**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

 

**FORM 10-Q**

 
| **x**                                                   | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| ** **                                              | ** ** | ** **                                                                                               |
| **For the  Quarterly Period Ended March 31, 2008** |
| ** **                                              | ** ** | ** **                                                                                               |
| **OR**                                                  |
| ** **                                              | ** ** | ** **                                                                                               |
| **o**                                                   | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |

** **

**For thetransition periodfrom           to           **

** **

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

# ** **

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

 

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

 

Registrant’stelephone number, including area code:

**(212)697-9660**

** **

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

 

Yes xNo o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 

| Large accelerated filer  o                     |   | Accelerated filer x          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer o                        |   | Smaller reporting  company o |
| (Do not check if a  smaller reporting company) |   |                              |

 

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

 

Yes o No x

 

Theaggregate number of Registrant’s outstanding shares on May 6, 2008 was58,274,680 shares of Common Stock, $0.0001 par value.

 

 

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**WARRENRESOURCES, INC.**

 

**TABLE OFCONTENTS**

 
| PART I—        | FINANCIAL INFORMATION                                                                                 |   |
|--------------------------|-------------------------------------------------------------------------------------------------------|--------|
|                     |                                                                                                  |   |
|                     | Item 1. Financial Statements  (Unaudited)                                                             |   |
|                     |                                                                                                  |   |
|                     | Consolidated Balance Sheets  as of March 31, 2008 and December 31, 2007                     |   |
|                     |                                                                                                  |   |
|                     | Consolidated Statements of  Operations for the three months ended March 31, 2008 and 2007        |   |
|                     |                                                                                                  |   |
|                     | Consolidated Statements of  Cash Flows for three months ended March 31, 2008 and 2007            |   |
|                     |                                                                                                  |   |
|                     | Notes to  the Consolidated Financial Statements                                                       |   |
|                     |                                                                                                  |   |
|                     | Item 2.  Management’s Discussion and Analysis of Financial Conditions and Results of  Operations |   |
|                     |                                                                                                  |   |
|                     | Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                   |   |
|                     |                                                                                                  |   |
|                     | Item 4.  Evaluation of Disclosure Controls and Procedures                                             |   |
|                     |                                                                                                  |   |
|  PART II— | OTHER INFORMATION                                                                                     |   |
|                     |                                                                                                  |   |
|                     | Item 1. Legal  Proceedings                                                                            |   |
|                     |                                                                                                  |   |
|                     | Item 1A. Risk Factors                                                                                 |   |
|                     |                                                                                                  |   |
|                     | Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                  |   |
|                     |                                                                                                  |   |
|                     | Item 3.  Defaults upon Senior Securities                                                              |   |
|                     |                                                                                                  |   |
|                     | Item 4.  Submission of Matters to a Vote of Security Holders                                          |   |
|                     |                                                                                                  |   |
|                     | Item 5. Other  Information                                                                            |   |
|                     |                                                                                                  |   |
|                     | Item 6. Exhibits                                                                                      |   |
|                     |                                                                                                  |   |
|                     | Signatures                                                                                            |   |

 

2

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**PART I—FINANCIAL INFORMATION**

** **

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

**Warren Resources, Inc. and Subsidiaries**

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                                                                                                         | ** ** | **March 31,  2008** | ** **      | **December 31,  2007** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|-----------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                                                                                         |       |                     |            |                        |       |
| Current Assets                                                                                                                                                                                                                                                                                     |       |                     |            |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                                                         |       | $                        | 27,327,171      |                        | $          | 12,815,406 |   |
| Accounts  receivable – trade                                                                                                                                                                                                                                                                  |       | 10,938,280               |            | 8,256,199                   |       |
| Restricted  investments in U.S. Treasury Bonds—available for sale, at fair value                                                                                                                                                                                                              |       | 93,229                   |            | 131,625                     |       |
| Other current  assets                                                                                                                                                                                                                                                                              |       | 1,663,831                |            | 1,634,826                   |       |
|                                                                                                                                                                                                                                                                                               |       |                     |            |                        |       |
| Total current  assets                                                                                                                                                                                                                                                                              |       | 40,022,511               |            | 22,838,056                  |       |
|                                                                                                                                                                                                                                                                                               |       |                     |            |                        |       |
| Other Assets                                                                                                                                                                                                                                                                                       |       |                     |            |                        |       |
| Oil and gas  properties—at cost, based on full cost method of accounting, net of  accumulated depreciation, depletion and amortization (includes unproved  properties excluded from amortization of $69,862,310 and $66,240,101 as  of  March 31, 2008 and  December 31, 2007) |       | 430,018,555              |            | 406,063,309                 |       |
| Property and  equipment—at cost, net                                                                                                                                                                                                                                                          |       | 2,357,070                |            | 2,422,702                   |       |
| Restricted  investments in U.S. Treasury Bonds—available for sale, at fair value                                                                                                                                                                                                              |       | 839,064                  |            | 1,184,629                   |       |
| Goodwill                                                                                                                                                                                                                                                                                           |       | 3,430,246                |            | 3,430,246                   |       |
| Other assets                                                                                                                                                                                                                                                                                       |       | 4,023,533                |            | 4,566,649                   |       |
|                                                                                                                                                                                                                                                                                               |       |                     |            |                        |       |
| Total other  assets                                                                                                                                                                                                                                                                                |       | 440,668,468              |            | 417,667,535                 |       |
| ** **                                                                                                                                                                                                                                                                                         | ** ** | **$**                    | **480,690,979** | ** **                  | **$**      | **440,505,591** | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                                     |       |                     |            |                        |       |
| Current  Liabilities                                                                                                                                                                                                                                                                               |       |                     |            |                        |       |
| Current  maturities of debentures and other long term liabilities                                                                                                                                                                                                                                  |       | $                        | 535,053         |                        | $          | 608,038 |   |
| Accounts payable  and accruals                                                                                                                                                                                                                                                                     |       | 29,953,420               |            | 34,343,819                  |       |
|                                                                                                                                                                                                                                                                                               |       |                     |            |                        |       |
| Total current  liabilities                                                                                                                                                                                                                                                                         |       | 30,488,473               |            | 34,951,857                  |       |
|                                                                                                                                                                                                                                                                                               |       |                     |            |                        |       |
| Long-Term  Liabilities                                                                                                                                                                                                                                                                             |       |                     |            |                        |       |
| Debentures, less  current portion                                                                                                                                                                                                                                                                  |       | 1,535,400                |            | 2,232,900                   |       |
| Other long-term  liabilities, less current portion                                                                                                                                                                                                                                                 |       | 7,831,809                |            | 7,639,485                   |       |
| Line of credit                                                                                                                                                                                                                                                                                     |       | 82,400,000               |            | 46,152,498                  |       |
|                                                                                                                                                                                                                                                                                               |       |                     |            |                        |       |
|                                                                                                                                                                                                                                                                                               |       | 91,767,209               |            | 56,024,883                  |       |
|                                                                                                                                                                                                                                                                                               |       |                     |            |                        |       |
| Commitments and  Contingencies                                                                                                                                                                                                                                                                     |       |                     |            |                        |       |
|                                                                                                                                                                                                                                                                                               |       |                     |            |                        |       |
| Stockholders’  Equity                                                                                                                                                                                                                                                                         |       |                     |            |                        |       |
| 8% convertible preferred stock, par value $.0001; authorized 10,000,000  shares, issued and outstanding, 131,576 shares in 2008 and 224,370 shares in  2007 (aggregate liquidation preference $1,578,912 in 2008 and $2,692,440 in  2007)                                                          |       | 1,576,022                |            | 2,688,236                   |       |
| Common  stock  - $.0001 par value; authorized,  100,000,000 shares; issued 58,234,346 in 2008 and 58,191,901 shares in 2007                                                                                                                                                                   |       | 5,823                    |            | 5,819                       |       |
| Additional  paid-in-capital                                                                                                                                                                                                                                                                        |       | 425,318,416              |            | 424,722,529                 |       |
| Accumulated  deficit                                                                                                                                                                                                                                                                               |       | (67,861,521              | )               | (77,324,451                 | )          |
| Accumulated  other comprehensive income, net of applicable income taxes of $81,000 in 2008  and $108,000 in 2007                                                                                                                                                                                   |       | 124,612                  |            | 164,773                     |       |
|                                                                                                                                                                                                                                                                                               |       | 359,163,352              |            | 350,256,906                 |       |
|                                                                                                                                                                                                                                                                                               |       |                     |            |                        |       |
| Less common  stock in Treasury—at cost; 632,250 shares in 2008 and 2007                                                                                                                                                                                                                       |       | 728,055                  |            | 728,055                     |       |
| Total  stockholders’ equity                                                                                                                                                                                                                                                                   |       | 358,435,297              |            | 349,528,851                 |       |
| ** **                                                                                                                                                                                                                                                                                         | ** ** | **$**                    | **480,690,979** | ** **                  | **$**      | **440,505,591** | ** ** |

 

The accompanyingnotes are an integral part of these financial statements.

 

3

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**Warren Resources, Inc. and Subsidiaries**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                                 | ** ** | **Three Months Ended  March 31, (Unaudited)** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2008**                                                          | ** ** | **2007** | ** ** |
| ** **                                                 | ** ** | ** **                                                        | ** ** | **(Restated, see  Note B)** | ** ** |
| **Revenues**                                               |       |                                                              |       |   |   |
| Oil and gas  sales                                         |       | $                                                                 | 23,483,693 |   | $ | 9,481,685 |   |
| Interest and  other income                                 |       | 344,774                                                           |       | 832,761 |   |
| Net gain on  investments                                   |       | 93,346                                                            |       | 8,081 |   |
|                                                       |       | 23,921,813                                                        |       | 10,322,527 |   |
|                                                       |       |                                                              |       |   |   |
| **Expenses**                                               |       |                                                              |       |   |   |
| Lease operating  expense and taxes                         |       | 5,863,894                                                         |       | 4,014,939 |   |
| Depreciation,  depletion and amortization                  |       | 3,913,535                                                         |       | 2,008,244 |   |
| General and  administrative                                |       | 3,312,233                                                         |       | 2,667,660 |   |
| Interest                                                   |       | 1,342,221                                                         |       | 156,868 |   |
|                                                       |       |                                                              |       |   |   |
|                                                       |       | 14,431,883                                                        |       | 8,847,711 |   |
|                                                       |       |                                                              |       |   |   |
| Income before  provision for income taxes                  |       | 9,489,930                                                         |       | 1,474,816 |   |
|                                                       |       |                                                              |       |   |   |
| Deferred income  tax expense                               |       | 27,000                                                            |       | 7,000 |   |
|                                                       |       |                                                              |       |   |   |
| Net income                                                 |       | 9,462,930                                                         |       | 1,467,816 |   |
|                                                       |       |                                                              |       |   |   |
| Less dividends  and accretion on preferred shares          |       | 32,892                                                            |       | 67,116 |   |
|                                                       |       |                                                              |       |   |   |
| Net income  applicable to common stockholders              |       | $                                                                 | 9,430,038  |   | $ | 1,400,700 |   |
|                                                       |       |                                                              |       |   |   |
| Earnings per  share – Basic                           |       | $                                                                 | 0.16       |   | $ | 0.03 |   |
| Earnings per  share – Diluted                         |       | 0.16                                                              |       | 0.03 |   |
|                                                       |       |                                                              |       |   |   |
| Weighted average  common shares outstanding – Basic   |       | 57,582,536                                                        |       | 53,519,642 |   |
| Weighted average  common shares outstanding – Diluted |       | 58,644,616                                                        |       | 54,466,840 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

4

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**Warren Resources, Inc. and Subsidiaries**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                         | ** ** | **For the three months ended  March 31, (Unaudited)** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2008**                                                                            | ** ** | **2007** | ** ** |
| ** **                                                                         | ** ** | ** **                                                                          | ** ** | **(Restated, see  Note B)** | ** ** |
| Cash flows from  operating activities:                                             |       |                                                                                |       |   |   |
| Net income                                                                         |       | $                                                                                   | 9,462,930  |   | $ | 1,467,816 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                                                                |       |   |   |
| Accretion of  discount on available-for-sale debt securities                       |       | (16,612                                                                             | )          | (15,695 | ) |
| Amortization and  write-off of deferred bond offering costs                        |       | 48,068                                                                              |       | 4,380 |   |
| Gain on sale of  US treasury bonds – available for sale                       |       | (93,346                                                                             | )          | — |   |
| Depreciation,  depletion and amortization                                          |       | 3,913,535                                                                           |       | 2,008,244 |   |
| Stock option  expense                                                              |       | 506,784                                                                             |       | 206,963 |   |
| Deferred tax  expense                                                              |       | 27,000                                                                              |       | 7,000 |   |
| Change in assets  and liabilities:                                                 |       |                                                                                |       |   |   |
| Increase in  accounts receivable—trade                                        |       | (2,682,081                                                                          | )          | (2,919,664 | ) |
| Decrease in  other assets                                                          |       | 466,043                                                                             |       | 3,182,949 |   |
| Decrease in  accounts payable and accruals                                         |       | (1,746,306                                                                          | )          | (1,614,465 | ) |
|                                                                               |       |                                                                                |       |   |   |
| Net cash  provided by operating activities                                         |       | 9,886,015                                                                           |       | 2,327,528 |   |
|                                                                               |       |                                                                                |       |   |   |
| Cash flows from  investing activities:                                             |       |                                                                                |       |   |   |
| Purchase,  exploration and development of oil and gas properties                   |       | (29,609,498                                                                         | )          | (25,045,964 | ) |
| Purchase of  property and equipment                                                |       | (96,389                                                                             | )          | (1,010,910 | ) |
| Proceeds from  U.S. Treasury Bonds–available-for-sale                         |       | 426,757                                                                             |       | — |   |
|                                                                               |       |                                                                                |       |   |   |
| Net cash used in  investing activities                                             |       | (29,279,130                                                                         | )          | (26,056,874 | ) |
|                                                                               |       |                                                                                |       |   |   |
| Cash flows from  financing activities:                                             |       |                                                                                |       |   |   |
| Proceeds from  line of credit                                                      |       | 36,247,502                                                                          |       | 20,000,000 |   |
| Payments on debt  and debentures                                                   |       | (800,342                                                                            | )          | (22,940 | ) |
| Issuance of  common stock, net                                                     |       | 122,000                                                                             |       | 195,250 |   |
| Repurchase of  preferred stock, net                                                |       | (1,664,280                                                                          | )          | — |   |
|                                                                               |       |                                                                                |       |   |   |
| Net cash  provided by financing activities                                         |       | 33,904,880                                                                          |       | 20,172,310 |   |
|                                                                               |       |                                                                                |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                              |       | 14,511,765                                                                          |       | (3,557,036 | ) |
|                                                                               |       |                                                                                |       |   |   |
| Cash and cash  equivalents at beginning of period                                  |       | 12,815,406                                                                          |       | 43,021,884 |   |
|                                                                               |       |                                                                                |       |   |   |
| Cash and cash  equivalents at end of period                                        |       | $                                                                                   | 27,327,171 |   | $ | 39,464,848 |   |
|                                                                               |       |                                                                                |       |   |   |   |   |
| Supplemental  disclosure of cash flow information                                  |       |                                                                                |       |   |   |
| Cash paid for  interest                                                            |       | $                                                                                   | 791,330    |   | $ | 91,940 |   |
| Cash paid for  income taxes                                                        |       | —                                                                              |       | — |   |
| Noncash  investing and financing activities                                        |       |                                                                                |       |   |   |
| Accrued  preferred stock dividend                                                  |       | $                                                                                   | 31,578     |   | $ | 65,145 |   |
| Common stock  issued on conversion of preferred stock                              |       | —                                                                              |       | 6,768 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

5

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** **

**WARREN RESOURCES, INC. AND SUBSIDIARIES**

** **

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)**

** **

**NOTEA—ORGANIZATION**

 

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

 

The accompanying unaudited financial statements and relatednotes present the Company’s consolidated financial position as of March 31,2008 and December 31, 2007, the consolidated results of operations for thethree months ended March 31, 2008 and 2007 and consolidated cash flows forthe three months ended March 31, 2008 and 2007. The unaudited financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America for interim financialinformation and with the instructions of Form 10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates of America for complete financial statements. In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included. Operatingresults for the three months ended March 31, 2008, are not necessarilyindicative of the results that may be expected for the fiscal year ending December 31,2008. The accounting policies followed by the Company are set forth in Note Ato the Company’s financial statements included in Form 10-K for the yearended December 31, 2007. These interim financial statements and notesthereto should be read in conjunction with the consolidated financialstatements presented in the Company’s 2007 Annual Report on Form 10-K.

 

**NOTEB – CHANGE IN ACCOUNTING PRINCIPLE**

 

Effective April 1, 2007, the Company adopted thefull cost method of accounting for its oil and gas properties. Previously, theCompany followed the successful efforts method of accounting for its oil andgas activities. Warren believes that the full cost method is preferable for acompany that is actively involved in the exploration and development of oil andgas reserves. Additionally, the full cost method is used by the majority ofWarren’s peers and management believes the change will improve thecomparability of Warren’s financial statements with its peer group. Warren’sfinancial results have been retroactively restated to reflect the full costmethod of accounting.

 

As prescribed by full cost accounting rules, all costsassociated with property acquisition, exploration and development activitiesare capitalized. Exploration and development costs include dry hole costs,geological and geophysical costs, direct overhead related to exploration anddevelopment activities and other costs incurred for the purpose of finding oiland gas reserves. Salaries and benefits paid to employees directly involved inthe exploration and development of oil and gas properties as well as otherinternal costs that can be specifically identified with acquisition,exploration and development activities are also capitalized. Proceeds receivedfrom disposals are credited against accumulated cost except when the salerepresents a significant disposal of reserves, in which case a gain or loss isrecognized. The sum of net capitalized costs and estimated future developmentand dismantlement costs are depleted on the equivalent unit-of-productionmethod, based on proved oil and gas reserves as determined by independent petroleumengineers.

 

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

 

The costs of certain unevaluated oil and gasproperties and exploratory wells being drilled are not included in the costssubject to amortization. Warren assesses costs not being amortized for possibleimpairments or reductions in

 

6

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value and if a reduction in value has occurred, theportion of the carrying cost in excess of the current value is transferred tocosts subject to amortization.

 

As a result of the change in accounting principle, ouraccumulated deficit as of January 1, 2006 increased from $82,861,220 asoriginally reported using the successful efforts method to $95,164,631 usingthe full cost method.

 

A comparison of the Company’s net income, earnings pershare, oil and gas properties and accumulated deficit under the successfulefforts method and the full cost method as disclosed herein, as follows:

 

**IncomeStatement**

**Threemonths ended March 31, 2008**

 
| ** **                                                             | ** ** | **As computed** | ** ** | **As reported** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|------------|------------|
| ** **                                                             | ** ** | **under**            | ** ** | **under**            | ** ** | **Effect** | ** ** |
| ** **                                                             | ** ** | **Successful**       | ** ** | **Full**             | ** ** | **of**     | ** ** |
| ** **                                                             | ** ** | **Efforts**          | ** ** | **Cost**             | ** ** | **change** | ** ** |
| Revenues                                                               |       |                 |       |                 |       |       |       |
| Oil and gas  sales                                                     |       | $                    | 23,483,693 |                 | $          | 23,483,693 |       | $ | — |   |
| Well services                                                          |       | 160,714              |       | —               |       | (160,714   | )          |
| Interest and  other income                                             |       | 344,774              |       | 344,774              |       | —     |       |
| Net gain on  investments                                               |       | 93,346               |       | 93,346               |       | —     |       |
|                                                                   |       |                 |       |                 |       |       |       |
|                                                                   |       | 24,082,527           |       | 23,921,813           |       | (160,714   | )          |
| Expenses                                                               |       |                 |       |                 |       |       |       |
| Production and  exploration                                            |       | 6,019,566            |       | 5,863,894            |       | (155,672   | )          |
| Well services                                                          |       | 182,125              |       | —               |       | (182,125   | )          |
| Depreciation,  depletion, amortization and impairment                  |       | 5,099,966            |       | 3,913,535            |       | (1,186,431 | )          |
| General and  administrative                                            |       | 3,414,153            |       | 3,312,233            |       | (101,920   | )          |
| Interest                                                               |       | 1,342,221            |       | 1,342,221            |       | —     |       |
|                                                                   |       |                 |       |                 |       |       |       |
|                                                                   |       | 16,058,031           |       | 14,431,883           |       | (1,626,148 | )          |
|                                                                   |       |                 |       |                 |       |       |       |
| Income before  provision for income taxes                              |       | 8,024,496            |       | 9,489,930            |       | 1,465,344  |       |
| Deferred income  tax expense                                           |       | 27,000               |       | 27,000               |       | —     |       |
|                                                                   |       |                 |       |                 |       |       |       |
| Net income                                                             |       | 7,997,496            |       | 9,462,930            |       | 1,465,344  |       |
| Less dividends  and accretion on preferred shares                      |       | 32,892               |       | 32,892               |       | —     |       |
|                                                                   |       |                 |       |                 |       |       |       |
| Net income  applicable to common stockholders                          |       | $                    | 7,964,604  |                 | $          | 9,430,038  |       | $ | 1,465,344 |   |
|                                                                   |       |                 |       |                 |       |       |       |
| Earnings per  share – basic                                       |       | $                    | 0.14       |                 | $          | 0.16       |       | $ | 0.02 |   |
| Earnings per  share – diluted                                     |       | $                    | 0.14       |                 | $          | 0.16       |       | $ | 0.02 |   |
| Depreciation,  depletion, amortization and impairment expense per Mcfe |       | $                    | 2.73       |                 | $          | 2.10       |       | $ | (0.63 | ) |

 

7

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**IncomeStatement**

**Threemonths ended March 31, 2007**

 
| ** **                                                             | ** ** | **As originally**  | ** ** | **As reported** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------|------------|----------------------|------------|------------|------------|
| ** **                                                             | ** ** | **reported under** | ** ** | **under**            | ** ** | **Effect** | ** ** |
| ** **                                                             | ** ** | **Successful**          | ** ** | **Full**             | ** ** | **of**     | ** ** |
| ** **                                                             | ** ** | **Efforts**             | ** ** | **Cost**             | ** ** | **change** | ** ** |
| Revenues                                                               |       |                    |       |                 |       |       |       |
| Oil and gas  sales                                                     |       | $                       | 9,481,685  |                 | $          | 9,481,685  |       | $ | — |   |
| Oil and gas  sales from marketing activities                           |       | 373,755                 |       | —               |       | (373,755   | )          |
| Well services                                                          |       | 304,706                 |       | —               |       | (304,706   | )          |
| Interest and  other income                                             |       | 832,761                 |       | 832,761              |       | —     |       |
| Net gain on  investments                                               |       | 8,081                   |       | 8,081                |       | —     |       |
|                                                                   |       |                    |       |                 |       |       |       |
|                                                                   |       | 11,000,988              |       | 10,322,527           |       | (678,461   | )          |
| Expenses                                                               |       |                    |       |                 |       |       |       |
| Production and  exploration                                            |       | 4,024,622               |       | 4,014,939            |       | (9,683     | )          |
| Turnkey  contracts                                                     |       | 354,355                 |       | —               |       | (354,355   | )          |
| Cost of marketed  oil and gas purchased from affiliated partnerships   |       | 360,970                 |       | —               |       | (360,970   | )          |
| Well services                                                          |       | 359,626                 |       | —               |       | (359,626   | )          |
| Depreciation,  depletion, amortization and impairment                  |       | 2,593,116               |       | 2,008,244            |       | (584,872   | )          |
| General and  administrative                                            |       | 2,667,660               |       | 2,667,660            |       | —     |       |
| Interest                                                               |       | 156,868                 |       | 156,868              |       | —     |       |
|                                                                   |       |                    |       |                 |       |       |       |
|                                                                   |       | 10,517,217              |       | 8,847,711            |       | (1,669,506 | )          |
|                                                                   |       |                    |       |                 |       |       |       |
| Income before  provision for income taxes                              |       | 483,771                 |       | 1,474,816            |       | 991,045    |       |
| Deferred income  tax expense                                           |       | 7,000                   |       | 7,000                |       | —     |       |
|                                                                   |       |                    |       |                 |       |       |       |
| Net income                                                             |       | 476,771                 |       | 1,467,816            |       | 991,045    |       |
| Less dividends  and accretion on preferred shares                      |       | 67,116                  |       | 67,116               |       | —     |       |
|                                                                   |       |                    |       |                 |       |       |       |
| Net income  applicable to common stockholders                          |       | $                       | 409,655    |                 | $          | 1,400,700  |       | $ | 991,045 |   |
|                                                                   |       |                    |       |                 |       |       |       |
| Earnings per  share – basic                                       |       | $                       | 0.01       |                 | $          | 0.03       |       | $ | 0.02 |   |
| Earnings per  share – diluted                                     |       | $                       | 0.01       |                 | $          | 0.03       |       | $ | 0.02 |   |
| Depreciation,  depletion, amortization and impairment expense per Mcfe |       | $                       | 2.19       |                 | $          | 1.70       |       | $ | (0.49 | ) |

 

8

----

 

**BalanceSheet**

**March 31,2008**

 
| ** **                                                                                   | ** ** | **As computed** | ** **  | **As reported** | ** ** | ** **  | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------|-------------|----------------------|------------|-------------|------------|
| ** **                                                                                   | ** ** | **under**            | ** **  | **under**            | ** ** | **Effect**  | ** ** |
| ** **                                                                                   | ** ** | **Successful**       | ** **  | **Full**             | ** ** | **of**      | ** ** |
| ** **                                                                                   | ** ** | **Efforts**          | ** **  | **Cost**             | ** ** | **change**  | ** ** |
|                                                                                         |       |                 |        |                 |       |        |       |
| Total current  assets                                                                        |       | $                    | 40,022,511  |                 | $          | 40,022,511  |       | $ | — |   |
| Oil and gas properties,  at cost net of accumulated depreciation, depletion and amortization |       | 403,543,997          |        | 430,018,555          |       | 26,474,558  |       |
| Property and  equipment                                                                      |       | 2,357,070            |        | 2,357,070            |       | —      |       |
| Other assets                                                                                 |       | 8,292,843            |        | 8,292,843            |       | —      |       |
|                                                                                         |       | 454,216,421          |        | 480,690,979          |       | 26,474,558  |       |
|                                                                                         |       |                 |        |                 |       |        |       |
| Current  liabilities                                                                         |       | 30,488,473           |        | 30,488,473           |       | —      |       |
| Long term  liabilities                                                                       |       | 91,767,209           |        | 91,767,209           |       | —      |       |
| Preferred stock                                                                              |       | 1,576,022            |        | 1,576,022            |       | —      |       |
| Common stock                                                                                 |       | 5,823                |        | 5,823                |       | —      |       |
| Additional paid  in capital                                                                  |       | 425,318,416          |        | 425,318,416          |       | —      |       |
|                                                                                         |       |                 |        |                 |       |        |       |
| Accumulated  deficit                                                                         |       | (94,336,079          | )           | (67,861,521          | )          | 26,474,558  |       |
| Accumulated  other comprehensive income                                                      |       | 124,612              |        | 124,612              |       | —      |       |
| Common stock in  Treasury                                                                    |       | (728,055             | )           | (728,055             | )          | —      |       |
|                                                                                         |       | $                    | 454,216,421 |                 | $          | 480,690,979 |       | $ | 26,474,558 |   |

 

**BalanceSheet**

**December 31,2007**

 
| ** **                                                                                    | ** ** | **As computed** | ** **  | **As reported** | ** ** | ** **  | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------|-------------|----------------------|------------|-------------|------------|
| ** **                                                                                    | ** ** | **under**            | ** **  | **under**            | ** ** | **Effect**  | ** ** |
| ** **                                                                                    | ** ** | **Successful**       | ** **  | **Full**             | ** ** | **of**      | ** ** |
| ** **                                                                                    | ** ** | **Efforts**          | ** **  | **Cost**             | ** ** | **change**  | ** ** |
|                                                                                          |       |                 |        |                 |       |        |       |
| Total current  assets                                                                         |       | $                    | 22,838,056  |                 | $          | 22,838,056  |       | $ | — |   |
| Oil and gas  properties, at cost net of accumulated depreciation, depletion and  amortization |       | 381,054,186          |        | 406,063,309          |       | 25,009,123  |       |
| Property and  equipment                                                                       |       | 2,422,702            |        | 2,422,702            |       | —      |       |
| Other assets                                                                                  |       | 9,181,524            |        | 9,181,524            |       | —      |       |
|                                                                                          |       | 415,496,468          |        | 440,505,591          |       | 25,009,123  |       |
|                                                                                          |       |                 |        |                 |       |        |       |
| Current  liabilities                                                                          |       | 34,951,858           |        | 34,951,857           |       | —      |       |
| Long term  liabilities                                                                        |       | 56,024,883           |        | 56,024,883           |       | —      |       |
| Preferred stock                                                                               |       | 2,688,236            |        | 2,688,236            |       | —      |       |
| Common stock                                                                                  |       | 5,819                |        | 5,819                |       | —      |       |
| Additional paid  in capital                                                                   |       | 424,722,529          |        | 424,722,529          |       | —      |       |
|                                                                                          |       |                 |        |                 |       |        |       |
| Accumulated deficit                                                                           |       | (102,333,575         | )           | (77,324,452          | )          | 25,009,123  |       |
| Accumulated  other comprehensive income                                                       |       | 164,773              |        | 164,773              |       | —      |       |
| Common stock in  Treasury                                                                     |       | (728,055             | )           | (728,055             | )          | —      |       |
|                                                                                          |       | $                    | 415,496,468 |                 | $          | 440,505,591 |       | $ | 25,009,123 |   |

 

9

----

 

##### **NOTE C**—STOCKBASED COMPENSATION

##### ** **

*StockOptions*

 

Compensation expenserelated to stock options and restricted stock awards recognized in operatingresults (general and administrative expenses) under SFAS No. 123R wasapproximately $507,000 and $207,000 for the three months ended March 31,2008 and 2007, respectively.

 

The following assumptions were used to value stock optionscalculated using the Black-Scholes options pricing model:

 
| ** **               | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------|------------|------------------------------------------------------|------------|
| ** **               | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Dividend yield           |       | 0                                                    | %          | 0 | % |
| Expected  volatility     |       | 48.2                                                 | %          | 43.8 | % |
| Risk-free  interest rate |       | 1.97                                                 | %          | 4.48 | % |
| Fair value of  options   |       | $                                                    | 4.15       |   | $ | 3.91 |   |
| Expected life            |       | 3.5 years                                            |       | 3.5 years |   |
|                          |            |                                                      |            |  |  |  |  |

 
| ** **                             | ** ** | ** **          | ** ** | **Weighted** | ** ** | **Weighted**                  | ** ** | ** **               | ** ** |
|----------------------------------------|------------|---------------------|------------|--------------|------------|-------------------------------|------------|--------------------------|------------|
| ** **                             | ** ** | ** **          | ** ** | **Average**  | ** ** | **Average**                   | ** ** | **Aggregate**            | ** ** |
| ** **                             | ** ** | **Number**          | ** ** | **Exercise** | ** ** | **Remaining**                 | ** ** | **Intrinsic Value** | ** ** |
| ** **                             | ** ** | **of Options** | ** ** | **Price**    | ** ** | **Term (in years)** | ** ** | **(in thousands)**  | ** ** |
| Outstanding at  December 31, 2007 |       | 2,775,750           |       | $            | 8.88       |                          |       |                     |       |   |
| Granted                                |       | 425,250             |       | 11.20        |       |                          |       |                     |       |
| Exercised                              |       | (23,000             | )          | 5.30         |       |                          |       |                     |       |
| Forfeited or  expired                  |       | (1,416              | )          | 12.28        |       |                          |       |                     |       |
| Outstanding at  March 31, 2008    |       | 3,176,584           |       | $            | 9.21       |                          | 2.42       |                     | $          | 9,407 |   |
|                                   |       |                |       |         |       |                          |       |                     |       |
| Exercisable at  March 31, 2008    |       | 2,179,661           |       | $            | 8.16       |                          | 1.58       |                     | $          | 8,655 |   |

 

The total intrinsic value of options exercised during thethree months ended March 31, 2008 and 2007 was $0.1 million and $0.2million respectively.

 

As of March 31, 2008, total unrecognized stock-basedcompensation expense related to non-vested stock options was $5.8 million,which we expect to recognize over a weighted average period of 2.3 years.

 

*RestrictedShares*

 

Restricted share activityas of March 31, 2008 was as follows:

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

 

10

----

 

Restricted stock awardsfor executive officers and employees vest ratably over three years. Fair valueof our restricted shares is based on our closing stock price on the date ofgrant. As of March 31, 2008, total unrecognized stock-based compensationexpense related to non-vested restricted shares was $1.6 million, which isexpected to be recognized over a weighted average period of approximately 3years.

 

#### **NOTE D**—CHANGES IN STOCKHOLDERS’ EQUITY

#### ** **

During the three monthsended March 31, 2008, the Company redeemed 92,794 shares of convertiblepreferred stock for a price of $12 per share. As of March 31, 2008,131,576 shares of convertible preferred stock remain outstanding. Preferreddividends of approximately $228,000 were accrued at March 31, 2008.

 

The preferred stock paysan 8% cumulative dividend and is treated as a deduction in additional paid incapital. The holders of the preferred stock are not entitled to vote except asdefined by the agreement or as provided by applicable law. The preferred stock may bevoluntarily converted, at the election of the holder into common stock of theCompany based on a conversion rate of 1share of preferred stock for 0.50 sharesof common stock.

 

Additionally, commencingseven years after the date of issuance (October 1, 2009), holders of thepreferred stock may elect to require the Company to redeem their preferredstock at a redemption price equal to the liquidation value of $12.00 per share,plus accrued but unpaid dividends, if any (“Redemption Price”). Upon thereceipt of a redemption election, the Company, at its option, shall either: (1) paythe holder cash in the amount equal to the Redemption Price or (2) issueto the holder shares of common stock in an amount equal to 125% of theredemption price and any accrued and unpaid dividends, based on the weightedaverage closing “bid” price of the Company’s common stock for the thirtytrading days immediately preceding the date of the written redemption electionby the holder up to a maximum of 1.5 shares of common stock for each one shareof preferred stock redeemed. The Company is accreting the carrying value of itspreferred stock to its redemption price using the effective interest methodwith changes recorded to additional paid in capital. The accretion of preferredstock results in a reduction of earnings per share applicable to commonstockholders.

 

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

 

During the three months ended March 31, 2008, employeesand directors exercised a total of 23,000 options at exercise prices between $4and $7 per share. The Company received proceeds of approximately $0.1 millionfrom these exercises. We issue new shares of common stock to settle optionexercises.

 

**NOTEE—INCOME PER SHARE**

 

Basic income per share iscomputed by dividing net income applicable to common stockholders by theweighted average number of shares of common stock outstanding during theperiod. Diluted income per share is based on the assumption that stock optionsand warrants are converted into common shares using the treasury stock methodand convertible bonds and preferred stock are converted using the if-convertedmethod. Conversion is not assumed if the results are anti-dilutive. Potentialcommon shares for the three months ended March 31, 2008 and March 31,2007 of 180,319 and 207,032 respectively, relating to convertible bonds andpreferred stock, were excluded from the computation of diluted income per sharebecause they are anti-dilutive. Potential common shares of 1,601,576 and2,315,030 respectively, relating to stock options, warrants and restrictedstock were excluded from the computation of diluted income per share for thethree months ended March 31, 2008 and 2007, respectively, because they areanti-dilutive. Stock options have a weighted average exercise price of $9.21and $8.46 at March 31, 2008 and March 31, 2007, respectively. At March 31,2008, the convertible bonds may be converted from the date of issuanceuntil maturity at 100% of principal amount into common stock of the Company ata price of $35 to $50. The preferred stock may be converted at thediscretion of the holder or upon meeting certain conditions at the discretionof the Company (see Note D).

 

11

----

 

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

 
| ** **                                          | ** ** | **Three Months  Ended  March 31, 2008** | ** ** | **Three Months  Ended  March 31, 2007  (Restated)** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
|                                                |       |                                                   |       |                                                               |       |
| Net income  available to shareholders               |       | $                                                      | 9,430,038  |                                                               | $          | 1,400,700 |   |
|                                                |       |                                                   |       |                                                               |       |
| Weighted average  shares outstanding - basic        |       | 57,582,536                                             |       | 53,519,642                                                         |       |
| Effect of  dilutive securities – stock options |       | 762,014                                                |       | 781,142                                                            |       |
| Effect of  dilutive securities – warrants      |       | 300,066                                                |       | 166,056                                                            |       |
|                                                |       |                                                   |       |                                                               |       |
| Weighted average  shares outstanding - diluted      |       | 58,644,616                                             |       | 54,466,840                                                         |       |
|                                                |       |                                                   |       |                                                               |       |
| Basic net income  per share                         |       | $                                                      | 0.16       |                                                               | $          | 0.03 |   |
| Diluted net  income per share                       |       | $                                                      | 0.16       |                                                               | $          | 0.03 |   |

 

**NOTEF—LONG-TERM LIABILITIES**

 

Long-term liabilities consisted of the following for thebalance sheets dated:

 
| ** **                             | ** ** | **March 31, 2008** | ** ** | **December 31,  2007** | ** ** |
|----------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                   |       |                         |       |                        |       |
| Line of Credit                         |       | $                            | 82,400,000 |                        | $          | 46,152,498 |   |
| Debentures                             |       | 1,706,000                    |       | 2,481,000                   |       |
| Debt  collateralized by treasury stock |       | 569,444                      |       | 594,786                     |       |
| Asset retirement  obligations          |       | 5,803,662                    |       | 5,581,481                   |       |
| Litigation  provision                  |       | 1,823,156                    |       | 1,823,156                   |       |
|                                   |       |                         |       |                        |       |
|                                   |       | 92,302,262                   |       | 56,632,921                  |       |
| Less current  portion                  |       | 535,053                      |       | 608,038                     |       |
|                                   |       |                         |       |                        |       |
| Long-term  portion                     |       | $                            | 91,767,209 |                        | $          | 56,024,883 |   |

#### ** **

On November 19, 2007, the Company entered into a fiveyear, $250 million credit agreement with Merrill Lynch Capital (now owned by GECapital Corporation). The Credit Facility provides for a revolving credit lineup to the lesser of (i) the borrowing base, (ii) $250 million or (iii) thedraw limit requested by the Company. The Credit Facility matures on November 19,2012. It is secured by substantially all of our assets. The borrowing base willbe determined by the lenders at least semi-annually on each April 1 and October 1and is based in part on the proved reserves of the Company. The currentborrowing base is $120 million with an over-advance of $15 million,representing an immediate availability of $135 million. Interest payments aremade quarterly in arrears. During the first quarter of 2008 the Company drewdown approximately $36 million under this facility. As of March 31, 2008,credit line interest of approximately $565,000 was accrued.

 

The Company is subject tocertain covenants under the terms of the Credit Facility which include, but arenot limited to the maintenance of the following financial ratios (1) minimumcurrent ratio (including unused borrowing base in current assets) of 1.0 to 1.0and (2) a minimum annualized consolidated EBITDAX (as defined by theCredit Facility) to net interest expense to of 2.5 to 1.0. As of March 31,2008, the Company has borrowed $82.4 million under the Credit Facility and wasin compliance with all covenants.

 

12

----

 

Depending on the currentlevel of borrowing base usage, the annual interest rate on each base rateborrowing under the Credit Facility will be at our option either: (a) thehigher of (i) the Agent’s prime rate of interest announced from time totime, or (ii) the Federal Funds rate most recently determined by theAgent, plus 0.5% per annum, plus an applicable margin that ranges from 0.25% to1.0%, or (b) Eurodollar Loan rate plus an applicable margin that rangesfrom 1.25% to 2.0%. Credit line interest of approximately $0.6 million wasaccrued for as of March 31, 2008.

 

The convertible bonds may be converted from the date ofissuance until maturity at 100% of principal amount into common stock of theCompany at prices ranging from $35 to $50. Each year the holders of theconvertible bonds may tender to the Company up to 10% of the aggregatebonds issued and outstanding. During the three months ended March 31,2008, the Company offered bond holders a premium of 33% to tender their bonds.This offer resulted in the redemption of bonds having a face value of $775,000.The early redemption resulting from this redemption was $256,000 and isreflected in interest expense.

 

#### **NOTE G—CONTINGENCIES**

#### ** **

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

 

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

 

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

 

In2005, Warren recorded a provision for $1,800,000 relating to a contingentliability that it may face as a result of a lawsuit originally filed in1998 by Gotham Insurance Company in the 81st Judicial District Court ofFrio County, Texas seeking a refund of approximately $1.8 million paid byGotham and other insurers for a well blow-out policy that occurred in 1997.After several appeals to the Texas Court of Appeals and the Texas SupremeCourt, the case has been remanded to the trial court for further proceedingswhich are expected to occur in 2008.

 

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

 

For partnerships formedfrom 1999 to 2001, investor partners previously had a right to have theirinterests repurchased by the Company at a formula price seven years from thedate of the original partnership formation. During the second quarter of 2007,Warren acquired the respective oil and gas assets of all of the partnershipsformed from 2000 to 2003. The acquisitions were accounted for as the purchaseof a business. The Company accounted for the transaction using the non-discountedclosing price of its publicly traded common stock based upon the averageclosing price as defined in the referenced acquisition agreements. Asconsideration for the oil and gas

 

13

----

 

properties acquired, Warrenissued an aggregate of 3,365,231 shares of our unregistered restricted commonstock to the five separate partnerships. The restricted shares of Common Stockwere valued based upon a 20% discount from the weighted average sales price forWarren’s publicly traded Common Stock for the sixty-one (61) calendar daysended May 31, 2007. During that period, the weighted average sales pricewas $13.50 per share, and the 20% discounted price was $10.80 per share. Theeffective date of those acquisitions was April 1, 2007 and their closingdate was June 20, 2007. The reserves attributable to the oil and gasproperties of the five drilling partnerships are approximately 9.9 Bcfe ofproved developed producing reserves. Warren also attributed an estimated fairmarket value for related water injection wells and unproved dewatering wellsthat were in the partnerships. In accordance with their five respectivepartnership agreements, the sale of substantially all of the oil and gasproperties by the five partnerships formed from 2000 to 2003 terminated anyrepurchase rights that their investor partners previously held.

 

Also, during the secondquarter of 2007, Warren acquired the respective oil and gas assets of the twopartnerships formed in 1999. The acquisitions are accounted for as the purchaseof a business. The Company accounted for the transaction using thenon-discounted closing price of its publicly traded common stock based upon theaverage closing price as defined in the referenced acquisition agreements. Asconsideration, Warren paid an aggregate of $1.6 million in cash and the balanceby issuing 447,031 shares of our unregistered restricted common stock to thetwo separate partnerships. The restricted shares of Common Stock were valuedbased upon a 20% discount from the weighted average sales price for Warren’spublicly traded Common Stock for the period January 1, 2007 through March 31,2007. During that period, the weighted average sales price was $11.22 pershare, and the 20% discounted price was $8.98 per share. The effective date ofthose two acquisitions was April 1, 2007 and their closing date was June 30,2007. In accordance with their respective partnership agreements, the sale ofsubstantially all of the oil and gas properties by the two partnerships formedin 1999 terminated any repurchase rights that their investor partnerspreviously held.

 
| CALCULATION OF  PURCHASE PRICE (IN MILLIONS) |   |   |   |
|----------------------------------------------|--------|--------|--------|
|                                         |   |   |   |
| Cash paid                                    |   | $      | 1.6    |   |
| Common stock  issued                         |   | 51.3   |   |
| Current  liabilities assumed:                |   | 0.3    |   |
| Total purchase  price for assets acquired    |   | $      | 53.2   |   |
|                                         |   |   |   |
| ALLOCATION OF  PURCHASE PRICE (IN MILLIONS)  |   |   |   |
| Proved oil and  gas properties               |   | $      | 38.2   |   |
| Unproved oil and  gas properties             |   | 15.0   |   |
|                                         |   |   |   |
| Total                                        |   | $      | 53.2   |   |

 

Thefollowing summary presents unaudited pro forma consolidated results ofoperations for the three months ended March 31, 2007, as if theacquisition of the drilling partnerships had occurred as of January 1,2007. The pro forma results are for illustrative purposes only and includeadjustments in addition to the pre-acquisition historical results, such asincreased depreciation, depletion and amortization expense resulting from theallocation of fair value to oil and gas properties acquired. The unaudited proforma information (presented in millions of dollars, except per share amounts)is not necessarily indicative of the operating results that would have occurredhad the acquisition been consummated at that date, nor is it necessarilyindicative of future operating results.

 

14

----

 
| **Pro Forma:**  | ** ** | **Three Months Ended  March 31, 2007** | ** ** |
|----------------------|------------|-------------------------------------------------------|------------|
| Revenues             |       | $                                                     | 12.1       |   |
| Net income           |       | 2.1                                                   |       |
| Earnings per  share: |       |                                                  |       |
| Basic—          |       | $                                                     | 0.04       |   |
| Diluted—        |       | $                                                     | 0.04       |   |

 

**NOTEH—BUSINESS SEGMENT INFORMATION**

 

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

 

**NOTE I—COMPREHENSIVEINCOME**

 

Other comprehensiveincome consists primarily of net unrealized investment gains and losses, net ofincome tax effect. Total comprehensive income for the periods is as follow:

 
| ** **                          | ** ** | **2008**   | ** ** | **2007**       | ** ** |
|-------------------------------------|------------|------------|------------|----------------|------------|
| ** **                          | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
|                                |       |       |       |           |       |
| Three Months  ending March 31, |       | $          | 9,422,769  |           | $          | 1,457,338 |   |
|                                     |            |            |            |                |            |  |  |

** **

**NOTE J –RECENTLY ISSUE ACCOUNTING STANDARDS**

 

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

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities—Including an amendment of FASB Statement No. 115.”This Statement permits the election to carry financial instruments and certainother items similar to financial instruments at fair value on the balancesheet, with all changes in fair value reported in earnings. By electing thefair value option in conjunction with a derivative, an entity can achieve anaccounting result similar to a fair value hedge without having to comply withcomplex hedge accounting rules. We adopted this Statement effective January 1,2008. During the first quarter of 2008, we did not make the fair value electionfor any financial instruments not already carried at fair value in accordancewith other accounting standards, so the adoption of SFAS No. 159 did notimpact our consolidated financial statements.

 

15

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

*** ***

**FORWARD-LOOKINGINFORMATION**

** **

*TheCompany has made in this report, and may from time to time otherwise make inother public filings, press releases and discussions with Company management,forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of1934 concerning the Company’s operations, economic performance and financialcondition. These forward-looking statements include information concerningfuture production and reserves, schedules, plans, timing of development,contributions from oil and gas properties, and those statements preceded by,followed by or that otherwise include the words “believes,” “expects,” “anticipates,”“intends,” “estimates,” “projects,” “target,” “goal,” “plans,” “objective,” “should”or similar expressions or variations on such expressions. For such statements,the Company claims the protection of the safe harbor for forward-lookingstatements contained in the Private Securities Litigation Reform Act of 1995.Although the Company believes that the expectations reflected in suchforward-looking statements are reasonable, it can give no assurance that such expectationswill prove to have been correct. Important factors that could cause actualresults to differ materially from the Company’s expectations include, but arenot limited to, the Company’s assumptions about energy markets, productionlevels, reserve levels, operating results, competitive conditions, technology,the availability of capital resources, capital expenditures and othercontractual obligations, the supply and demand for and the price of oil,natural gas and other products or services, the weather, inflation, theavailability of goods and services, drilling risks, future processing volumesand pipeline throughput, general economic conditions, either internationally ornationally or in the jurisdictions in which the Company or its subsidiaries aredoing business, legislative or regulatory changes, including changes inenvironmental regulation, environmental risks and liability under federal,state and foreign environmental laws and regulations, potential environmentalobligations, the securities or capital markets, our ability to repay debt andother factors discussed in “Risk Factors” and in “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” included in theCompany’s 2007 Annual Report on Form 10-K, this Form 10-Q and in theCompany’s other public filings, press releases and discussions with Companymanagement. Warren undertakes no obligation to publicly update or revise any forward-looking statements.*

* *

**Overview**

** **

We are a growingindependent energy company engaged in the exploration and development ofdomestic onshore oil and natural gas reserves. We focus our efforts primarilyon our waterflood oil recovery programs and horizontal drilling in theWilmington field within the Los Angeles Basin of California and on theexploration and development of coalbed methane (“CBM”) properties located inthe Rocky Mountain region. As of March 31, 2008, we owned natural gas andoil leasehold interests in approximately 230,000 gross, 130,000 net acres, 90%of which are undeveloped. Substantially all our undeveloped acreage is locatedin the Rocky Mountains. Our total net proved reserves are located on less than10% of our net acreage.

 

**Liquidityand Capital Resources**

** **

Our cashand cash equivalents increased $14.5 million during the first three months of2008. This resulted from cash provided by financing activities of $33.9 millionand cash provided by operating activities of $9.9 million.  This was partially offset by cash used ininvesting activities of $29.3 million.

 

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

 

On November 19,2007, Warren entered into a five year, $250 million credit agreement withMerrill Lynch Capital (now owned by GE Capital Corporation) on behalf of asyndicate of five participating banks (the “Credit Facility”).   The Credit Facility provides for a revolvingcredit facility up to the lesser of (i) the borrowing base (ii) $250million or (iii) the draw limit requested by the Company.  The Credit Facility matures on November 19,2012.  It is secured by substantially allof our assets.  The borrowing base willbe determined by the lenders at least semi-annually on each April 1 and October 1,and is based in part on the proved reserves of the Company. Interest paymentsare made 

 

16

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quarterly inarrears.  The current borrowing base is$120 million with an overadvance of $15 million, representing an immediateavailability of $135 million. The Company is subject to certain covenants underthe terms of the Credit Facility which include, but are not limited to themaintenance of the following financial ratios (1) minimum current ratio(including unused borrowing base in current assets) of 1.0 to 1.0 and (2) aminimum annualized consolidated EBITDAX (as defined by the Credit Facility) tonet interest expense to of 2.5 to 1.0. As of March 31, 2008, the Company has borrowed $82.4 million underthe Credit Facility and was in compliance with all covenants.

 

Depending on the currentlevel of borrowing base usage, the annual interest rate on each base rateborrowing under the Credit Facility will be at our option either: (a) thehigher of (i) the Agent’s prime rate of interest announced from time totime, or (ii) the Federal Funds rate most recently determined by theAgent, plus 0.5% per annum, plus an applicable margin that ranges from 0.25% to1.0%, or (b) Eurodollar Loan rate plus an applicable margin that rangesfrom 1.25% to 2.0%. Credit line interest of approximately $0.6 million wasaccrued for as of March 31, 2008.

 

During the first threemonths of 2008, the Company had net income of $9.4 million as compared to netincome of $1.4 million for the first three months of 2007.  At March 31, 2008, current assetsexceeded current liabilities by approximately $9.5 million.

 

At March 31, 2008,we had approximately 2.2 million vested outstanding stock options issued underour stock based equity compensation plans. Of the total 2.2 million outstandingvested options, 0.3 million options had exercise prices above the closingmarket price $11.87 of our common stock on March 31, 2008. If the optionswith exercise prices below the closing market price on March 31, 2008 areexercised by the holders, we would receive $13.8 million in cash.

 

*Contractual Obligations*

* *

The contractualobligations table below assumes the maximum amount is tendered each year. Thetable does not give effect to the conversion of any bonds to common stock whichwould reduce payments due. All bonds are secured at maturity by zero couponU.S. treasury bonds deposited into an escrow account equaling the parvalue of the bonds maturing on or before the maturity of the bonds. Such U.S.treasury bonds had a fair market value of $0.9 million at March 31,2008.  The table below does not reflectthe release of escrowed U.S. treasury bonds to us upon redemption.

 
| ** **                                                                       | ** ** | **Payments due by period** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations  As of  March 31, 2008** | ** ** | **Total**                                 | ** ** | **Less Than  1 Year** | ** ** | **1-3  Years** | ** ** | **3-5  Years** | ** ** | **More Than  5 Years** | ** ** |
|                                                                             |       |                                      |       |   |   |   |   |   |   |   |   |
| Line of credit                                                                   |       | $                                         | 82,400,000 |   | — |   | — |   | $ | 82,400,000 |   | — |   |
| Bonds                                                                            |       | 1,706,000                                 |       | 170,600 |   | 291,726 |   | 236,298 |   | 1,007,376 |   |
| Drilling  commitments                                                            |       | 1,294,050                                 |       | 1,294,050 |   | — |   | — |   | — |   |
| Leases                                                                           |       | 3,590,993                                 |       | 485,827 |   | 1,288,924 |   | 1,241,618 |   | 574,624 |   |
| Total                                                                            |       | $                                         | 88,991,043 |   | $ | 1,950,477 |   | $ | 1,580,650 |   | $ | 83,877,916 |   | $ | 1,582,000 |   |
|                                                                                  |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

17

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**RESULTS OF OPERATIONS:**

** **

**Three months Ended March 31, 2008 Compared toThree Months Ended March 31, 2007**

** **

*Oil and gas sales.*Revenue from oil and gas sales increased $14.0 million in the first quarter of2008 to $23.5 million, a 148% increase compared to the same quarter in2007.  This increase resulted fromsignificantly increasing our drilling activity in the Wilmington Townlot Unit (“WTU”)in southern California.  Net oilproduction for the three months ended March 31, 2008 and 2007 was 243Mbbls and 161 Mbbls, respectively.  Netgas production for the three months ended March 31, 2008 and 2007 was 405Mmcf and 216 Mmcf, respectively.  Theaverage realized price per barrel of oil for the three months ended March 31,2008 and 2007 was $85.17 and $50.51, respectively.  Additionally, the average realized price perMcf of gas for the three months ended March 31, 2008 and 2007 was $6.80and $6.15, respectively.

 

*Production &exploration.* Production and exploration expense increased$1.8 million in the first quarter of 2008 to $5.9 million, a 46% increasecompared to the same quarter in 2007. Primarily, this increase resulted from an increase in oilproduction.  Total production increasedto 1.9 Bcfe for the first quarter of 2008 compared to 1.2 Bcfe for the firstquarter of 2007, an increase of 58%.

 

*Interest and other income.*Interest and other income decreased $0.5 million in the first quarter of 2008to $0.3 million, a 59% decrease compared to the same quarter in 2007. Thisrepresents a decrease in interest earned due to lower cash and cash equivalentsbalances and lower interest rates during the quarter as compared to thecorresponding quarter last year.

 

*Depreciation, depletion andamortization .*Depreciation, depletion and amortizationexpense increased $1.9 million for the first quarter of 2008 to $3.9 million, a95% increase compared to the corresponding quarter last year. This increaseresults from increased production and increased capitalized costs during thefirst quarter of 2008 compared to the corresponding period of 2007.  Production increased 58% during this period.

 

*General and administrative expenses.*General and administrative expenses increased $0.6 million in the first quarterof 2008 to $3.3 million, a 24% increase compared to the corresponding quarterlast year.  This reflects an increase inpersonnel as a result of increased drilling activities.  Also, this reflects an increase in stockoption expense of $0.3 million.

 

*Interest expense.*Interest expense increased $1.2 million in the first quarter of 2008 to $1.3million compared to the same quarter last year. The increase results from interest expense relating to the drawdownunder our Credit Facility.

 

**CRITICAL ACCOUNTING POLICIES**

** **

Our discussion andanalysis of our financial condition and results of operations are based onconsolidated financial statements that have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses. Webelieve that certain accounting policies affect our more significant judgmentsand estimates used in the preparation of our consolidated financial statements.Our 2007 Form 10-K includes a discussion of our critical accountingpolicies.

 

*Change inAccounting Principle*

* *

In the second quarter of2007, we converted from the successful efforts method of accounting for our oiland gas properties to the full cost method. We believe that the full costmethod is preferable for our company as we devote a significant portion of ourtime and capital budget to exploration activities.

 

Under full cost rules,all costs associated with property acquisition, exploration and developmentactivities are capitalized. Exploration and development costs include dry holecosts, geological and geophysical costs, direct overhead related to explorationand development activities and other costs incurred for the purpose of findingoil and gas reserves. Proceeds received from disposals are credited againstaccumulated cost except when the sale represents a significant disposal ofreserves, in which case a gain or loss is recognized. The sum of netcapitalized costs and 

 

18

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estimated futuredevelopment and dismantlement costs are depleted on the equivalentunit-of-production method, based on proved oil and gas reserves as determinedby independent petroleum engineers.

 

In accordance withfull cost accounting rules, we will be subject to a limitation on capitalizedcosts. The capitalized cost of oil and gas properties, net of accumulateddepreciation, depletion and amortization, may not exceed the estimated futurenet cash flows from proved oil and gas reserves discounted at 10 percent,plus the lower of cost or fair market value of unproved properties as adjustedfor related tax effects. If capitalized costs exceed this limit (the “ceilinglimitation”), the excess must be charged to expense. For the three months endedMarch 31, 2008 and 2007, the Company did not have any charges associatedwith its ceiling test.

 

The costs ofcertain unevaluated oil and gas properties and exploratory wells being drilledare not included in the costs subject to amortization. We will assesses costsnot being amortized for possible impairments or reductions in value and if areduction in value has occurred, the portion of the carrying cost in excess ofthe current value is transferred to costs subject to amortization.

 

Certainreclassifications have been made to the prior period’s financial statements toconform to the full cost presentation.

 

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

** **

***Energy PriceRisk***

 

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

 

***Commodity Risk***

*** ***

 In 2007 we enteredinto a financial derivative put contract to hedge our exposure to commodityprice risk associated with anticipated future crude oil production. Currently,we have used floor price put agreements to hedge approximately 700 barrels perday of crude oil. We believe we will have more predictability of our crude oilrevenues as a result of these financial derivative contracts.

 

 The following tablesummarizes our open financial derivative positions as of March 31, 2008related to natural gas and crude oil production.

 
| **Product** | ** ** | **Type** | ** ** | **Remaining  Contract Period** | ** ** | **Volume** | ** ** | **Price per  Mcf or Bbl** | ** **  | **Fair Value** | ** **   |
|-------------|------------|----------|------------|-------------------------------------|------------|------------|------------|------------------------------------------|-------------|---------------------|--------------|
| Oil         |       | Put      |       | March 2008-Dec 2008       |       | 700 Bbld   |       | $                                        |  70.00 |                |         |   |
|        |       |     |       |                                |       |       |       |                                     |        |                |         |
| Total       |       |     |       |                                |       |       |       |                                     |        | $                   |  68,472 |   |
|             |            |          |            |                                     |            |            |            |                                          |             |                     |              |  |  |

 

The Company has notelected to designate the aforementioned derivative as a hedge. The change infair value resulted in approximately $70,000 of net losses recorded to oil andgas revenue for the three months ended March 31, 2008. Our remaininganticipated production for 2008 and beyond is subject to commodity pricefluctuations.

 

***Interest Rate Risk***

*** ***

**We have exposure to changes in interest rates from ourfloating rate debt under our Credit Facility with GE Capital Corporation. Allof our convertible debt has fixed interest rates, so consequently we are notexposed to cash flow risk from market interest rate changes on this convertibledebt. We also hold investments in U.S. treasury bonds available for sale, whichrepresents securities held in escrow accounts on behalf of purchasers ofcertain bonds.  Additionally, we may holdU.S. treasury bonds trading securities, which predominantly represent U.S.treasury bonds released from escrow accounts. The fair market value of these securities will generally increase if thefederal discount rate decreases and decrease if the federal discount rateincreases.**

 

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***Financial Instruments***

*** ***

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

 

***Inflation and Changes in Prices***

*** ***

The general level ofinflation affects our costs. Salaries and other general and administrativeexpenses are impacted by inflationary trends and the supply and demand ofqualified professionals and professional services. Inflation and pricefluctuations affect the costs associated with exploring for and producingnatural gas and oil, which have a material impact on our financial performance.

 

***Forward-LookingStatements and Risk***

*** ***

Certain statements inthis report, including statements of the future plans, objectives, and expectedperformance of the company, are forward-looking statements that are dependentupon certain events, risks and uncertainties that may be outside the company’scontrol, and which could cause actual results to differ materially from thoseanticipated. Some of these include, but are not limited to, the market pricesof oil and gas, economic and competitive conditions, exploration risks such asdrilling unsuccessful wells, higher-than-expected costs, potential liabilityfor remedial actions under existing or future environmental regulations andlitigation, potential liability resulting from pending or futurelitigation,  environmental and regulatoryuncertainties that could delay or prevent drilling, and not successfullycompleting, or any material delay of, any development of new or existingfields, expansion, or capital expenditure, legislative and regulatory changes,financial market conditions, political and economic uncertainties of foreigngovernments, future business decisions, and other uncertainties, all of whichare difficult to predict. Forward-looking statements are generally accompaniedby words such as “estimate”, “project”, “predict”, “will”, “anticipate”, “plan”,“intend”, “believe”, “expect” or similar expressions that convey theuncertainty of future events or outcomes. You should not place undue relianceon these forward-looking statements, which speak only as of the date of thisreport. Unless legally required, Warren does not undertake any obligation toupdate any forward-looking statements, as a result of new information, futureevents or otherwise. Certain risks that may affect Warren’s results ofoperations and financial position appear in Part 1, Item 1A “Risk Factors”of Warren’s 2007 Annual Report on Form 10-K.

 

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

 

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

#### *** ***

***Evaluation ofDisclosure Controls and Procedures***

*** ***

Our management,under the supervision and with the participation of our Chief Executive Officer(“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness ofour disclosure controls and procedures as defined in Securities and ExchangeCommission (“SEC”) Rule 13a-15(e) and 15d-15(e) as of the end ofthe period covered by this report.  Basedupon that evaluation, management  hasconcluded that our  disclosure  controls and  procedures  are effective to ensure  thatinformation  we are required to disclosein reports that we file or submit under the Securities Exchange Act iscommunicated to management, including the CEO and CFO, as appropriate to allowtimely decisions  regarding requireddisclosure and is  recorded,  processed, summarized  and  reported within the time periods specified in the SEC’s rules and forms.

 

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

*** ***

There have been nochanges in our internal controls over financial reporting or in other factorsthat have materially affected, or are reasonably likely to materially affect,the Company’s internal control over financial reporting.

 

## **PART II—OTHERINFORMATION**

## ** **

**Item 1. *Legal Proceedings***

*** ***

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

 

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

 

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

 

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

 

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

*** ***

Our business has manyrisks. Factors that could materially adversely affect our business, financialcondition, operating results or liquidity and the trading price of our commonstock are described under “Risk Factors” in Item 1A of our annual reporton Form 10-K for the year ended December 31, 2007. This informationshould be considered carefully, together with other information in this report,our press releases and other reports and materials we file with the Securitiesand Exchange Commission. Additional risks and uncertainties not currently knownto us or that we currently deem to be immaterial also may materially adverselyaffect our business, financial condition and/or operating results.

 

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

** **

a.     Not applicable

 

b.     Not applicable

 

c.     Not applicable

 

21

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

 

Notapplicable.

 

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

 

Not applicable

 

**Item 5. *Other Information***

 

Not applicable.

 

**Item 6. *Exhibits***

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

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

 

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

** **

**SIGNATURES**

** **

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

 
|                   | WARREN RESOURCES, INC.   (Registrant) |
|------------------------|---------------------------------------|
|                   |                                  |   |
| Date: May 7, 2008 |                                  | /s/ Timothy A. Larkin |
|                   | By:                                   | Timothy A. Larkin *Executive Vice President,   Chief Financial Officer and   Principal Accounting Officer* |

 

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