |
|                                              |   |                                  |      |                                 |   |   |   |   |   |
| Income  (Loss) Per Share – Basic and diluted |   | $                                     | 0.04      |                                 | $      | (0.05 | ) | $ | 0.00 |   | $ | (0.15 | ) |

 

**NOTE 16—GOODWILL**

 

The Company adopted SFASNo. 142, *Goodwilland Other Intangible Assets,* effective January 1, 2002 and as such,has not subsequently recorded any amortization of goodwill. Under SFAS No. 142,companies only adjust the carrying amount of goodwill or indefinite lifeintangible assets upon an impairment.

 

During 2002, the Companyhad set the beginning of the second quarter (April) as the annual period forgoodwill impairment testing. During the second quarter of 2003, the Companyretained an independent outside valuation expert to assist in developing thefair value analysis necessary to conduct the testing for impairment of itsgoodwill, all of which arose in its acquisition of Warren E&P. The resultsof this analysis indicated that no impairment of goodwill had occurred.

 

**NOTE 17—SALE OF ASSETS**

 

During the third quarterof 2003, we sold certain non-strategic oil and gas properties in New Mexico forapproximately $0.5 million.

 

**NOTE 18—SUBSEQUENT EVENTS**

 

During the third quarterof 2003, certain joint venture general partnerships formed between accreditedinvestors and Warren Resources, Inc. commenced a vote to (a) amend their jointventure agreement to allow for two classes of partners: preferred partners andcommon partners and (b) allow partners to select whether they wanted to bepreferred partners having certain preferred rights in the joint venture byconsenting to the additional capital contributed by the Company in the form ofits unregistered Preferred Shares. For its additional capital contribution,Warren received additional common partner interests in the joint venture.  As of September 30, 2003, the joint ventureshad not received the necessary 50% of affirmative votes required to effect thetransaction.  As of November 4, 2003,the joint ventures had received 86% of affirmative votes.  As a result of this transaction, the Companyexpects to issue approximately one million Preferred Shares to the jointventures during the fourth quarter of 2003.

 

13

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**Item2. *Management’sdiscussion******and analysis of financial conditions and results of operations***

 

**FORWARD-LOOKING INFORMATION**

 

This Report on Form 10-Qand our other filings with the SEC contain forward-looking statements within themeaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934. When used in this Report and our other filingswith the SEC, the words “anticipated,” “believe,” “estimate,” “project,”“budget,” “will,” “should,” “hope,” “may”, “intend” and “expect” and similarexpressions identify forward-looking statements. Although we believe that ourplans, intentions and expectations reflected in these forward-lookingstatements are reasonable, these plans, intentions and expectations may not beachieved. Forward-looking statements in this Report and our filings with theSEC include, without limitation, statements regarding:

 

•financial position;

•business strategy;

•budgets;

•amount, nature and timing of capital expenditures;

•drilling of wells;

•natural gas and oil reserves;

•timing and amount of future production of natural gas and oil;

•operating costs and other expenditures;

•future net revenues from production and estimates of oil and gas reserves;

•cash flow and anticipated liquidity; and

•prospect development and property acquisitions.

 

These forward-lookingstatements are based on assumptions that the Company believes are reasonable,but they are open to a wide range of uncertainties and business risks, includingthe following:

 

•fluctuations of the prices received or demand for oil and natural gas overtime;

•risks associated with oil and gas exploration;

•our ability to find, acquire, market, develop and produce new properties;

•availability and cost of material and equipment;

•uncertainty of reserve estimates and in the projection of future rates ofproduction and timing of development expenditures;

•operating hazards;

•climactic conditions;

•availability of capital and unexpected substantial variances in capitalrequirements;

•the strength and financial resources of our competitors;

•regulatory developments;

•environmental risks; and

•general economic conditions.

 

Actual results,performance or achievements could differ materially from those contemplated,expressed or implied by the forward-looking statements contained in this Reportand our other filings with the SEC. Important factors that could cause actualresults to differ materially from our forward-looking statements are set forthin this Report and our other filings with the SEC, including under the heading“Risk Factors” in our annual report on Form 10-K. These factors are notintended to represent a complete list of the general or specific factors thatmay affect us. It should be recognized that other factors, including generaleconomic factors and business strategies, may be significant, presently or inthe future, and the factors set forth in this report and our other filings withthe SEC may affect us to a greater extent than indicated. All forward-lookingstatements attributable to us or persons acting on our behalf are expresslyqualified in their entirety by the cautionary statements set forth in thisReport and our other filings with the SEC. Except as required by law, we undertakeno obligation to update any forward-looking statement, whether as a result ofnew information, future events or otherwise.

 

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**LIQUIDITY AND CAPITAL RESOURCES:**

 

We have funded ouractivities primarily with the proceeds raised through privately placed drillingprograms and our private sale of our equity and debt securities. These privateplacements primarily were made through a network of independent broker dealers.Since 1992, we have raised approximately $222 million through the privateplacements of interests in 30 drilling programs. Additionally, we have raised$71.6 million through the issuance of our debt securities and $44.9 millionthrough the issuance of our equity securities. In our drilling programs, wefund the costs associated with acreage acquisition and the tangible portion ofdrilling activities, while investors in the drilling programs fund allintangible drilling costs.

 

In late 2002, each of the13 drilling programs formed from 1994 through 1997 commenced a VoteSolicitation of their partners to: (i) obtain the requisite 2/3rds affirmativevote of their respective partners to convert their drilling program from aDelaware limited partnership to an LLC wherein all LLC members would have limitedliability, including Warren, and (ii) allow partners to select whether theywanted to be (a) a standard member in the LLC with substantially the samerights and obligations that they had as partners in their respective drillingfund, or (b) a Preferred Member in the LLC having certain preferential rightsby consenting to Warren’s contribution of additional capital to the LLC uponconversion (the “Recapitalization”) in the form of its unregistered PreferredShares in an amount equal to between 110% to 120% of the potential repurchaseprice of consenting partner’s interests calculated as of December 31, 2002. Forits additional capital contribution, Warren received additional standardmembership interests in the LLC and was specially allocated a prorata interestas a standard member in the wells and oil leases formerly allocable to thepartners who elected to become Preferred Members. Election by a partner tobecome a Preferred Member terminated their repurchase rights under the originalbuy/sell agreements. At September 30, 2003, all 13 programs obtained therequisite votes to convert to LLCs and on average 74.4% of the program memberselected to become Preferred Members in their LLC. As a result of theRecapitalization, Warren issued 3,295,111 Preferred Shares in the aggregate,1,952,151 during the first nine months of 2003, to the 13 LLCs as an additionalcapital contribution and received its prorata share of additional standardmembership interests in the LLCs.

 

Our cashand cash equivalents decreased $4.2 million for the nine months ended September30, 2003. This resulted from a $4.9 million decrease in cash used in investingactivities and $0.9 million decrease in cash used in operating activitiesoffset by a $1.6 million increase in cash provided from financing activities.

 

Cash provided frominvesting activities decreased due to expenditures on oil and gas propertiesduring the first nine months of 2003. This decrease was partially offset by the receipt of U.S. Treasury Bondspreviously held in escrow on behalf of our drilling program and debentures.Primarily, the U.S. Treasury Bonds were released to us as a result of theRecapitalization discussed above.

 

Cash provided fromoperating activities decreased due to drilling wells on behalf of the drilling programsand the related recognition of deferred revenue during the first nine months of2003.  Additionally, the funds raisedthrough our drilling programs are primarily raised during the last quarter ofour calendar year.  As a result, duringthe first nine months of the calendar year, we incur turnkey expenses relatedto drilling programs and do not raise a material amount of additional fundsthrough drilling programs.  Thisdecrease in cash provided from operating activities was offset by the receiptof life insurance funds relating to our Executive Vice President, James C.Johnson, Jr. who passed away in December 2002.

 

Cash provided fromfinancing activities increased due the issuance of preferred stock forcash.  This increase was offset by theredemption of debentures and dividends paid on preferred stock.

 

Our most materialcommitment of funds relates to the drilling programs. Our deferred revenuebalance relating to our drilling commitments totaled $29.4 million at September30, 2003. This commitment varies pro rata with the amount of funds raisedthrough our drilling programs.

 

The Company had a netloss of $0.6 million for the nine months ended September 30, 2003, as comparedto a net loss of $3.1 million for the corresponding period ending September 30,2002. At September 30, 2003, current liabilities exceeded current assets byapproximately $7.9 million.  During thefirst nine months of 2003, shareholders’ equity increased $33.6 million from$7.0 million to $40.6 million, primarily from the Recapitalization discussedabove and the sale of our preferred stock.

 

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During 2002, we raised$5.4 million for our drilling programs compared to $18.1 million and $46.5million in 2001 and 2000, respectively. As a result, the Company’s turnkeyrevenue and total gross profit in 2003 will be less than in 2002 and 2001 andthe number of the Company’s oil and gas properties developed throughpartnership arrangements will be reduced.

 

In order to improveoperations and liquidity and meet its cash flow needs, we have or intend to dothe following:

 

• Raise additional capitalthrough the sale of preferred and common stock.

 

• Obtain a credit facilitybased in part on the value of our proven reserves.

 

• Continue to privatelyplace drilling programs, which based on prior experience, managementanticipates raising approximately $6.0 million in 2003.

 

•  Generate turnkey profit and operating cashflow from turnkey drilling contracts equal to approximately 25% of the totalamount of total turnkey price.

 

•  Reduce fixed overhead expenses and primarilyconduct developmental drilling operations in our two main target areas, coalbedmethane properties in Wyoming and oil formations in the Wilmington field inCalifornia.

 

•  Increase oil and gas revenues by exchangingpreferred stock for interests in producing properties.

 

•  Use $2.0 million of deferred drillingcredits from Anadarko Petroleum Corporation to develop our acreage in theWashakie Basin, Wyoming.

 

As a result of theseplans, management believes that it will generate sufficient cash flows to meetits current obligations in 2003.

 

**RESULTS OF OPERATIONS:**

 

**Threemonths Ended September 30, 2003 Compared to Three Months Ended September 30,2002**

 

*Turnkey contract revenue and expenses.*Turnkey contract revenue decreased $69,000 in the third quarter to $2.4million, a 3% decrease compared to the corresponding quarter of the precedingyear. Additionally, turnkey contract expense increased $0.2 million during thethird quarter to $2.0 million, a 12% increase compared to the same period in2002.  The drilling activity in thethird quarter was flat when compared to the corresponding quarter of 2002.

 

Gross profit from turnkeyactivities was $0.4 million or 15% for the third quarter. This compares togross profit of $0.6 million or 26% for the corresponding quarter in 2002. Thedecrease in gross profit percentage during the third quarter of 2003 resultsfrom drilling certain wells more economically in 2002 compared to the correspondingquarter of 2003.

 

*Oil and gas sales and costs from marketing activities.*Oil and gas sales from marketing activities decreased $1.0 million in the thirdquarter to $1.4 million, a 42% decrease compared to the same period last year.Cost of oil and gas marketing activities decreased $1.0 million in the quarterto $1.3 million, a 42% decrease compared to the same quarter in 2002. Thesedecreases primarily resulted from the Recapitalizations as discussed above,whereby we now receive oil and gas production previously allocated to drillingprograms.  Oil and gas production fromthe wells in the drilling programs in which we earn a marketing fee for thethree months ended September 30, 2003 and 2002, was 0.4 Bcfe and 0.8 Bcfe,respectively.  This decrease was offsetby higher average gas prices.  Theaverage price per Mcfe during the third quarter of 2003 and 2002 was $4.38 and$2.60, respectively.

 

The gross profit frommarketing activities for the third quarter of 2003 was $24 thousand as comparedto $40 thousand in the same period last year.

 

*Well services activities.* Well servicesrevenue decreased $52 thousand in the third quarter to $0.3 million, a 14%decrease compared to the corresponding quarter of the preceding year. Wellservices expense decreased $28

 

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thousand in the thirdquarter to $0.1 million.  These nominalfluctuations in the third quarter of 2003 are consistent with the flat drillingactivity compared to the same period in 2002.

 

Gross profit from wellservices activities was $0.2 million for the third quarter. This compared togross profit of $0.2 million for the corresponding quarter of last year.

 

*Oil and gas sales.* Revenue from oil andgas sales increased $1.3 million in the third quarter to $1.4 million, a 865%increase compared to the same quarter in 2002, due to increased ownership inour drilling programs. We obtained oil and gas interests from our drillingprograms as a result of the Recapitalizations referred to above.  Our share of pre-payout production fromdrilling programs formed subsequent to 1998 is generally 25% of the productionallocated to these drilling programs.

 

*Production & exploration.* Productionand exploration expense increased $1.4 million in the third quarter of 2003 to$0.6 million.  This compared to a creditbalance of $0.8 for the comparable period of 2002.  The increase resulted from increased ownership in our drillingprograms. We obtained oil and gas interests from our drilling programs as aresult of the Recapitalizations referred to above.  Additionally, the credit balance in the comparable period in 2002resulted from a $1.4 million reversal of plugging and abandonment liabilityrelating to wells sold during this period.

 

*Net gain (loss) on investments.* Net losson investments was $0.1 million for the third quarter of 2003.  Net gain on investments was $0.2 millionduring the third quarter of 2002. Primarily, investments represent zero coupon U.S. treasury bonds held inour inventory. Fluctuations in net gain or loss on investments resulted fromchanges in long-term interest rates.

 

*Interest and other income.* Interest incomedecreased $27 thousand in the third quarter to $0.2 million, a 10% decreasecompared to the same quarter in 2002.

 

*Gain on sale of assets.* The $0.5 milliongain on the sale of assets resulted from the sale of certain non-strategicproperties in New Mexico during the third quarter of 2003.

 

*Depreciation, Depletion and Amortization.*Depreciation, depletion and amortization expense decreased $0.1 million for thequarter to $0.3 million, a 24% decrease compared to the corresponding quarterlast year. During the third quarter of 2002, we recorded impairment expensetotaling $0.2 million relating to our Pewitt Ranch prospect in Texas.

 

*General and administrative expenses.*General and administrative expenses decreased $1.3 million in the third quarterof 2003 to $0.7 million, a 63% decrease compared to the corresponding quarterlast year.  During the third quarter of2002, we wrote off $0.9 million of previously capitalized offeringexpenses.  Additionally, the decreaseresulted from a reduction in the number of employees employed during the thirdquarter of 2003 compared to the corresponding quarter of 2002.

 

*Interest expense.* Interest expense decreased$1.4 million in the third quarter to $0.1 million, a 94% decrease compared tothe same quarter last year. Primarily, this decrease reflects an increase inthe amount of interest capitalized to our Wyoming and California properties.

 

**Ninemonths Ended September 30, 2003 Compared to Nine Months Ended September 30,2002**

 

*Turnkey contract revenue and expenses.*Turnkey contract revenue decreased $4.6 million in the first nine months of2003 to $4.3 million, a 52% decrease compared to the corresponding period ofthe preceding year. Additionally, turnkey contract expense decreased $3.2million during the first nine months of 2003 to $3.3 million, a 49% decreasecompared to the same period in 2002. These decreases resulted from a lowerlevel of drilling activity during the period compared to the correspondingperiod of the preceding year. The level of drilling activity is affected by theamount of funds raised from our drilling programs in the prior fiscal year. Weraised $5.4 million from our drilling programs in 2002 compared to $18.1million during 2001.

 

Gross profit (loss) fromturnkey activities was $1.0 million or 23% for the first nine months of 2003.This compares to gross profit of $2.4 million or 27% for the correspondingperiod in 2002. The increase in gross profit percentage

 

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during the first ninemonths of 2002 results from drilling certain wells more economically than thecorresponding period of 2003 and changes in working interests of various wellsin our drilling programs.

 

*Oil and gas sales and costs from marketing activities.*Oil and gas sales from marketing activities decreased $5.0 million in the firstnine months of 2003 to $4.1 million, a 55% decrease compared to the same periodlast year. Cost of oil and gas marketing activities decreased $4.9 million inthe first nine months of 2003 to $4.1 million, a 55% decrease compared to thesame quarter in 2002. These decreases primarily resulted from theRecapitalizations as discussed above, whereby we now receive oil and gasproduction previously allocated to drilling programs.  Oil and gas production from the wells in the drilling programs inwhich we earn a marketing fee for the nine months ended September 30, 2003 and2002 was 1.0 Bcfe and 2.7 Bcfe, respectively. This decrease was offset by higher average gas prices.  The average price per Mcfe during the firstnine months of 2003 and 2002 was $4.26 and $2.59, respectively.

 

The gross profit frommarketing activities for the first nine months of 2003 was $83 thousand ascompared to $119 thousand in the same period last year.

 

*Well services activities.* Well servicesrevenue decreased $0.7 million in the first nine months of 2003 to $0.8million, a 45% decrease compared to the corresponding period of the precedingyear. Well services expense decreased $0.3 million for the first nine months of2003 to $0.4 million, a 38% decrease compared to the same period in 2002. Thedecreases in well services revenue resulted from the decrease in drilling activityduring the first nine months of 2003 compared to the corresponding period of2002 as discussed above.  Additionally,decreases in well revenue and expenses resulted from the sale of certain assetsof our drilling subsidiary, CJS Pinnacle Petroleum LLC (Pinnacle) on February14th, 2002, for total consideration of $4.2 million. The operationsof Pinnacle ceased since the sale.

 

Gross profit from wellservices activities was $0.4 million for the first nine months of 2003. Thiscompared to gross profit of $0.8 million for the corresponding period lastyear. This decrease in gross profit resulted from the decrease in well servicesrevenue and the sale of Pinnacle as discussed above.

 

*Oil and gas sales.* Revenue from oil andgas sales increased $3.9 million in the first nine months of 2003 to $4.2million, a 1132% increase compared to the same period last year, due toincreased ownership in our drilling programs. We obtained oil and gas interestsfrom our drilling programs as a result of the Recapitalizations referred toabove.  Our share of pre-payoutproduction from drilling programs formed subsequent to 1998 is generally 25% ofthe production allocated to these drilling programs.

 

*Production & exploration.* Productionand exploration expense increased $1.6 million in the first nine months of 2003to $2.6 million, a 163% increase compared to the same quarter last year.  This resulted from increased ownership inour drilling programs. We obtained oil and gas interests from our drillingprograms as a result of the Recapitalizations referred to above.  Additionally, a plugging and abandonmentliability of $1.4 million was reversed during the third quarter of 2002.

 

*Net gain (loss) on investments.* Net gainon investments was $0.1 million for the first nine months of 2003 and $0.5million for the same period in 2002. Primarily, investments represent zero coupon U.S. treasury bonds held inour inventory. Fluctuations in net gain or loss on investments resulted fromchanges in long-term interest rates.

 

*Interest and other income.* Interest incomedecreased $0.2 million in the first nine months of 2003 to $1.0 million, a 14%decrease compared to the same period in 2002. Primarily, this decrease isattributable to lower interest rates during 2003.

 

*Gain on sale of assets.* The $0.5 milliongain of the sale of assets resulted from the sale of certain non-strategicproperties in New Mexico during the third quarter of 2003.

 

*Depreciation, Depletion and Amortization.*Depreciation, depletion and amortization expense decreased $1.3 million for thefirst nine months of 2003 to $0.8 million, a 62% decrease compared to thecorresponding period last year. During the third quarter of 2002, we recordedimpairment expense totaling $1.1 million relating to our Kirby Decker prospectin Montana.

 

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*General and administrative expenses.*General and administrative expenses decreased $1.5 million in the first ninemonths of 2003 to $2.9 million.  Duringthe third quarter of 2002, we wrote off $0.9 million of previously capitalizedoffering expenses.  Additionally, thedecrease resulted from a reduction in the number of employees employed during2003 compared to 2002.

 

*Interest expense.* Interest expensedecreased $3.1 million in the first nine months to $1.3 million, a 70% decreasecompared to the same period last year. Primarily, this decrease reflects anincrease in the amount of interest capitalized to our Wyoming and Californiaproperties.

 

*Contingent Repurchase Obligation.*Repurchaseobligation expense of $3.1 million was recorded in 2001 based on pricing atMarch 15, 2002. The repurchase obligation expense was reversed during the firstquarter of 2002. As stated above, the determination of whether a repurchaseliability exists is based upon estimates of future net cash flows from reservestudies prepared by petroleum engineers compared to the potential repurchase ofdrilling program units. Significant decreases in natural gas and oil prices atDecember 31, 2001 lowered the estimated future cash flows when compared tofuture potential repurchase obligations. As a result, a repurchase liabilityand a repurchase obligation expense of $3.3 million was recorded in 2001.

 

**Open Disclosure Issues with the Securities and ExchangeCommission**

 

The Company has beenadvised by the Staff of the SEC that it, in consultation with the Staff of theFinancial Standards Accounting Board, is considering certain implementationissues in the application of provisions of Statement of Financial AccountingStandards No. 141, “Business Combinations,” and Statement of FinancialStandards No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142), tocompanies in the extractive industries, including oil and gas companies. TheStaff of the SEC is considering whether SFAS No. 142 requires registrants toreclassify costs associated with mineral rights, including both proved andunproved leasehold acquisition costs, as intangible assets in the balancesheet, apart from other capitalized oil and gas property costs. Historically, theCompany and all other oil and gas companies have included the cost of these oiland gas leasehold interests as part of oil and gas properties. The Staff isalso considering whether SFAS No. 142 requires registrants to provide theadditional disclosures prescribed by SFAS No. 142 for intangible assets forcosts associated with mineral rights.

 

The reclassification ofthese amounts would not affect the method in which such costs are amortized orthe manner in which the Company assesses impairment of capitalized costs. As aresult, net income would not be affected by the reclassification.

 

**Item3. *Quantitativeand qualitative******disclosure about market risk***

 

*Commodity Risk.* Our major market riskexposure is the commodity pricing applicable to our natural gas and oilproduction. Realized commodity prices received for our production are primarilydriven by the prevailing worldwide price for crude oil and spot pricesapplicable to natural gas. The effects of price volatility is expected tocontinue.

 

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

 

**Quarterly evaluation of the Company’s Disclosure Controls andInternal Controls.**Within the 90 days prior to the filing ofthis Quarterly Report on Form 10-Q, the Company evaluated the effectiveness ofthe design and operation of its “disclosure controls and procedures”(Disclosure Controls), and its “internal controls and procedures for financialreporting” (Internal Controls). This evaluation (the Controls Evaluation) wasdone under the supervision and with the participation of management, includingour Chief Executive Officer (CEO) and Chief Financial Officer (CFO). Rulesadopted by the SEC require that in this section of the Quarterly Report wepresent the conclusions of the CEO and the CFO about the effectiveness of ourDisclosure Controls and Internal Controls based on and as of the date of theControls Evaluation.

 

**CEO and CFO Certifications.**Appearingimmediately following the Signatures section of this Quarterly Report, thereare two separate forms of “Certifications” of the CEO and the CFO. The firstform of Certification is required in accordance with Section 302 of theSarbanes-Oxley Act of 2002 (the Section 302 Certification). This section of theQuarterly Report which you are currently reading is the information concerningthe Controls Evaluation referred

 

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to in the Section 302Certifications and this information should be read in conjunction with theSection 302 Certifications for a more complete understanding of the topicspresented.

 

**Disclosure Controls and Internal Controls.**DisclosureControls are procedures that are designed with the objective of ensuring thatinformation required to be disclosed in our reports filed under the SecuritiesExchange Act of 1934 (Exchange Act), such as this Quarterly Report, isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s (SEC) rules and forms. DisclosureControls are also designed with the objective of ensuring that such informationis accumulated and communicated to our management, including the CEO and CFO,as appropriate to allow timely decisions regarding required disclosure.Internal Controls are procedures which are designed with the objective ofproviding reasonable assurance that (1)

our transactions areproperly authorized; (2) our assets are safeguarded against unauthorized orimproper use; and (3) our transactions are properly recorded and reported, allto permit the preparation of our financial statements in conformity withaccounting principles generally accepted in the United States of America.

 

**Limitations on the Effectiveness of Controls.**TheCompany’s management, including the CEO and CFO, does not expect that ourDisclosure Controls or our Internal Controls will prevent all error and allfraud. A control system, no matter how well conceived and operated, can provideonly reasonable, not absolute, assurance that the objectives of the controlsystem are met. Further, the design of a control system must reflect the factthat there are resource constraints, and the benefits of controls must beconsidered relative to their costs. Because of the inherent limitations in allcontrol systems, no evaluation of controls can provide absolute assurance thatall control issues and instances of fraud, if any, within the Company have beendetected. These inherent limitations include the realities that judgments indecision-making can be faulty, and that breakdowns can occur because of simpleerror or mistake. Additionally, controls can be circumvented by the individualacts of some persons, by collusion of two or more people, or by managementoverride of the control. The design of any system of controls also is based inpart upon certain assumptions about the likelihood of future events, and therecan be no assurance that any design will succeed in achieving its stated goalsunder all potential future conditions; over time, control may become inadequatebecause of changes in conditions, or the degree of compliance with the policiesor procedures may deteriorate. Because of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected.

 

**Scope of the Controls Evaluation.**TheCEO/CFO evaluation of our Disclosure Controls and our Internal Controlsincluded a review of the controls’ objectives and design, the controls’implementation by the Company and the effect of the controls on the informationgenerated for use in this Quarterly Report. In the course of the ControlsEvaluation, we sought to identify data errors, controls problems or acts offraud and to confirm that appropriate corrective action, including processimprovements, were being undertaken. This type of evaluation will be done on aquarterly basis so that the conclusions concerning controls effectiveness canbe reported in our Quarterly Reports on Form 10-Q and Annual****Reporton Form 10-K. Our Internal Controls are also evaluated on an ongoing basis byother personnel in our organization and by our independent auditors inconnection with their audit and review activities. The overall goals of thesevarious evaluation activities are to monitor our Disclosure Controls and ourInternal Controls and to make modifications as necessary; our intent in thisregard is that the Disclosure Controls and the Internal Controls will bemaintained as dynamic systems that change (including with improvements andcorrections) as conditions warrant.

 

Among other matters, wesought in our evaluation to determine whether there were any “significantdeficiencies” or “material weaknesses” in the Company’s Internal Controls, orwhether the Company had identified any acts of fraud involving personnel whohave a significant role in the Company’s Internal Controls. This informationwas important both for the Controls Evaluation generally and because items 5and 6 in the Section 302 Certifications of the CEO and CFO require that the CEOand CFO disclose that information to our Board’s Audit Committee and to our independentauditors and to report on related matters in this section of the QuarterlyReport. In the professional auditing literature, “significant deficiencies” arereferred to as “reportable conditions”; these are control issues that couldhave a significant adverse effect on the ability to record, process, summarizeand report financial data in the financial statements. A “material weakness” isdefined in the auditing literature as a particularly serious reportablecondition where the internal control does not reduce to a relatively low levelthe risk that misstatements caused by error or fraud may occur in amounts thatwould be material in relation to the financial statements and not be detectedwithin a timely period by employees in the normal course of performing theirassigned functions. We also sought to deal with other controls matters in theControls Evaluation, and in each case if a problem was identified, weconsidered what revision, improvement and/or correction to make in accord withour on-going procedures.

 

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In accord with SECrequirements, the CEO and CFO note that, since the date of the ControlsEvaluation to the date of this Quarterly Report, there have been no significantchanges in Internal Controls or in other factors that could significantlyaffect Internal Controls, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

**Conclusions.**Based upon the ControlsEvaluation, our CEO and CFO have concluded that, subject to the limitationsnoted above, our Disclosure Controls are effective to ensure that materialinformation relating to Warren and its consolidated subsidiaries is made knownto management, including the CEO and CFO, particularly during the period whenour periodic reports are being prepared, and that our Internal Controls areeffective to provide reasonable assurance that our financial statements arefairly presented in conformity with accounting principles generally accepted inthe United States of America.

 

**PART II—OTHER INFORMATION**

 

**Item1. *LegalProceedings***

 

On September 28, 1999,Magness Petroleum Company, our joint venture partner in the Wilmington Field,filed a complaint against Warren, Warren E&P, and certain Warrensubsidiaries in the Superior Court of Los Angeles County, alleging that we hadbreached our joint venture agreement with Magness and an alleged oral agreementregarding advance payment of expenses for drilling and completionoperations.  Magness sought dissolutionof the joint venture, an accounting and a declaratory judgment as to the rightsof the parties under the joint venture agreement.  We were successful in enforcing the arbitration provision in thejoint venture agreement and entered into an agreement with Magness to submitthe matter for arbitration by the Judicial Arbitration Mediation Services, or“JAMS,” before the Honorable Keith J. Wisot, a retired Los Angeles SuperiorCourt Judge.  Judge Wisot, as thearbitrator, ruled that the joint venture agreement is a valid enforceableagreement, declined to dissolve the joint venture, denied Magness’ claims forbreach of contract, and held that he and JAMS would retain jurisdiction toenforce the Final Award. On August 8, 2001, Magness filed a demand with theAmerican Arbitration Association, or “AAA,” reasserting its claims fordissolution of the joint venture and breach of contract. Subsequently Warrensought to enforce the original Final Award render by Judge Wisot in the JAMSarbitration. After a procedural determination of proper arbitration forum thatwas eventually determined by the California Court of Appeals in December 2002and a Motion for Clarification filed in January 2003 before the CaliforniaSuperior Court, in September 2003 the California Superior Court ordered thatJAMS will hear Warren’s motion to enforce the Final Award covering unauthorizeddirect labor charges and tangible costs and AAA will hear Magness’s new theoryof dissolution of the Joint Venture and Warren’s drilling rights if the JointVenture is not dissolved and Warren’s claims for damages for preventingresumption of drilling activities. The respective arbitrators have not set anyconferences or hearings to hear the recently assigned matters before JAMS orAAA. Accordingly, pending final resolution, further development of theWilmington Field will be curtailed.

 

In 1998, Warren E&Pwas sued in the 81st Judicial District Court of Frio County, Texasby Stricker Drilling Company, Inc. and Manning Safety Systems to recover thevalue of lost equipment based on a well blow out.  Warren was later joined in the suit as a defendant.  As a result of the lawsuit, Gotham InsuranceCompany, Warren E&P’s well blow-out insurer, intervened.  The suit was settled in 1999 with allparties except Gotham.  Gotham paid over$1.7 million under the insurance policy and now seeks a refund of approximately$1.5 million of monies paid, denying coverage, and alleging fraud andmisrepresentation and a failure of Warren E&P to act with due diligence andpursuant to safety regulations.  WarrenE&P countersued for the remaining proceeds under the policy coverage.  In the summer and fall of 2000, summaryjudgments were entered for Warren E&P on essentially all claims except itsbad faith claims against Gotham. Gotham’s claims against Warren E&P and Warren were rejected.  Final judgment was rendered on May 14, 2001in Warren E&P’s favor for the remaining policy proceeds, interest andattorney fees.  Gotham appealed thefinal judgment to the San Antonio Court of Appeals seeking a refund ofapproximately $1.5 million.  The case onappeal was orally argued on March 28, 2002. On July 23, 2003, a three judgepanel of the San Antonio Court of Appeals rendered its decision in favor ofGotham on all points, except for the amount of restitution owed by WarrenE&P and related parties, reversing the earlier summary judgment entered bythe trial court for Warren E&P. Although the three judge panel of the SanAntonio Court of Appeals acknowledged that Gotham asked for the Court to renderits judgment in Gotham’s favor on its restitution claims, Gotham gave noparticulars, and therefore the Court of Appeals remanded Gotham’s restitutionclaims to the trial court for further proceedings consistent with its opinion.Although the ultimate resolution is uncertain, counsel has

 

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advised Warren E&Pthat it believes the three judge panel of the San Antonio Court of Appealscommitted numerous errors of fact and law, primarily relying on their erroneousconclusion that Warren E&P as operator of the oil well incurred no loss.Accordingly, Warren E&P is appealing the San Antonio Court of Appeals paneldecision to the Texas Supreme Court, which may be accepted and heard by theTexas Supreme Court at their discretion.

 

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

 

**Item2. *Changesin Securities***

 

a. Notapplicable

 

b. Notapplicable

 

c. AtSeptember 30, 2003, the Company had issued 4,965,814 shares of its PreferredStock, with a value of $12.00 per share of which, 1,244,546 shares were issuedto accredited investors for cash consideration of $14,934,552,  426,157 shares were issued to bondconverters and 3,295,111 were issued as additional LLC capital contributions asa result of the Recapitalizations. The shares of Convertible Preferred Stockare restricted securities. The issuance was exempt from registration under theSecurities Act of 1933, as amended (the “Securities Act”) pursuant to Section4(2) and/or Section 3(a)(9). The Company’s Board of Directors has authorizedthe issuance of up to 6,100,000 shares of Convertible Preferred Stock.Information on the Convertible Preferred Stock transaction is contained in theCompany’s Form 8-K filed on December 17, 2002 and in this Form 10-Q for thequarterly periods ended September 30, 2003 in “Part 1 Financial Information”under the caption “ Notes to Consolidated Financial Statements” under “Note 6:Changes in Shareholders’ Equity” and is incorporated herein by reference.

 

**Item3. *Defaultsupon Senior Securities***

 

Notapplicable.

 

**Item4. *Submissionof Matters to a Vote of Security Holders***

 

Not applicable.

 

**Item5. *OtherInformation***

 

                Not applicable.

 

 

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**Item6.  *Exhibits and Reports on Form 8-K***

 

**a)**                                    **Exhibits**

 

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

 
| **Exhibit  Number** |   | **Description**                          |   | **Original Filed  Exhibit** |   | **File  Number** |
|---------------------|--------|------------------------------------------|--------|-----------------------------|--------|------------------|
| 31*                 |   | Rule  13a-14(a)/15d-14(a) Certifications |   |                        |   | 1-8968           |
| 32*                 |   | Section 1350  Certifications             |   |                        |   | 1-8968           |

 

**(b)**                                  **Reports on Form 8-K**

 

The registrant did notfile any reports on Form 8-K during the quarter ended September 30, 2003.

 

**Signatures, and Certifications of the Chief Executive Officerand the Chief Financial Officer of the Company.**

 

The following pagesinclude the Signatures page for this Form 10-Q, and two separate Certificationsof the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) ofthe Company.

 

The first form ofCertification is required by Rule 13a-14 under the Securities Exchange Act of1934 (the Exchange Act) in accord with Section 302 of the Sarbanes-Oxley Act of2002 (the Section 302 Certification). The Section 302 Certification includesreferences to an evaluation of the effectiveness of the design and operation ofthe Company’s “disclosure controls and procedures” and its “internal controlsand procedures for financial reporting”. Item 4 of Part I of this QuarterlyReport presents the conclusions of the CEO and the CFO about the effectivenessof such controls based on and as of the date of such evaluation (relating toItem 4 of the Section 302 Certification), and contains additional informationconcerning disclosures to the Company’s Audit Committee and independentauditors with regard to deficiencies in internal controls and fraud (Item 5 ofthe Section 302 Certification) and related matters (Item 6 of the Section 302Certification).

 

The second form ofCertification is required by section 1350 of chapter 63 of title 18 of theUnited States Code.

 

**SIGNATURES**

 

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

 
|                   | WARREN RESOURCES, INC. |
|------------------------|------------------------|
|                   | (Registrant)           |
|                   |                   |   |
|                   |                   |   |
| Date: November 6, 2003 | By:                    | /s/  Timothy A. Larkin |   |
|                   |                   | Timothy A. Larkin |
|                   |                   | *Senior Vice President,  Chief Financial Officer and  Principal Accounting Officer* |

 

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