**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

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

 

**WARREN RESOURCES, INC.**

(Exact Name of Registrant as Specified in itsCharter.)

 

| **Delaware**                                                    |   | **11-3024080**                           |
|-----------------------------------------------------------------|--------|------------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification Number) |
|                                                            |   |                                     |
| **489 Fifth Avenue, New York,  New York**                       |   | **10017**                                |
| (Address of Principal Executive Offices)                        |   | (Zip Code)                               |
|                                                            |   |                                     |
| Registrant’s telephone number, including  area code:       |
|                                                            |
| **(212) 697-9660**                                              |

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 and 15 (d) of the Securities Exchange Act of1934 during the preceding 12 months and (2) has been subject to such filingrequirements for the past 90 days.

Yes  ýNo  o

 

The aggregate number ofRegistrant’s outstanding shares on August 13, 2003 was 17,569,320 sharesof Common Stock, $0.0001 par value.

 

 

----

 

**WARRENRESOURCES, INC.**

 

**INDEX**

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

 

2

----

 

**PART I—FINANCIALINFORMATION**

 

###### **ITEM I—FINANCIAL STATEMENTS**

** **

**Warren Resources, Inc. and Subsidiaries**

**CONSOLIDATEDBALANCE SHEETS**

 
|                                                                                                                                                                                                                                              |   | **June 30,  2003** |            | **December 31,  2002** |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|-----------------|-----------------------------|------------|
|                                                                                                                                                                                                                                              |   | **(Unaudited)**         |            |                        | ** ** |
| **ASSETS**                                                                                                                                                                                                                                        |   |                    |            |                        |       |
| CURRENT ASSETS                                                                                                                                                                                                                                    |   |                    |            |                        |       |
| Cash and cash equivalents                                                                                                                                                                                                                         |   | $                       | 21,028,790      |                        | $          | 23,184,936 |   |
| Accounts receivable – trade                                                                                                                                                                                                                  |   | 2,354,692               |            | 6,895,483                   |       |
| Accounts receivable from affiliated  partnerships                                                                                                                                                                                                 |   | 362,610                 |            | 921,252                     |       |
| Trading securities                                                                                                                                                                                                                                |   | 638,462                 |            | 78,383                      |       |
| Restricted investments in U.S. Treasury  Bonds—available-for-sale, at fair value (amortized cost of $1,014,114 in 2003  and $683,513 in 2002)                                                                                                |   | 1,192,361               |            | 810,822                     |       |
| Other current assets                                                                                                                                                                                                                              |   | 1,577,055               |            | 2,053,248                   |       |
|                                                                                                                                                                                                                                              |   |                    |            |                        |       |
| Total current assets                                                                                                                                                                                                                              |   | 27,153,970              |            | 33,944,124                  |       |
|                                                                                                                                                                                                                                              |   |                    |            |                        |       |
| OTHER ASSETS                                                                                                                                                                                                                                      |   |                    |            |                        |       |
| Oil and gas properties—at cost, based on  successful efforts method of accounting, net of accumulated depletion and  amortization                                                                                                            |   | 80,989,313              |            | 48,684,362                  |       |
| Property and equipment—at cost, net                                                                                                                                                                                                          |   | 639,605                 |            | 751,479                     |       |
| Restricted investments in U.S. Treasury  Bonds-available for sale, at fair value (amortized cost of $10,101,043 in  2003 and $7,571,860 in 2002)                                                                                                  |   | 12,022,151              |            | 9,058,851                   |       |
| Deferred bond offering costs (net of  accumulated amortization of $3,459,484 in 2003 and $3,051,046 in 2002)                                                                                                                                      |   | 2,981,584               |            | 3,390,022                   |       |
| Goodwill                                                                                                                                                                                                                                          |   | 3,430,246               |            | 3,430,246                   |       |
| Other assets                                                                                                                                                                                                                                      |   | 6,088,791               |            | 5,365,435                   |       |
| Restricted Cash                                                                                                                                                                                                                                   |   | —                  |            | 3,637,775                   |       |
|                                                                                                                                                                                                                                              |   |                    |            |                        |       |
| Total other assets                                                                                                                                                                                                                                |   | 106,151,690             |            | 74,318,170                  |       |
|                                                                                                                                                                                                                                              |   |                    |            |                        |       |
|                                                                                                                                                                                                                                              |   | **$**                   | **133,305,660** |                        | **$**      | **108,262,294** |   |
|                                                                                                                                                                                                                                              |   |                    |            |                        |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                                     |   |                    |            |                        |       |
|                                                                                                                                                                                                                                              |   |                    |            |                        |       |
| CURRENT LIABILITIES                                                                                                                                                                                                                               |   |                    |            |                        |       |
| Current maturities of debentures                                                                                                                                                                                                                  |   | $                       | 5,042,970       |                        | $          | 5,466,970 |   |
| Current maturities of other long-term  liabilities                                                                                                                                                                                                |   | 268,816                 |            | 178,980                     |       |
| Accounts payable and accrued expenses                                                                                                                                                                                                             |   | 4,201,510               |            | 3,822,809                   |       |
| Deferred income—turnkey drilling contracts  with affiliated partnerships                                                                                                                                                                     |   | 30,474,553              |            | 32,265,725                  |       |
|                                                                                                                                                                                                                                              |   |                    |            |                        |       |
| Total current liabilities                                                                                                                                                                                                                         |   | 39,987,849              |            | 41,734,484                  |       |
|                                                                                                                                                                                                                                              |   |                    |            |                        |       |
| LONG-TERM LIABILITIES                                                                                                                                                                                                                             |   |                    |            |                        |       |
| Debentures, less current portion                                                                                                                                                                                                                  |   | 45,386,730              |            | 49,202,730                  |       |
| Other long-term liabilities, less current  portion                                                                                                                                                                                                |   | 1,760,873               |            | 1,353,129                   |       |
|                                                                                                                                                                                                                                              |   |                    |            |                        |       |
|                                                                                                                                                                                                                                              |   | 47,147,603              |            | 50,555,859                  |       |
|                                                                                                                                                                                                                                              |   |                    |            |                        |       |
| MINORITY INTEREST                                                                                                                                                                                                                                 |   | 13,730,657              |            | 8,970,078                   |       |
|                                                                                                                                                                                                                                              |   |                    |            |                        |       |
| STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                         |   |                    |            |                        |       |
| 8% convertible  preferred stock, par value $.00001; authorized 20,000,000 shares, issued and  outstanding, 4,167,602 shares in 2003 and 1,784,197 shares in 2002  (aggregate liquidation preference  $50,011,224 in 2003 and $21,410,364 in 2002) |   | 49,116,502              |            | 20,955,838                  |       |
| Common Stock - $.0001 par value;  authorized, 100,000,000 shares; issued 17,569,320 in 2003 and 17,581,996  shares in 2002)                                                                                                                       |   | 1,757                   |            | 1,758                       |       |
| Additional paid-in-capital                                                                                                                                                                                                                        |   | 50,645,576              |            | 52,424,147                  |       |
| Accumulated deficit                                                                                                                                                                                                                               |   | (67,777,899             | )               | (66,529,795                 | )          |
| Accumulated other comprehensive income, net  of applicable income taxes of $840,000 in 2003 and $646,000 in 2002                                                                                                                                  |   | 1,262,564               |            | 971,508                     |       |
|                                                                                                                                                                                                                                              |   | 33,248,500              |            | 7,823,456                   |       |
| Less common stock in Treasury—at cost;  702,500 shares in 2003 and 707,691 shares in 2002                                                                                                                                                    |   | 808,949                 |            | 821,583                     |       |
| Total shareholders’ equity                                                                                                                                                                                                                   |   | 32,439,551              |            | 7,001,873                   |       |
|                                                                                                                                                                                                                                              |   | **$**                   | **133,305,660** |                        | **$**      | **108,262,294** |   |

 

The accompanying notes are an integral partof these financial statements

 

3

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**WarrenResources, Inc. and Subsidiaries**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

 
|                                                                           |   | **Three  Months Ended  June 30, (Unaudited)** |         | **Six Months  Ended  June 30, (Unaudited)** |       |
|--------------------------------------------------------------------------------|--------|----------------------------------------------------|--------------|--------------------------------------------------|------------|
|                                                                           |   | **2003**                                           |         | **2002**                                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| **REVENUES**                                                                   |   |                                               |         |                                             |       |   |   |   |   |
| Turnkey contracts with affiliated  partnerships                                |   | $                                                  | 1,013,475    |                                             | $          | 2,630,033 |   | $ | 1,876,672 |   | $ | 6,373,982 |   |
| Oil and gas sales from marketing activities                                    |   | 1,379,633                                          |         | 3,909,082                                        |       | 2,789,524 |   | 6,786,693 |   |
| Well services                                                                  |   | 258,693                                            |         | 412,989                                          |       | 501,420 |   | 1,132,803 |   |
| Oil and gas sales                                                              |   | 1,297,482                                          |         | 130,256                                          |       | 2,832,493 |   | 198,091 |   |
| Net gain on investments                                                        |   | 52,786                                             |         | 125,847                                          |       | 126,330 |   | 263,179 |   |
| Interest and other income                                                      |   | 438,934                                            |         | 344,873                                          |       | 752,245 |   | 890,724 |   |
|                                                                           |   | 4,441,003                                          |         | 7,553,080                                        |       | 8,878,684 |   | 15,645,472 |   |
|                                                                           |   |                                               |         |                                             |       |   |   |   |   |
| **EXPENSES**                                                                   |   |                                               |         |                                             |       |   |   |   |   |
| Turnkey contracts                                                              |   | 323,791                                            |         | 1,919,238                                        |       | 1,234,640 |   | 4,643,934 |   |
| Cost of marketed oil and gas purchased from  affiliated partnerships           |   | 1,354,417                                          |         | 3,876,348                                        |       | 2,731,079 |   | 6,707,794 |   |
| Well services                                                                  |   | 161,578                                            |         | 174,565                                          |       | 329,775 |   | 573,989 |   |
| Production & exploration                                                   |   | 991,678                                            |         | 247,262                                          |       | 1,952,416 |   | 1,790,419 |   |
| Depreciation, depletion and amortization                                       |   | 359,320                                            |         | 1,389,254                                        |       | 519,295 |   | 1,716,617 |   |
| General and administrative                                                     |   | 1,134,628                                          |         | 1,145,265                                        |       | 2,164,886 |   | 2,433,337 |   |
| Interest                                                                       |   | 291,521                                            |         | 1,590,093                                        |       | 1,238,434 |   | 2,943,568 |   |
| Contingent repurchase obligation                                               |   | —                                             |         | —                                           |       | — |   | (3,064,661 | ) |
|                                                                           |   | 4,616,933                                          |         | 10,342,025                                       |       | 10,170,525 |   | 17,744,997 |   |
|                                                                           |   |                                               |         |                                             |       |   |   |   |   |
| Loss before provision for income taxes                                         |   | (175,930                                           | )            | (2,788,945                                       | )          | (1,291,841 | ) | (2,099,525 | ) |
|                                                                           |   |                                               |         |                                             |       |   |   |   |   |
| Deferred income tax benefit                                                    |   | (191,000                                           | )            | (201,000                                         | )          | (194,000 | ) | (86,000 | ) |
|                                                                           |   |                                               |         |                                             |       |   |   |   |   |
| Net Income (Loss) before minority interest  and change in accounting principle |   | 15,070                                             |         | (2,587,945                                       | )          | (1,097,841 | ) | (2,013,525 | ) |
|                                                                           |   |                                               |         |                                             |       |   |   |   |   |
| Minority Interest                                                              |   | (28,852                                            | )            | —                                           |       | (62,045 | ) | — |   |
|                                                                           |   |                                               |         |                                             |       |   |   |   |   |
| Net Loss before change in accounting  principle                                |   | (13,782                                            | )            | (2,587,945                                       | )          | (1,159,886 | ) | (2,013,525 | ) |
|                                                                           |   |                                               |         |                                             |       |   |   |   |   |
| Cumulative Effect of Change in Accounting  Principle                           |   | —                                             |         | —                                           |       | (88,218 | ) | — |   |
|                                                                           |   |                                               |         |                                             |       |   |   |   |   |
| Net Loss                                                                       |   | (13,782                                            | )            | (2,587,945                                       | )          | (1,248,104 | ) | (2,013,525 | ) |
|                                                                           |   |                                               |         |                                             |       |   |   |   |   |
| Less dividends on preferred shares                                             |   | 935,906                                            |         | —                                           |       | 1,736,068 |   |   |   |
|                                                                           |   |                                               |         |                                             |       |   |   |   |   |
| Net Loss Applicable to Common Stockholders                                     |   | **$**                                              | **(949,688** | **)**                                            | **$**      | **(2,587,945** | **)** | **$** | **(2,984,172** | **)** | **$** | **(2,013,525** | **)** |
|                                                                           |   |                                               |         |                                             |       |   |   |   |   |
| Basis and Diluted Loss per Common Share                                        |   |                                               |         |                                             |       |   |   |   |   |
| Loss Before Accounting Change                                                  |   | $                                                  | (0.06        | )                                                | $          | (0.15 | ) | $ | (0.17 | ) | $ | (0.11 | ) |
| Cumulative Effect of Change in Accounting  Principle                           |   | —                                             |         | —                                           |       | — |   | — |   |
| Net Loss                                                                       |   | $                                                  | (0.06        | )                                                | $          | (0.15 | ) | $ | (0.17 | ) | $ | (0.11 | ) |
|                                                                           |   |                                               |         |                                             |       |   |   |   |   |
| Weighted Average Common Shares Outstanding                                     |   | 16,867,972                                         |         | 17,534,357                                       |       | 16,871,121 |   | 17,534,499 |   |

 

The accompanying notes are an integral partof these financial statements

 

4

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**WarrenResources, Inc. and Subsidiaries**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 
|                                                                                       |   | **For the  six months ended  June 30, (Unaudited)** |       |
|--------------------------------------------------------------------------------------------|--------|----------------------------------------------------------|------------|
|                                                                                       |   | **2003**                                                 |       | **2002** | ** ** |
| Cash flows from operating activities:                                                      |   |                                                     |       |   |   |
| Net loss                                                                                   |   | $                                                        | (1,248,104 | ) | $ | (2,013,525 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |   |                                                     |       |   |   |
| Accretion of discount on available-for-sale  debt securities                               |   | (271,431                                                 | )          | (259,924 | ) |
| Amortization and write-off of deferred bond  offering costs                                |   | 408,438                                                  |       | 209,805 |   |
| (Gain) Loss on sale of US treasury  bonds—available for sale                          |   | (122,965                                                 | )          | 11,567 |   |
| Depreciation, depletion and amortization                                                   |   | 519,295                                                  |       | 1,716,617 |   |
| Deferred tax benefit                                                                       |   | (194,000                                                 | )          | (86,000 | ) |
| Leases contributed to partnerships                                                         |   | —                                                   |       | 254,332 |   |
| Change in assets and liabilities:                                                          |   |                                                     |       |   |   |
| (Increase) Decrease in trading securities                                                  |   | (560,079                                                 | )          | 191,871 |   |
| Decrease in accounts receivable—trade                                                 |   | 4,540,791                                                |       | 1,373,043 |   |
| (Increase) Decrease in accounts receivable  from affiliated partnerships                   |   | 558,642                                                  |       | (94,128 | ) |
| (Increase) Decrease in other assets                                                        |   | (247,163                                                 | )          | 141,647 |   |
| Decrease in accounts payable and accrued  expenses                                         |   | (557,204                                                 | )          | (4,386,041 | ) |
| Decrease in deferred income from affiliated  partnerships                                  |   | (1,791,172                                               | )          | (6,373,983 | ) |
| Decrease in contingent repurchase  obligation to affiliated partnerships                   |   | —                                                   |       | (3,318,993 | ) |
| Increase (Decrease) in other long term  liabilities                                        |   | (366,586                                                 | )          | 1,609,500 |   |
|                                                                                       |   |                                                     |       |   |   |
| Net cash provided by (used in) operating  activities                                       |   | 668,462                                                  |       | (11,024,212 | ) |
| Cash flows from investing activities:                                                      |   |                                                     |       |   |   |
| Purchases of U.S. Treasury  Bonds—available-for-sale                                  |   | —                                                   |       | (14,906 | ) |
| Purchases of oil and gas properties                                                        |   | (3,937,623                                               | )          | (2,955,624 | ) |
| Purchase of property and equipment                                                         |   | (3,539                                                   | )          | (214 | ) |
| Proceeds from the sale of oil and gas  properties, net of selling fees                     |   | —                                                   |       | 3,276,869 |   |
| Proceeds from the sale of property and  equipment, net of selling fees                     |   | 45,850                                                   |       | — |   |
| Proceeds from U.S. Treasury  Bonds—available-for-sale                                 |   | 1,172,390                                                |       | 120,864 |   |
|                                                                                       |   |                                                     |       |   |   |
| Net cash provided by (used in) investing  activities                                       |   | (2,722,922                                               | )          | 426,989 |   |
|                                                                                       |   |                                                     |       |   |   |
| Cash flows from financing activities:                                                      |   |                                                     |       |   |   |
| Payments on other long-term debt                                                           |   | (1,329,906                                               | )          | (1,068,524 | ) |
| Issuance of preferred stock, net                                                           |   | 2,058,252                                                |       | — |   |
| Dividends paid on preferred stock                                                          |   | (800,092                                                 | )          |   |   |
| Repurchase of common stock                                                                 |   | (29,940                                                  | )          | (2,624 | ) |
|                                                                                       |   |                                                     |       |   |   |
| Net cash used in financing activities                                                      |   | (101,686                                                 | )          | (1,071,148 | ) |
|                                                                                       |   |                                                     |       |   |   |
| Net Decrease in cash and cash equivalents                                                  |   | (2,156,146                                               | )          | (11,668,371 | ) |
| Cash and cash equivalents at beginning of  period                                          |   | 23,184,936                                               |       | 22,923,605 |   |
|                                                                                       |   |                                                     |       |   |   |
| Cash and cash equivalents at end of period                                                 |   | $                                                        | 21,028,790 |   | $ | 11,255,234 |   |
| Supplemental disclosure of cash flow  information                                          |   |                                                     |       |   |   |
| Cash paid for interest, net of amount  capitalized                                         |   | $                                                        | 829,996    |   | $ | 2,709,347 |   |
| Cash paid for income taxes                                                                 |   | —                                                   |       | — |   |

 

The accompanying notes are an integral partof these financial statements

 

5

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**WARRENRESOURCES, INC. AND SUBSIDIARIES**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

**JUNE 30,2003**

 

**NOTE 1—ORGANIZATION**

 

Warren Resources, Inc. (the “Company”), was formed on June 12,1990 under the laws of the state of New York for the purpose of acquiring anddeveloping oil and gas properties. On September 5th, 2002, the Companychanged its state of incorporation to Delaware. As a result, all shares of theCompany’s stock were converted into shares of the Delaware corporation. TheCompany’s properties are primarily located in New Mexico, Texas, Wyoming andCalifornia. In addition, the Company serves as the managing general partner(the “MGP”) to affiliated partnerships and joint ventures.

 

Theaccompanying unaudited financial statements and related notes present theCompany’s consolidated financial position as of June 30, 2003 andDecember 31, 2002, the results of operations for the three and six monthsended June 30, 2003 and 2002 and cash flows for the six months endedJune 30, 2003 and 2002. The unaudited financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States of America for interim financial information and with theinstructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, theydo not include all of the information and footnotes required by accountingprinciples generally accepted in the United States of America for completefinancial statements. In the opinion of management, all adjustments (consistingof normal recurring accruals) considered necessary for a fair presentation havebeen included. Operating results for the three and six months endedJune 30, 2003 are not necessarily indicative of the results that may beexpected for the fiscal year ending December 31, 2003. Certainreclassifications have been made to the 2002 amounts to conform to the 2003presentation. The accounting policies followed by the Company are set forth inNote A to the Company’s financial statements in Form 10-K for the year endedDecember 31, 2002. These interim financial statements and notes theretoshould be read in conjunction with our annual consolidated financial statementspresented in our 2002 Annual Report on Form 10-K.

 

##### **NOTE 2**—STOCK OPTIONS

 

At June 30, 2003, the Company had stock-based compensation plans.The Company accounts for those plans under the recognition and measurementprinciples of Accounting Principles Board (APB) Opinion No. 25, “Accounting forStock Issued to Employees,” and related interpretations. The following tableillustrates the effect on net loss and loss per share if the Company hadapplied the fair-value recognition provisions of Financial Accounting StandardsBoard (FASB) Statement No. 123, “Accounting for Stock-Based Compensation,” tostock-based employee compensation:

 
|                                                                                                                                          |   | **Three  months ended June 30,** |       | **Six months  ended June 30,** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|------------|-------------------------------------|------------|
|                                                                                                                                          |   | **2003**                              |       | **2002**                            | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                                                                                          |   |                                  |       |                                |       |   |   |   |   |
| Net Loss, as reported                                                                                                                         |   | $                                     | (949,688   | )                                   | $          | (2,587,945 | ) | $ | (2,984,172 | ) | $ | (2,013,525 | ) |
|                                                                                                                                          |   |                                  |       |                                |       |   |   |   |   |
| Deduct: Total stock-based employee  compensation expense determined under fair-value-based method for all awards,  net of related tax effects |   | $                                     | (547,278   | )                                   | $          | (102,420 | ) | $ | (547,278 | ) | $ | (204,840 | ) |
|                                                                                                                                          |   |                                  |       |                                |       |   |   |   |   |
| Pro forma Net Loss                                                                                                                            |   | $                                     | (1,496,966 | )                                   | $          | (2,690,365 | ) | $ | (3,531,450 | ) | $ | (2,218,365 | ) |
|                                                                                                                                          |   |                                  |       |                                |       |   |   |   |   |
| Basic and Diluted Loss Per Share:                                                                                                             |   |                                  |       |                                |       |   |   |   |   |
| As Reported -                                                                                                                                 |   | $                                     | (0.06      | )                                   | $          | (0.15 | ) | $ | (0.17 | ) | $ | (0.11 | ) |
| Pro Forma -                                                                                                                                   |   | $                                     | (0.09      | )                                   | $          | (0.15 | ) | $ | (0.17 | ) | $ | (0.13 | ) |

 

6

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#### **NOTE3—MANAGEMENT’S PLANS**

 

The Company had a net loss of $14 thousand for the quarter endedJune 30, 2003, as compared to a loss of $2.6 million for the correspondingquarter ending June 30, 2002. At June 30, 2003, current liabilitiesexceeded current assets by approximately $12.8 million. During 2002, theCompany raised $5.4 million for its drilling programs compared to $18.1 millionand $46.5 million in 2001 and 2000, respectively. As a result, the Company’sturnkey revenue and total gross profit in 2003 will be less than in 2002 and2001 and the number of the Company’s oil and gas properties developed throughpartnership arrangements will be reduced.

 

In order to improve operations and liquidity and meet its cash flowneeds, the company has or intends to do the following:

 

•                   Raiseadditional capital through the sale of preferred stock.

 

•                   Obtain a creditfacility based in part on the value of our proven reserves.

 

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

 

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

 

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

 

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

 

•                  Use$2 million of deferred drilling credits from Anadarko Petroleum Corporation todevelop our acreage in the Washakie Basin, Wyoming.

 

As a result of these plans, management believes thatit will generate sufficient cash flows to meet its current obligations in 2003.

 

**NOTE 4—REPURCHASEOBLIGATION**

 

CertainCompany sponsored oil and gas partnerships provide investor partners a right totender their interest to the Company for repurchase at specified future dates.In the event the Company does repurchase the investor interest, the Companywill be entitled to receive any future cash flows from the underlying oil andgas properties. The determination of whether a contingent repurchase obligationexists is based upon the estimated discounted present value of future netrevenues of proved developed and undeveloped reserves of each partnership, netof future capital costs and the Company’s working interest, from reservestudies prepared by petroleum engineers compared to the formula purchase price.A contingent repurchase obligation expense and liability of $3,318,993 was recognizedat December 31, 2001 based on oil and gas pricing at March 15, 2002.During the first quarter of 2002, the Company assigned additional provedundeveloped reserves located in the Wilmington Unit to various partnerships tosatisfy the liability relating to its contingent repurchase obligation. Basedupon this calculation using prices at March 31, 2002, the liabilityrelating to the Company’s contingent repurchase obligation was extinguished. Asa result, a gain of approximately $3,065,000 was recognized for the three-monthperiod ending March 31, 2002. As a result of the recent recapitalizationof thirteen of our drilling programs (See Note 15), we believe that we willhave no liability resulting from a repurchase obligation in the future.

 

**NOTE 5—PLUGGING ANDABANDONMENT LIABILITY**

 

In June 2001, the Financial Accounting Standard Board issued SFASNo. 143, “Accounting for Asset Retirement Obligations” which requires entitiesto record the fair value of a liability for an asset retirement obligation in theperiod in which it is incurred and a corresponding increase in the carryingamount of the related long-lived asset. This statement is effective for fiscalyears beginning after June 15, 2002. The Company adopted SFAS No. 143 onJanuary 1, 2003 and recorded a net asset of $557,000, a related liabilityof $645,000 (using a 10% discount rate) and a cumulative effect on change inaccounting principle on prior years of $88,000. The new standard had no material

 

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impact onincome before the cumulative effect of adoption in the first quarter of 2003,nor would it have had a material impact on the quarterly results for 2002assuming an adoption of this accounting standard on a proforma basis. Duringthe three months ending June 30, 2003 and March 31, 2003, the assetretirement liability was increased by approximately $21,000 in each quarter, asa result of accretion and recorded as interest expense. During the six monthsended June 30, 2003 there has been no significant changes in cash flowassumptions for the liability or liabilities incurred or settled during theperiod. The Company has treasury bills held in escrow with a fair market of$2,765,000 which are legally restricted for plugging and abandonment of its Wilmingtonfield.

 

#### **NOTE6 —CHANGES IN SHAREHOLDERS’ EQUITY**

 

For the six months ended June 30, 2003, dividends on preferredshares were approximately $1,700,000 and were treated as a reduction inadditional paid in capital. During the six months ended June 30, 2003 theCompany bought and retired 7,485 shares of its common stock for approximately$30,000.

 

As of June 30, 2003, 4,167,602 shares of convertible preferredstock were issued and outstanding, with dividends in arrears of $935,906. Forthe six months ended June 30, 2003, the Company issued 2,383,405 preferredshares, 1,930,518 relating to the recapitalization of our drilling programs,245,711 relating to bond conversions and 207,176 for cash consideration ofapproximately $2,486,000, less issuance costs of approximately $440,000. Thepreferred stock pays an 8% cumulative dividend, payable quarterly. The holdersof the preferred stock are not entitled to vote except as defined by theagreement or as provided by applicable law. The preferred stock may be voluntary converted at the election of theholder, commencing one year after the date of issuance.  Each outstanding redeemable convertiblepreferred share is convertible into common stock of the Company based on thetable below.  The conversion rate is subjectto adjustment from time to time as defined by the agreement.

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

 

Additionally, commencing seven years after the date of issuance,holders of the preferred stock may elect to require the Company to redeem theirpreferred stock at a redemption price equal to the liquidation value of $12.00per share, plus accrued but unpaid dividends, if any (“Redemption Price”).  Upon the receipt of a redemption election,the Company, at its option, shall either: (1) pay the holder cash in the amountequal to the Redemption Price or (2) issue to holder shares of common stock up toa maximum of 1.5 shares of common stock for each one share of preferred stockredeemed. The Company is accreting the carrying value of its preferred stock toits redemption price using the effective interest method with changes recordedto additional paid in capital.

 

**NOTE 7—LOSS PER SHARE**

 

Basic loss per share is computed by dividing net loss by the weightedaverage number of shares of common stock outstanding during the period. Dilutedloss per share is based on the assumption that stock options are converted intocommon shares using the treasury stock method and convertible bonds, debenturesand preferred stock are converted using the if-converted method. Conversion isnot assumed if the results are anti-dilutive. Potential common shares at June 30, 2003 and June 30, 2002, of9,633,171 and 6,129,666, respectively, relating to convertible bonds,debentures and preferred stock and 2,257,012 and 1,770,000, respectively,relating to incentive stock options, were excluded from the computation ofdiluted loss per share because they are anti-dilutive. Incentive stock optionshave a weighted average exercise price of $5.06 and $4.52 at June 30, 2003and June 30, 2002, respectively. The Convertible Bonds and Debentures maybe converted from the date of issuance until maturity at 100% of principalamount into common stock of the Company at prices ranging from $5.00 to$50.00.  The preferred stock may beconverted at the discretion of the holder (See note 6).

 

8

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**NOTE 8—LONG TERM DEBT**

 

TheConvertible Bonds and Debentures may be converted from the date of issuanceuntil maturity at 100% of principal amount into common stock of the Company atprices ranging from $5.00 to $50. Each year the holders of the ConvertibleDebentures may tender to the Company up to 10% of the aggregate Debentureissued.

 
|                                                                    |   | **June 30,  2003** |       | **December 31,  2002** |   |
|-------------------------------------------------------------------------|--------|-------------------------|------------|-----------------------------|--------|
|                                                                    |   |                    |       |                        |   |
| 12% Sinking Fund Debentures, due  December 31, 2007                |   | $                       | 11,056,000 |                        | $      | 14,376,000 |   |
| 12% Secured Convertible Debentures, due  December 31, 2009         |   | 790,000                 |       | 790,000                     |   |
| 12% Secured Convertible Bonds, due  December 31, 2010              |   | 1,715,000               |       | 1,715,000                   |   |
| 13.02% Sinking Fund Convertible Debentures,  due December 31, 2010 |   | 14,770,200              |       | 14,780,200                  |   |
| 13.02% Sinking Fund Convertible Debentures,  due December 31, 2015 |   | 11,837,500              |       | 12,137,500                  |   |
| 12% Secured Convertible Bonds, due  December 31, 2016              |   | 1,400,000               |       | 1,460,000                   |   |
| 12% Sinking Fund Convertible Debentures,  due December 31, 2017    |   | 6,040,000               |       | 6,590,000                   |   |
| 12% Secured Convertible Bonds, due  December 31, 2020              |   | 1,635,000               |       | 1,635,000                   |   |
| 12% Secured Convertible Bonds, due  December 31, 2022              |   | 1,186,000               |       | 1,186,000                   |   |
|                                                                    |   |                    |       |                        |   |
|                                                                    |   | 50,429,700              |       | 54,669,700                  |   |
| Less: Current Portion                                                   |   | 5,042,970               |       | 5,466,970                   |   |
|                                                                    |   |                    |       |                        |   |
| Long Term Portion                                                       |   | $                       | 45,386,730 |                        | $      | 49,202,730 |   |

 

#### **NOTE9 – CAPITALIZED INTEREST**

Interest of approximately $1,603,000 and $339,000 was capitalizedduring the three months ended June 30, 2003 and 2002, respectively,relating to our California and Wyoming properties. Interest of approximately$2,532,000 and $908,000 was capitalized for the six months ended June 30,2003 and 2002, respectively, relating to the same properties.

 

**NOTE 10—INCOME TAXES**

 

For the periods ended June 30, 2003 and 2002, the Company’seffective income tax rate differed from the federal statutory rate due tochanges in the valuation allowance for deferred tax assets.

 

**NOTE 11—LITIGATION**

 

*Gotham InsuranceLitigation*. In 1998, Warren E & P was sued in the81st Judicial District Court of Frio County, Texas by StrickerDrilling Company, Inc. and Manning Safety Systems to recover the value of lostequipment based on a well blow out. Warren was later joined in the suit as a defendant.  As a result of the lawsuit, Gotham InsuranceCompany, Warren E & P’s well blow-out insurer, intervened.  The suit was settled in 1999 with all partiesexcept Gotham.  Gotham paid over $1.7million under the insurance policy and now seeks a refund of approximately $1.5million of monies paid, denying coverage, and alleging fraud andmisrepresentation and a failure of Warren E & P to act with due diligenceand pursuant to safety regulations. Warren E & P countersued for the remaining proceeds under the policycoverage.  In the summer and fall of2000, summary judgments were entered for Warren E & P on essentially allclaims except its bad faith claims against Gotham.  Gotham’s claims against Warren E & P and Warren wererejected.  Final judgment was renderedon May 14, 2001 in Warren E & P’s favor for the remaining policyproceeds, interest and attorney fees. Gotham appealed the final judgment to the San Antonio Court of Appealsseeking a refund of approximately $1.5 million.  The case on appeal was orally argued on March 28, 2002. OnJuly 23, 2003, a three judge panel of the San Antonio Court of Appealsrendered its decision in favor of Gotham on all points, except for the amountof restitution owed by Warren E&P and related parties, reversing theearlier

 

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summary judgment entered by the trial court for Warren E & P.Although the three judge panel of the San Antonio Court of Appeals acknowledgedthat Gotham asked for the Court to render its judgment in Gotham’s favor on itsrestitution claims, Gotham gave no particulars, and therefore the Court ofAppeals remanded Gotham’s restitution claims to the trial court for furtherproceedings consistent with its opinion. Although the ultimate resolution isuncertain, counsel has advised Warren E&P that it believes the three judgepanel of the San Antonio Court of Appeals committed numerous errors of fact andlaw and accordingly on August 7, 2003 Warren E&P made a Motion forRehearing before the three judge panel of the San Antonio Court of Appeals anda Motion for a Rehearing en banc before the full San Antonio Appellate Court.

 

Warren is party to various matters of litigation arising in the normalcourse of business. Management believes that the ultimate outcome of thematters will not have a material effect on the Company’s financial condition orresults of operations.

 

**NOTE 12—BUSINESSSEGMENT INFORMATION**

 

The Company’s operating activities can be divided into four majorsegments: turnkey contracts, oil and gas marketing, oil and gas exploration andproduction operations and well services. The Company drills oil and natural gaswells for Company-sponsored drilling programs and retains an interest in eachwell. Also, the Company markets natural gas for affiliated drilling programs.The Company charges Company-sponsored drilling programs and other third partiescompetitive industry rates for well operations and gas gathering. Segmentinformation is as follows:

 
|                        |   | **Three  Months Ended** |      | **Six Months  Ended**   |       |
|-----------------------------|--------|-------------------------|-----------|-------------------------|------------|
|                        |   | **June 30,  2003** |      | **June 30,  2002** | ** ** | **June 30,  2003** | ** ** | **June 30,  2002** | ** ** |
| **Revenue**                 |   |                    |      |                    |       |   |   |   |   |
| Turnkey Contracts           |   | $                       | 1,013,475 |                    | $          | 2,630,033 |   | $ | 1,876,672 |   | $ | 6,373,982 |   |
| Oil and Gas Marketing       |   | 1,379,633               |      | 3,909,082               |       | 2,789,524 |   | 6,786,693 |   |
| Oil and Gas Operations      |   | 1,297,482               |      | 130,256                 |       | 2,832,493 |   | 198,091 |   |
| Well Services               |   | 258,693                 |      | 412,989                 |       | 501,420 |   | 1,132,803 |   |
| Other                       |   | 491,720                 |      | 470,720                 |       | 878,575 |   | 1,153,903 |   |
|                        |   |                    |      |                    |       |   |   |   |   |
|                        |   | $                       | 4,441,003 |                    | $          | 7,553,080 |   | $ | 8,878,684 |   | $ | 15,645,472 |   |
|                        |   |                    |      |                    |       |   |   |   |   |
|                        |   | **June 30,  2003** |      | **June 30,  2002** |       | **June 30,  2003** |   | **June 30,  2002** |   |
| **Operating Income (Loss)** |   |                    |      |                    |       |   |   |   |   |
| Turnkey Contracts           |   | $                       | 664,193   |                    | $          | 685,948 |   | $ | 590,975 |   | $ | 4,745,710 |   |
| Oil and Gas Marketing       |   | 25,216                  |      | 32,734                  |       | 58,445 |   | 78,899 |   |
| Oil and Gas Operations      |   | (20,212                 | )         | (1,469,253              | )          | 432,987 |   | (3,188,595 | ) |
| Well Services               |   | 97,115                  |      | 238,764                 |       | 171,645 |   | 483,554 |   |
| Other                       |   | (942,242                | )         | (2,277,138              | )          | (2,545,893 | ) | (4,219,093 | ) |
|                        |   |                    |      |                    |       |   |   |   |   |
|                        |   | $                       | (175,930  | )                       | $          | (2,788,945 | ) | $ | (1,291,841 | ) | $ | (2,099,525 | ) |

 

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**NOTE 13—NEWACCOUNTING PRONOUNCEMENTS**

 

In November 2002, FASB Interpretation 45, *Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers* (FIN 45), was issued. FIN 45 requires a guarantor entity, atthe inception of a guarantee covered by the measurement provisions of theinterpretation, to record a liability for the fair value of the obligationundertaken in issuing the guarantee. The Company previously did not record aliability when guaranteeing obligations unless it became probable that theCompany would have to perform under the guarantee. FIN 45 applies prospectivelyto guarantees the Company issued or modifies subsequent to December 31,2002, but has certain disclosure requirements effective for interim and annualperiods ending after December 15, 2002. The Company has historicallyissued guarantees only on a limited basis and does not anticipate FIN 45 willhave a material effect on its 2003 financial statements. Disclosures requiredby FIN 45 are not required because the Company does not have any existingguarantees at June 30, 2003.

 

In January 2003, the FASB issued FASB Interpretation 46 (FIN 46), *Consolidationof Variable Interest Entities*. FIN 46 clarifies the application ofAccounting Research Bulletin 51, *Consolidated Financial Statements*, forcertain entities that do not have sufficient equity at risk for the entity tofinance its activities without additional subordinated financial support fromother parties or in which equity investors do not have the characteristics of acontrolling financial interest (“variable interest entities”). Variableinterest entities within the scope of FIN 46 will be required to beconsolidated by their primary beneficiary. The primary beneficiary of avariable interest entity is determined to be the party that absorbs a majorityof the entity’s expected losses, receives a majority of its expected returns,or both. FIN 46 applies immediately to variable interest entities created afterJanuary 31, 2003, and to variable interest entities in which an enterpriseobtains an interest after that date. It applies in the first fiscal year orinterim period beginning after June 15, 2003, to variable interestentities in which an enterprise holds a variable interest that it acquiredbefore February 1, 2003. The Company is in the process of determining whatimpact, if any, the adoption of the provisions of FIN 46 will have upon itsfinancial condition or results of operations relating to drilling programsformed in 1998 and after.

 

In May 2003, the FASB issued Statement 150, Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity.Statement 150 changes the classification in the statement of financial positionof certain common financial instruments from either equity or mezzaninepresentation to liabilities and requires an issuer of those financialstatements to recognize changes in fair value or redemption amount, asapplicable, in earnings. Statement 150 is effective for the first interimperiod beginning after June 15, 2003 (for the Company in the third quarterof 2003). The Company is currently in the process of determining the impactthat adoption of the provisions of Statement 150 will have on its financialcondition and results of operations.

 

**NOTE 14—COMPREHENSIVEINCOME (LOSS)**

 

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

 
|                              |   | **2003** |     | **2002** |   |
|-----------------------------------|--------|----------|----------|----------|--------|
|                              |   |     |     |     |   |
| Six Months ending June 30,   |   | $        | (957,048 | )        | $      | (1,883,565 | ) |
|                              |   |     |     |     |   |
| Three Months ending June 30, |   | $        | 273,389  |     | $      | (2,286,193 | ) |

 

**NOTE 15—CONSENTSOLICITAION**

 

In late 2002, each of thethirteen drilling programs formed from 1994 through 1997 commenced a VoteSolicitation of their partners to: (i) obtain the requisite 2/3rds affirmativeapproval of their respective partners to convert their drilling program from aDelaware limited partnership to an LLC wherein all LLC members would havelimited liability, including Warren, and (ii) allow partners to select whetherthey wanted to be (a) a standard member in the LLC with substantially the samerights and obligations that they had as partners in their respective drillingfund, or (b) a preferred member in the LLC having certain preferential rightsby consenting to Warren’s contribution of additional capital to the LLC uponconversion (the “Recapitalization”) in the form of its unregistered PreferredShares in an amount equal to between 110% to 120% of the potential repurchaseprice of consenting partner’s

 

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interests calculated as ofDecember 31, 2002. For its additional capital contribution, Warrenreceived additional standard membership interests in the LLC and was speciallyallocated a prorata interest as a standard member in the wells and oil leasesformerly allocable to the partners who elected to become Preferred Members.Election by a partner to become a preferred member terminated any repurchaserights they may have had under the original partnership’s buy/sell agreements.At December 31, 2002, six of the thirteen programs obtained the requisiteapproval to convert to LLCs and were consolidated in the financial statementsfor the year ended December 31, 2002. At March 31, 2003, all thirteenprograms obtained the requisite votes to convert to LLCs and on average 72.9%of the program members elected to become preferred members in their LLC. As aresult of the recapitalizations, the Company issued an aggregate of 3,229,716Preferred Shares to the LLCs in 2002 and 2003. During the first quarter theCompany issued 1,641,628 preferred shares to the remaining 7 LLCs as a capitalcontribution, with an estimated fair value of $19,699,536 and received itsprorata share of additional standard membership interests in the LLCs. The fairvalue of the Preferred Shares was based on actual cash sales to independentparties in this time period. Due to the increase in control of these thirteenaffiliated partnerships, the Company has consolidated these entities forfinancial reporting purposes at June 30, 2003. The Company accounted forthe remaining 7 LLCs as a purchase transaction with the estimated fair value ofthe assets and liabilities assumed in the acquisition as follows:

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

 

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

 
|                                           |   | **Pro Forma  (unaudited)  Three months ended June 30,** |      | **Pro Forma  (unaudited)  Six months ended June 30,** |       |
|------------------------------------------------|--------|--------------------------------------------------------------|-----------|------------------------------------------------------------|------------|
|                                           |   | **2003**                                                     |      | **2002**                                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                           |   |                                                         |      |                                                       |       |   |   |   |   |
| Revenues                                       |   | $                                                            | 4,441,003 |                                                       | $          | 8,640,686 |   | $ | 11,201,767 |   | $ | 17,820,679 |   |
|                                           |   |                                                         |      |                                                       |       |   |   |   |   |
| Net Loss                                       |   | $                                                            | (949,688  | )                                                          | $          | (2,438,616 | ) | $ | (2,332,669 | ) | $ | (1,714,867 | ) |
|                                           |   |                                                         |      |                                                       |       |   |   |   |   |
| Loss Per Common Share – Basic and diluted |   | $                                                            | (0.06     | )                                                          | $          | (0.14 | ) | $ | (0.14 | ) | $ | (0.10 | ) |

 

12

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**NOTE 16—GOODWILL**

 

The Company adopted SFAS No. 142, *Goodwill and Other Intangible Assets,*effective January 1, 2002 and as such, has not subsequently recorded anyamortization of goodwill. Under SFAS No. 142, companies only adjust thecarrying amount of goodwill or indefinite life intangible assets upon animpairment.

 

During 2002, the Company had set the beginning of the second quarter(April) as the annual period for goodwill impairment testing. During the secondquarter of 2003, the Company retained an independent outside valuation expertto assist in developing the fair value analysis necessary to conduct thetesting for impairment of its goodwill, all of which arose in its acquisitionof Warren E&P. The results of this analysis indicated that no impairment ofgoodwill had occurred.

 

**Item 2****. *Management’sdiscussion and analysis of financial conditions and operations***

 

**FORWARD-LOOKINGINFORMATION**

 

This Report on Form 10-Q and our other filings with the SEC containforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933 and Section 21E of the Securities Exchange Act of 1934. When usedin this Report and our other filings with the SEC, the words “anticipated,”“believe,” “estimate,” “project,” “budget,” “will,” “should,” “hope,” “may”,“intend” and “expect” and similar expressions identify forward-looking statements.Although we believe that our plans, intentions and expectations reflected inthese forward-looking statements are reasonable, these plans, intentions andexpectations may not be achieved. Forward-looking statements in this Report andour filings with the SEC include, without limitation, statements regarding:

 

• financialposition; • business strategy; • budgets; • amount, nature andtiming of capital expenditures; • drilling of wells; • natural gas and oilreserves; • timing and amountof future production of natural gas and oil; • operating costs andother expenditures; • future net revenuesfrom production and estimates of oil and gas reserves; • cash flow andanticipated liquidity; and • prospectdevelopment and property acquisitions.

 

These forward-looking statements are based on assumptions that theCompany believes are reasonable, but they are open to a wide range ofuncertainties and business risks, including the following:

 

•fluctuations of the prices received or demand for oil and natural gas overtime; • risks associatedwith oil and gas exploration; • our ability tofind, acquire, market, develop and produce new properties; • availability andcost of material and equipment; • uncertainty ofreserve estimates and in the projection of future rates of production andtiming of development expenditures; • operating hazards;

•climactic conditions; •availability of capital and unexpected substantial variances in capitalrequirements; •the strength and financial resources of our competitors; •regulatory developments; •environmental risks; and •general economic conditions.

 

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Actual results, performance or achievements could differ materiallyfrom those contemplated, expressed or implied by the forward-looking statementscontained in this Report and our other filings with the SEC. Important factorsthat could cause actual results to differ materially from our forward-lookingstatements are set forth in this Report and our other filings with the SEC,including under the heading “Risk Factors” in our annual report on Form 10-K.These factors are not intended to represent a complete list of the general orspecific factors that may affect us. It should be recognized that other factors,including general economic factors and business strategies, may be significant,presently or in the future, and the factors set forth in this report and ourother filings with the SEC may affect us to a greater extent than indicated.All forward-looking statements attributable to us or persons acting on ourbehalf are expressly qualified in their entirety by the cautionary statementsset forth in this Report and our other filings with the SEC. Except as requiredby law, we undertake no obligation to update any forward-looking statement,whether as a result of new information, future events or otherwise.

 

**LIQUIDITY AND CAPITALRESOURCES:**

 

We have funded our activities primarily with the proceeds raisedthrough privately placed drilling programs and our private sale of our equityand debt securities. These private placements primarily were made through anetwork of independent broker dealers. Since 1992, we have raised approximately$222 million through the private placements of interests in 30 drilling programs.Additionally, we have raised $58.7 million through the issuance of our debtsecurities and $63.3 million through the issuance of our equity securities. Inour drilling programs, we fund the costs associated with acreage acquisitionand the tangible portion of drilling activities, while investors in thedrilling programs fund all intangible drilling costs.

 

In late 2002, each of the 13 drilling programs formed from 1994 through1997 commenced a Vote Solicitation of their partners to: (i) obtain the requisite2/3rds affirmative vote of their respective partners to convert their drillingprogram from a Delaware limited partnership to an LLC wherein all LLC memberswould have limited liability, including Warren, and (ii) allow partners toselect whether they wanted to be (a) a standard member in the LLC withsubstantially the same rights and obligations that they had as partners intheir respective drilling fund, or (b) a Preferred Member in the LLC havingcertain preferential rights by consenting to Warren’s contribution ofadditional capital to the LLC upon conversion (the “Recapitalization”) in theform of its unregistered Preferred Shares in an amount equal to between 110% to120% of the potential repurchase price of consenting partner’s interests calculatedas of December 31, 2002. For its additional capital contribution, Warrenreceived additional standard membership interests in the LLC and was speciallyallocated a prorata interest as a standard member in the wells and oil leasesformerly allocable to the partners who elected to become Preferred Members.Election by a partner to become a Preferred Member terminated their repurchaserights under the original buy/sell agreements. At June 30, 2003, all 13programs obtained the requisite votes to convert to LLCs and on average 73.9%of the program members elected to become Preferred Members in their LLC. As aresult of the Recapitalization, Warren issued 3,273,478 Preferred Shares in theaggregate, 1,930,518 during the first six months of 2003, to the 13 LLCs as anadditional capital contribution and received its prorata share of additionalstandard membership interests in the LLCs.

 

Our cashand cash equivalents decreased $2.2 million for the six months endedJune 30, 2003. This resulted from a $2.8 million decrease in cash used ininvesting activities and $0.1 million decrease in cash used in financingactivities offset by a $0.7 million increase in cash provided from operatingactivities.

 

Cash provided from investing activities decreased due to the purchaseof certain oil and gas properties during the first six months of 2003.  This decrease was partially offset by thereceipt of U.S. Treasury Bonds previously held in escrow on behalf of ourdrilling program and debentures. Primarily, the U.S. Treasury Bonds werereleased to us as a result of the Recapitalization discussed above.

 

Cash provided from operating activities increased due to the receipt oflife insurance funds relating to our Executive Vice President, James C.Johnson, Jr. who passed away in December 2002.  This increase was offset by drilling wells on behalf of thedrilling programs and the related recognition of deferred revenue during thefirst six months of 2003. Additionally, the funds raised through our drillingprograms are primarily raised during the last quarter of our calendar year. Asa result, during the first six months of the calendar year, we incur turnkeyexpenses related to drilling programs and do not raise additional funds throughdrilling programs.

 

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Our most material commitment of funds relates to the drilling programs.Our deferred revenue balance relating to our drilling commitments totaled $30.5million at June 30, 2003. This commitment varies pro rata with the amountof funds raised through our drilling programs.

 

The Company had a net loss of $1.2 million for the six months endedJune 30, 2003, as compared to a net loss of $2.0 million for thecorresponding period ending June 30, 2002. At June 30, 2003, currentliabilities exceeded current assets by approximately $12.8 million.  During the first six months of 2003,shareholders’ equity increased $25.4 million from $7.0 million to $32.4million, primarily from the Recapitalization discussed above.

 

During 2002, we raised $5.4 million for our drilling programs comparedto $18.1 million and $46.5 million in 2001 and 2000, respectively. As a result,the Company’s turnkey revenue and total gross profit in 2003 will be less thanin 2002 and 2001 and the number of the Company’s oil and gas propertiesdeveloped through partnership arrangements will be reduced.

 

In order to improve operations and liquidity and meet its cash flowneeds, we have or intend to do the following:

 

•  Raise additional capital through the sale ofpreferred stock.

 

•  Obtain a credit facility based in part onthe value of our proven reserves.

 

•  Continue to privately place drillingprograms, which based on prior experience management anticipates raisingapproximately $6.0 million in 2003.

 

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

 

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

 

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

 

•  Use $2 million of deferred drilling credits fromAnadarko Petroleum Corporation to develop our acreage in the Washakie Basin,Wyoming.

 

As a result of these plans, management believes that it will generatesufficient cash flows to meet its current obligations in 2003.

 

**RESULTS OFOPERATIONS:**

 

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

 

*Turnkey contractrevenue and expenses.* Turnkey contract revenuedecreased $1.6 million in the second quarter to $1.0 million, a 61% decreasecompared to the corresponding quarter of the preceding year. Additionally,turnkey contract expense decreased $1.6 million during the second quarter to$0.3 million, an 83% decrease compared to the same period in 2002. Thesedecreases resulted from a lower level of drilling activity during the secondquarter compared to the corresponding quarter of the preceding year. The levelof drilling activity is affected by the amount of funds raised from ourdrilling programs in the prior fiscal year. We raised $5.4 million from ourdrilling programs in 2002 compared to $18.1 million during 2001.

 

Gross profit from turnkey contract revenue and expenses was $0.7million or 68% for the second quarter. This compares to gross profit of $0.7million or 27% for the corresponding quarter in 2002. The increase in grossprofit percentage during the second quarter of 2003 results from drillingcertain wells more economically than the corresponding quarter of 2002 andchanges in working interests of various wells in our drilling programs.

 

*Oil and gas salesand costs from marketing activities.* Oil and gas salesfrom marketing activities decreased $2.5 million in the second quarter to $1.4 million, a 65% decrease comparedto the same period last year. Cost of oil and gas marketing activitiesdecreased $2.5 million in the quarter to $1.4 million, a 65% decrease comparedto the same 

 

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quarter in 2002. These decreases primarily resulted from theRecapitalizations as discussed above, whereby we now receive oil and gasproduction previously allocated to drilling programs.  Oil and gas production from the wells in the drilling programs inwhich we earn a marketing fee for the three months ended June 30, 2003 and2002, was 0.3 Bcfe and 0.9 Bcfe, respectively. This decrease was offset by higher average gas prices.  The average price per Mcf during the secondquarter of 2003 and 2002 was $5.22 and $1.64, respectively.

 

The gross profit from marketing activities for the second quarter of2003 was $25 thousand as compared to $33 thousand in the same period last year.

 

*Well servicesactivities.* Well services revenue decreased $0.2million in the second quarter to $0.3 million, a 37% decrease compared to thecorresponding quarter of the preceding year. Well services expense decreased$13 thousand for the second quarter to $0.2 million, a nominal decreasecompared to the same period in 2002. These decreases in well services revenueresulted from the decrease in drilling activity during the second quarter of2003 compared to the corresponding period of 2002 as discussed above.

 

Gross profit from well services activities was $0.1 million for thesecond quarter. This compared to gross profit of $0.2 million for thecorresponding quarter last year. This decrease in gross profit resulted fromthe decrease in well services revenue as discussed above.

 

*Oil and gas sales.*Revenue from oil and gas sales increased $1.2 million in the second quarter to$1.3 million, a 896% increase compared to the same quarter in 2002, due toincreased ownership in our drilling programs. We obtained oil and gas interestsfrom our drilling programs as a result of the Recapitalizations referred toabove.  Our share of pre-payoutproduction from drilling programs formed subsequent to 1998 is generally 25% ofthe production allocated to these drilling programs.

 

*Net gain (loss) oninvestments.* Net gain on investments was $0.1 millionfor the second quarters of 2003 and 2002. Primarily, investments represent zero coupon U.S. treasury bonds held inour inventory. Fluctuations in net gain or loss on investments resulted fromchanges in long-term interest rates.

 

*Interest and otherincome.* Interest income increased $0.1 million in thesecond quarter to $0.4 million, a 27% increase compared to the same quarter in2002. Primarily, this increase is attributable to an increase in incomegenerated by selling firm capacity pipeline space to unaffiliated parties.

 

*General andadministrative expenses.* General and administrativeexpenses decreased $11 thousand in the second quarter of 2003 to $1.1 million,a nominal decrease compared to 2002.

 

*Depreciation,Depletion and Amortization.* Depreciation, depletionand amortization expense decreased $1.0 million for the quarter to $0.4million, a 74% decrease compared to the corresponding quarter last year. Duringthe second quarter of 2002, we recorded impairment expense totaling $1.1million relating to our Kirby Decker prospect in Montana.

 

*Interest expense.*Interest expense decreased $1.3 million in the second quarter to $0.3 million,an 82% decrease compared to the same quarter last year. Primarily, thisdecrease reflects an increase in the amount of interest capitalized to ourWyoming and California properties.

 

*Production &exploration.* Production and exploration expenseincreased $0.7 million in the second quarter of 2003 to $1.0 million, a 301%increase compared to the same quarter last year.  This resulted from increased ownership in our drilling programs.We obtained oil and gas interests from our drilling programs as a result of theRecapitalizations referred to above.

 

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**Sixmonths Ended June 30, 2003 Compared to Six Months Ended June 30, 2002**

 

*Turnkey contractrevenue and expenses.* Turnkey contract revenuedecreased $4.5 million in the first six months of 2003 to $1.9 million, a 71%decrease compared to the corresponding period of the preceding year.Additionally, turnkey contract expense decreased $3.4 million during the firstsix months of 2003 to $1.2 million, a 73% decrease compared to the same periodin 2002. These decreases resulted from a lower level of drilling activityduring the period compared to the corresponding period of the preceding year.The level of drilling activity is affected by the amount of funds raised fromour drilling programs in the prior fiscal year. We raised $5.4 million from ourdrilling programs in 2002 compared to $18.1 million during 2001.

 

Gross profit (loss) from turnkey contract revenue and expenses was $0.6million or 34% for the first six months of 2003. This compares to gross profitof $1.7 million or 27% for the corresponding period in 2002. The increase ingross profit percentage during the first six months of 2003 results fromdrilling certain wells more economically than the corresponding period of 2002 andchanges in working interests of various wells in our drilling programs.

 

*Oil and gas salesand costs from marketing activities.* Oil and gas salesfrom marketing activities decreased $4.0 million in the first six months of 2003 to $2.8 million, a 59% decreasecompared to the same period last year. Cost of oil and gas marketing activitiesdecreased $4.0 million in the first six months of 2003 to $2.7 million, a 59%decrease compared to the same quarter in 2002. These decreases primarilyresulted from the Recapitalizations as discussed above, whereby we now receiveoil and gas production previously allocated to drilling programs.  Oil and gas production from the wells in thedrilling programs in which we earn a marketing fee for the six months endedJune 30, 2003 and 2002 was 0.7 Bcfe and 1.9 Bcfe, respectively.  This decrease was offset by higher averagegas prices.  The average price per Mcfduring the first six months of 2003 and 2002 was $4.22 and $1.59, respectively.

 

The gross profit from marketing activities for the first six months of2003 was $58 thousand as compared to $79 thousand in the same period last year.

 

*Well servicesactivities.* Well services revenue decreased $0.6million in the first six months of 2003 to $0.5 million, a 56% decrease comparedto the corresponding period of the preceding year. Well services expensedecreased $0.2 million for the first six months of 2003 to $0.3 million, a 43%decrease compared to the same period in 2002. The decreases in well servicesrevenue resulted from the decrease in drilling activity during the first sixmonths of 2003 compared to the corresponding period of 2002 as discussedabove.  Additionally, decreases in wellrevenue and expenses resulted from the sale of certain assets of our drillingsubsidiary, CJS Pinnacle Petroleum LLC (Pinnacle) on February 14th,2002, for total consideration of $4.2 million. The operations of Pinnacleceased since the sale.

 

Gross profit from well services activities was $0.2 million for thefirst six months of 2003. This compared to gross profit of $0.6 million for thecorresponding period last year. This decrease in gross profit resulted from thedecrease in well services revenue and the sale of Pinnacle as discussed above.

 

*Oil and gas sales.*Revenue from oil and gas sales increased $2.6 million in the first six monthsof 2003 to $2.8 million, a 1330% increase compared to the sane period lastyear, due to increased ownership in our drilling programs. We obtained oil andgas interests from our drilling programs as a result of the Recapitalizationsreferred to above.  Our share ofpre-payout production from drilling programs formed subsequent to 1998 isgenerally 25% of the production allocated to these drilling programs.

 

*Net gain (loss) oninvestments.* Net gain on investments was $0.1 millionfor the first six months of 2003 and $0.3 million for the same period in2002.  Primarily, investments representzero coupon U.S. treasury bonds held in our inventory. Fluctuations in net gainor loss on investments resulted from changes in long-term interest rates.

 

*Interest and otherincome.* Interest income decreased $0.1 million in thefirst six months of 2003 to $0.8 million, a 16% decrease compared to the sameperiod in 2002. Primarily, this decrease is attributable to lower interestrates during 2003.

 

*General andadministrative expenses.* General and administrativeexpenses decreased $0.3 million in the first six months of 2003 to $2.2million.  This decrease resulted from areduced number of employees.  During thefirst six months of 2003 and 2002, we employed approximately 35 and 40individuals, respectively.

 

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*Depreciation,Depletion and Amortization.* Depreciation, depletionand amortization expense decreased $1.2 million for the first six months of2003 to $0.5 million, a 70% decrease compared to the corresponding period lastyear. During the second quarter of 2002, we recorded impairment expensetotaling $1.1 million relating to our Kirby Decker prospect in Montana.

 

*Interest expense.*Interest expense decreased $1.7 million in the first six months to $1.2million, a 58% decrease compared to the same quarter last year. Primarily, thisdecrease reflects an increase in the amount of interest capitalized to ourWyoming and California properties.

 

*Production &exploration.* Production and exploration expenseincreased $0.2 million in the first six months of 2003 to $2.0 million, a 9%increase compared to the same quarter last year.  This resulted from increased ownership in our drilling programs.We obtained oil and gas interests from our drilling programs as a result of theRecapitalizations referred to above.

 

*ContingentRepurchase Obligation.*Repurchase obligation expenseof $3.3 million was recorded in 2001 based on pricing at March 15, 2002.The repurchase obligation expense was reversed during the 1stquarter of 2002. As stated above, the determination of whether a repurchaseliability exists is based upon estimates of future net cash flows from reservestudies prepared by petroleum engineers compared to the potential repurchase ofdrilling program units. Significant decreases in natural gas and oil prices atDecember 31, 2001 lowered the estimated future cash flows when compared tofuture potential repurchase obligations. As a result, a repurchase liabilityand a repurchase  obligation expense of$3.3 million was recorded in 2001.

 

**Open DisclosureIssues with the Securities and Exchange Commission**

 

The Company has been advised by the Staff of the SEC that it, inconsultation with the Staff of the Financial Standards Accounting Board, isconsidering certain implementation issues in the application of provisions ofStatement of Financial Accounting Standards No. 141, “Business Combinations,”and Statement of Financial Standards No. 142, “Goodwill and Other IntangibleAssets” (SFAS No. 142), to companies in the extractive industries, includingoil and gas companies. The Staff of the SEC is considering whether SFAS No. 142requires registrants to reclassify costs associated with mineral rights,including both proved and unproved leasehold acquisition costs, as intangibleassets in the balance sheet, apart from other capitalized oil and gas propertycosts. Historically, the Company and all other oil and gas companies haveincluded the cost of these oil and gas leasehold interests as part of oil andgas properties. The Staff is also considering whether SFAS No. 142 requiresregistrants to provide the additional disclosures prescribed by SFAS No. 142for intangible assets for costs associated with mineral rights.

 

The reclassification of these amounts would not affect the method inwhich such costs are amortized or the manner in which the Company assessesimpairment of capitalized costs. As a result, net income would not be affectedby the reclassification.

 

**Item 3****. *Quantitativeand qualitative disclosure about market risk***

 

*Commodity Risk.*Our major market risk exposure is the commodity pricing applicable to ournatural gas and oil production. Realized commodity prices received for ourproduction are primarily driven by the prevailing worldwide price for crude oiland spot prices applicable to natural gas. The effects of price volatility isexpected to continue.

 

#### **Item 4**. *Evaluation of Disclosure Controls andProcedures*

 

**Quarterly evaluationof the Company’s Disclosure Controls and Internal Controls.**Withinthe 90 days prior to the filing of this Quarterly Report on Form 10-Q, theCompany evaluated the effectiveness of the design and operation of its“disclosure controls and procedures” (Disclosure Controls), and its “internalcontrols and procedures for financial reporting” (Internal Controls). Thisevaluation (the Controls Evaluation) was done under the supervision and withthe participation of management, including our Chief Executive Officer (CEO)and Chief Financial Officer (CFO). Rules adopted by the SEC require that inthis section of the Quarterly Report we present the conclusions of the CEO andthe CFO about the effectiveness of our Disclosure Controls and InternalControls based on and as of the date of the Controls Evaluation.

 

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**CEO and CFOCertifications.**Appearing immediately following theSignatures section of this Quarterly Report, there are two separate forms of“Certifications” of the CEO and the CFO. The first form of Certification isrequired in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (theSection 302 Certification). This section of the Quarterly Report which you arecurrently reading is the information concerning the Controls Evaluationreferred to in the Section 302 Certifications and this information should beread in conjunction with the Section 302 Certifications for a more completeunderstanding of the topics presented.

 

**Disclosure Controlsand Internal Controls.**Disclosure Controls areprocedures that are designed with the objective of ensuring that informationrequired to be disclosed in our reports filed under the Securities Exchange Actof 1934 (Exchange Act), such as this Quarterly Report, is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s (SEC) rules and forms. Disclosure Controls are alsodesigned with the objective of ensuring that such information is accumulatedand communicated to our management, including the CEO and CFO, as appropriateto allow timely decisions regarding required disclosure.  Internal Controls are procedures which aredesigned with the objective of providing reasonable assurance that (1)

our transactions are properly authorized; (2) our assets aresafeguarded against unauthorized or improper use; and (3) our transactions areproperly recorded and reported, all to permit the preparation of our financialstatements in conformity with accounting principles generally accepted in theUnited States of America.

 

**Limitations on theEffectiveness of Controls.**The Company’s management,including the CEO and CFO, does not expect that our Disclosure Controls or ourInternal Controls will prevent all error and all fraud. A control system, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system are met. Further,the design of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within the Company have been detected. Theseinherent limitations include the realities that judgments in decision-makingcan be faulty, and that breakdowns can occur because of simple error ormistake. Additionally, controls can be circumvented by the individual acts ofsome persons, by collusion of two or more people, or by management override ofthe control. The design of any system of controls also is based in part uponcertain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions; over time, control may become inadequate becauseof changes in conditions, or the degree of compliance with the policies orprocedures may deteriorate. Because of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected.

 

**Scope of the ControlsEvaluation.**The CEO/CFO evaluation of our DisclosureControls and our Internal Controls included a review of the controls’objectives and design, the controls’ implementation by the Company and theeffect of the controls on the information generated for use in this QuarterlyReport. In the course of the Controls Evaluation, we sought to identify data errors,controls problems or acts of fraud and to confirm that appropriate correctiveaction, including process improvements, were being undertaken. This type ofevaluation will be done on a quarterly basis so that the conclusions concerningcontrols effectiveness can be reported in our Quarterly Reports on Form 10-Qand AnnualReport on Form 10-K. Our Internal Controls are also evaluated on anongoing basis by other personnel in our organization and by our independentauditors in connection with their audit and review activities. The overallgoals of these various evaluation activities are to monitor our DisclosureControls and our Internal Controls and to make modifications as necessary; ourintent in this regard is that the Disclosure Controls and the Internal Controlswill be maintained as dynamic systems that change (including with improvementsand corrections) as conditions warrant.

 

Among other matters, we sought in our evaluation to determine whetherthere were any “significant deficiencies” or “material weaknesses” in theCompany’s Internal Controls, or whether the Company had identified any acts offraud involving personnel who have a significant role in the Company’s InternalControls. This information was important both for the Controls Evaluation generallyand because items 5 and 6 in the Section 302 Certifications of the CEO and CFOrequire that the CEO and CFO disclose that information to our Board’s AuditCommittee and to our independent auditors and to report on related matters inthis section of the Quarterly Report. In the professional auditing literature,“significant deficiencies” are referred to as “reportable conditions”; theseare control issues that could have a significant adverse effect on the abilityto record, process, summarize and report financial data in the financialstatements. A “material weakness” is defined in the auditing literature as aparticularly serious reportable condition where the internal control does notreduce to a relatively low level the risk that misstatements caused by

 

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error or fraud may occur in amounts that would be material in relationto the financial statements and not be detected within a timely period byemployees in the normal course of performing their assigned functions. We alsosought to deal with other controls matters in the Controls Evaluation, and ineach case if a problem was identified, we considered what revision, improvementand/or correction to make in accord with our on-going procedures.

 

In accord with SEC requirements, the CEO and CFO note that, since thedate of the Controls Evaluation to the date of this Quarterly Report, therehave been no significant changes in Internal Controls or in other factors thatcould significantly affect Internal Controls, including any corrective actionswith regard to significant deficiencies and material weaknesses.

 

**Conclusions.**Basedupon the Controls Evaluation, our CEO and CFO have concluded that, subject tothe limitations noted above, our Disclosure Controls are effective to ensurethat material information relating to Warren and its consolidated subsidiariesis made known to management, including the CEO and CFO, particularly during theperiod when our periodic reports are being prepared, and that our InternalControls are effective to provide reasonable assurance that our financialstatements are fairly presented in conformity with accounting principlesgenerally accepted in the United States of America.

 

**PART II****—OTHERINFORMATION**

 

**Item 1. *Legal Proceedings***

 

Except as provided below, we are not engaged in any material legalproceedings to which we or our subsidiaries are a party or to which any of ourproperty is subject.

 

On September 28, 1999, Magness Petroleum Company, our jointventure partner in the Wilmington Field, filed a complaint against Warren,Warren E & P, and certain Warren subsidiaries in the Superior Court of LosAngeles County, alleging that we had breached our joint venture agreement withMagness and an alleged oral agreement regarding advance payment of expenses fordrilling and completion operations. Magness sought dissolution of the joint venture, an accounting and adeclaratory judgment as to the rights of the parties under the joint venture agreement.  We were successful in enforcing thearbitration provision in the joint venture agreement and entered into anagreement with Magness to submit the matter for arbitration by the JudicialArbitration Mediation Services, or “JAMS,” before the Honorable Keith J. Wisot,a retired Los Angeles Superior Court Judge. Judge Wisot, as the arbitrator, ruled that the joint venture agreementis a valid enforceable agreement, declined to dissolve the joint venture,denied Magness’ claims for breach of contract, and held that he and JAMS wouldretain jurisdiction to enforce the award. On August 8, 2001, Magness fileda demand with the American Arbitration Association, or “AAA,” reasserting itsclaims for dissolution of the joint venture and breach of contract.  On August 20, 2001, Warren filed arequest to resume arbitration before Judge Wisot and Magness filed an objectionto such jurisdiction.  OnSeptember 19, 2001, Warren petitioned the Superior Court of California forLos Angeles County to compel Magness to enter binding arbitration with Warrenbefore Judge Wisot and JAMS.  OnOctober 5, 2001, Magness cross-petitioned to compel Warren to enterbinding arbitration with Magness before AAA. On January 3, 2002, the Los Angeles Superior Court granted Warren’spetition, denied Magness’ petition and ordered Magness to discontinue itsefforts to remove the controversy from the jurisdiction of JAMS and to proceedforthwith to arbitration before Judge Wisot of JAMS.  Magness appealed this ruling by the Superior Court and onFebruary 6, 2002, the Court of Appeal of the State of California stayedthe January 3, 2002 order compelling arbitration before JAMS, pending ahearing on the lower court’s ruling. The hearing was held before the Court ofAppeal on September 27, 2002, and on November 18, 2002 the Court ofAppeal rendered its opinion that the written agreement to arbitrate before JAMS(the “JAMS Agreement”) entered into in December 1999 only covered mattersand issues presented in and relating to the JAMS arbitration and that pursuantto the arbitration clause of the Joint Venture Agreement new issues or disputesnot covered by the JAMS Agreement should be brought before the AAA. In responseto a Motion for Rehearing filed by Warren, the Court of Appeal ordered onDecember 17, 2002 that its original opinion be modified to clarify thatthere has not been a determination whether Magness has complied in full withthe JAMS arbitrator’s Final Award. Warren believes that Magness has not fullycomplied and is in default of the JAMS Final Award and is seeking enforcementof the Final Award, along with damages incurred by reason of Magness’ failureto comply. In order to clarify what specific matters continue under JAMSjurisdiction pursuant to the original written stipulation for arbitration, onJanuary 12, 2003, Warren filed a Motion for Clarification in the SuperiorCourt of California along with a Motion for Enforcement of Final Award withJAMS. A initial hearing of the Motion for Clarification was held before JudgeBuckner of the Superior Court on February 20, 2003. The parties

 

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presented their proposed Ordersand supporting briefs regarding the Motion for Clarification to Judge Buckneron April 4, 2003 and are awaiting his issuance of an executed Order.  Accordingly, pending final resolution,further development of the Wilmington Field will be curtailed.

 

In 1998, Warren E & P was sued in the 81st JudicialDistrict Court of Frio County, Texas by Stricker Drilling Company, Inc. andManning Safety Systems to recover the value of lost equipment based on a wellblow out.  Warren was later joined inthe suit as a defendant.  As a result ofthe lawsuit, Gotham Insurance Company, Warren E & P’s well blow-outinsurer, intervened.  The suit wassettled in 1999 with all parties except Gotham.  Gotham paid over $1.7 million under the insurance policy and nowseeks a refund of approximately $1.5 million of monies paid, denying coverage,and alleging fraud and misrepresentation and a failure of Warren E & P toact with due diligence and pursuant to safety regulations.  Warren E & P countersued for theremaining proceeds under the policy coverage. In the summer and fall of 2000, summary judgments were entered forWarren E & P on essentially all claims except its bad faith claims againstGotham.  Gotham’s claims against WarrenE & P and Warren were rejected. Final judgment was rendered on May 14, 2001 in Warren E & P’sfavor for the remaining policy proceeds, interest and attorney fees.  Gotham appealed the final judgment to theSan Antonio Court of Appeals seeking a refund of approximately $1.5million.  The case on appeal was orallyargued on March 28, 2002. On July 23, 2003, a three judge panel ofthe San Antonio Court of Appeals rendered its decision in favor of Gotham onall points, except for the amount of restitution owed by Warren E&P andrelated parties, reversing the earlier summary judgment entered by the trialcourt for Warren E & P. Although the three judge panel of the San AntonioCourt of Appeals acknowledged that Gotham asked for the Court to render itsjudgment in Gotham’s favor on its restitution claims, Gotham gave noparticulars, and therefore the Court of Appeals remanded Gotham’s restitutionclaims to the trial court for further proceedings consistent with its opinion.Although the ultimate resolution is uncertain, counsel has advised WarrenE&P that it believes the three judge panel of the San Antonio Court ofAppeals committed numerous errors of fact and law and accordingly onAugust 7, 2003 Warren E&P made a Motion for Rehearing before the threejudge panel of the San Antonio Court of Appeals and a Motion for a Rehearing enbanc before the full San Antonio Appellate Court.

 

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

 

**Item 2. *Changes in Securities***

 

a. Not applicable

 

b.  Not applicable

 

c.  At June 30, 2003, the Company hadissued 4,167,602 shares of its Preferred Stock, with a value of $12.00 pershare of which, 565,770 shares were issued to accredited investors for cashconsideration of $6,789,240,  328,354  shares were issued to bond converters and3,273,478 were issued as additional LLC capital contributions as a result ofthe Recapitalizations. The shares of Convertible Preferred Stock are restrictedsecurities. The issuance was exempt from registration under the Securities Actof 1933, as amended (the “Securities Act”) pursuant to Section 4(2) and/orSection 3(a)(9). The Company’s Board of Directors has authorized the issuanceof up to 6,100,000 shares of Convertible Preferred Stock. Information on the ConvertiblePreferred Stock transaction is contained in the Company’s Form 8-K filed onDecember 17, 2002 and in this Form 10-Q for the quarterly periods endedJune 30,  2003 in “Part 1 FinancialInformation” under the caption “ Notes to Consolidated Financial Statements”under “Note 6: Changes in Shareholders’ Equity” and is incorporated herein byreference. A copy of the Company’s Certificate of Correction to its Certificateof Designation, Preferences and Rights filed on December 17, 2002 is filedas Exhibit 3.1 hereto. The form of Contribution Agreement by which the Companyissued its Convertible Preferred Stock to the 13 separate LLC’s as additionalcapital contributions is attached as Exhibit 4.1 hereto.

 

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

 

Not applicable.

 

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

 

On May 21, 2003, we held our 2003 Annual Meeting of stockholders.A majority of the 17,569,320 issued and outstanding shares of the Corporation’scommon stock on the record date were represented at the Annual Meeting, byproxy or in person. At the Meeting, the following matters were considered andapproved by the requisite majority vote of the shareholders represented at theMeeting:

 

1.                                       Proposalto elect Anthony Coelho, Dominick D’Alleva, Lloyd Davies, Marshall Miller,Thomas Noonan, Michael Quinlan and Norman Swanton as directors of the Companyfor a term expiring at the 2004 annual meeting, or until their successors areduly elected, as follows:

 

Anthony Coelho wasre-elected by a vote of 8,665,094 for and 1,441,648 abstain; Dominick D’Allevawas re-elected by a vote of 9,137,516 for and 969,226 abstain; Lloyd Davies wasre-elected by a vote of 9,149,534 for and 957,208 abstain; Marshall Miller was re-elected by a vote of 9,150,798for and 955,944 abstain; Thomas Noonan was re-elected by a vote of 9,042,396and 1,064,346 abstain; Michael Quinlan was re-elected by a vote of 9,147,972for and 958,770 abstain; and Norman Swanton was re-elected by a vote of9,147,412for and 959,330 abstain.

 

2.                                       Proposal toratify the appointment of Grant Thornton LLP as the Company’s auditors for2003.

 

The appointment of Grant Thornton LLP as the Company’s auditors wasapproved by a vote of 9,069,290 for, 968,411against and 69,041abstain.

 

**Item 5. *Other Information***

 

In accord with Section 10A(i)(2) of the Securities Exchange Act of1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002, the Company isresponsible for listing the non-audit services approved in the Second Quarterby the Company’s Audit Committee to be performed by Grant Thornton LLP, theCompany’s external auditor. Non-audit services are defined in the law asservices other than those provided in connection with an audit or a review ofthe financial statements of the Company. The non-audit services approved by theAudit Committee in the Third Quarter are each considered by the Company to beaudit-related services which are closely related to the financial auditprocess. Each of the services has been approved in accord with a pre-approvalfrom the Committee’s Chairman pursuant to delegated authority by the Committee.

 

During the quarterly period covered by this filing, the Audit Committeeapproved additional engagements of Grant Thornton LLP for the followingnon-audit services: (1) tax matter consultations and (2) income tax returnpreparations.

 

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**Item 6. *Exhibits and Reports on Form 8-K***

 

 
| **(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** |                                                                                                           | **Original  Filed  Exhibit** |                                         | **File  Number** |
|---------------------|--------|-----------------|----------------------------------------------------------------------------------------------------------------|------------------------------|----------------------------------------------|------------------|
|                | 3.1    |            | Certificate of Designation of 8% Series A Cumulative Convertible  Preferred Stock                              |                         | 3.1 to Form 8-K dated December 17, 2002 |             | 1-8968 |
|                | 3.2*   |            | Certificate of Correction to Certificate of Designation of 8% Series  A Cumulative Convertible Preferred Stock |                         |                                         |             |   |
|                | 4.1*   |            | Form of Contribution Agreement                                                                                 |                         |                                         |             | 1-8968 |
|                | 31*    |            | Rule 13a-14(a)/15d-14(a) Certifications                                                                        |                         |                                         |             |   |
|                | 32*    |            | Section 1350 Certifications                                                                                    |                         |                                         |             |   |

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

 

The registrant did not file any reports on Form 8-K during the quarterended June 30, 2003.

 

**Signatures, andCertifications of the Chief Executive Officer and the Chief Financial Officerof the Company.**

 

The following pages include the Signatures page for this Form 10-Q, andtwo separate Certifications of the Chief Executive Officer (CEO) and the Chief FinancialOfficer (CFO) of the Company.

 

The first form of Certification is required by Rule 13a-14 under theSecurities Exchange Act of 1934 (the Exchange Act) in accord with Section 302of the Sarbanes-Oxley Act of 2002 (the Section 302 Certification). The Section302 Certification includes references to an evaluation of the effectiveness ofthe design and operation of the Company’s “disclosure controls and procedures”and its “internal controls and procedures for financial reporting”. Item 4 ofPart I of this Quarterly Report presents the conclusions of the CEO and the CFOabout the effectiveness of such controls based on and as of the date of suchevaluation (relating to Item 4 of the Section 302 Certification), and containsadditional information concerning disclosures to the Company’s Audit Committeeand independent auditors with regard to deficiencies in internal controls andfraud (Item 5 of the Section 302 Certification) and related matters (Item 6 ofthe Section 302 Certification).

 

The second form of Certification is required by section 1350 of chapter63 of title 18 of the United States Code.

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|                       | WARREN RESOURCES, INC. |
|----------------------------|------------------------|
|                       | (Registrant)           |
|                       |                   |
|                       |                   |
| Date: August 13, 2003 | By:                    | /s/ Timothy A. Larkin |   |
|                       |                   | Timothy A. Larkin |
|                       |                   | *Senior Vice  President,  Chief Financial Officer and  Principal Accounting Officer* |

 

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