**UNITEDSTATES**

**SECURITIESAND 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  March 31, 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**

 

**WARRENRESOURCES, INC.**

(Exact Name ofRegistrant as Specified in its Charter.)

 

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

 

Registrant’stelephone number, including area code:

 

**(212) 697-9660**

 

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

Yes ýNo o

 

The aggregate number ofRegistrant’s outstanding shares on May 14, 2003 was 17,576,805 shares of CommonStock, $0.0001 par value.

 

 

----

 

**WARREN RESOURCES, INC.**

 

**INDEX**

** **
| PART I—   | FINANCIAL INFORMATION                                                                                |
|----------------|------------------------------------------------------------------------------------------------------|
|           |                                                                                                 |
|           | Item 1. Financial  Statements                                                                        |
|           |                                                                                                 |
|           | Balance sheets as of March  31, 2003 and December 31, 2002                                           |
|           |                                                                                                 |
|           | Statements of  operations for the three months ended March 31, 2003 and 2002                         |
|           |                                                                                                 |
|           | Statements of cash  flows for the three months ended March 31, 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—FINANCIAL INFORMATION**

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

**WarrenResources, Inc. and Subsidiaries**

**CONSOLIDATEDBALANCE SHEETS**

 
|                                                                                                                                                                                                                                              |   | **March 31,  2003** |            | **December  31,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|-----------------|-------------------------|--------|
|                                                                                                                                                                                                                                              |   | **(Unaudited)**     |            |                    |   |
| **ASSETS**                                                                                                                                                                                                                                        |   |                |            |                    |   |
| CURRENT  ASSETS                                                                                                                                                                                                                                   |   |                |            |                    |   |
| Cash  and cash equivalents                                                                                                                                                                                                                        |   | $                   | 23,157,896      |                    | $      | 23,184,936 |   |
| Accounts  receivable – trade                                                                                                                                                                                                                 |   | 3,453,419           |            | 6,895,483               |   |
| Accounts  receivable from affiliated partnerships                                                                                                                                                                                                 |   | 384,660             |            | 921,252                 |   |
| Trading  securities                                                                                                                                                                                                                               |   | 39,693              |            | 78,383                  |   |
| Restricted  investments in U.S. Treasury Bonds-available-for-sale, at fair value  (amortized cost of $1,055,211 in 2003 and $683,513 in 2002)                                                                                                     |   | 1,152,734           |            | 810,822                 |   |
| Other  current assets                                                                                                                                                                                                                             |   | 2,127,479           |            | 2,053,248               |   |
|                                                                                                                                                                                                                                              |   |                |            |                    |   |
| Total  current assets                                                                                                                                                                                                                             |   | 30,315,881          |            | 33,944,124              |   |
|                                                                                                                                                                                                                                              |   |                |            |                    |   |
| OTHER  ASSETS                                                                                                                                                                                                                                     |   |                |            |                    |   |
| Oil  and gas properties—at cost, based on successful efforts method of accounting,  net of accumulated depletion and amortization                                                                                                            |   | 78,786,048          |            | 48,684,362              |   |
| Property  and equipment—at cost, net                                                                                                                                                                                                         |   | 651,122             |            | 751,479                 |   |
| Restricted  investments in U.S. Treasury Bonds—available for sale, at fair value  (amortized cost of $10,492,615 in 2003 and $7,571,860 in 2002)                                                                                             |   | 12,016,274          |            | 9,058,851               |   |
| Deferred  bond offering costs (net of accumulated amortization of $3,231,615 in 2003  and $3,051,046 in 2002)                                                                                                                                     |   | 3,209,453           |            | 3,390,022               |   |
| Goodwill                                                                                                                                                                                                                                          |   | 3,430,246           |            | 3,430,246               |   |
| Other  assets                                                                                                                                                                                                                                     |   | 5,193,639           |            | 5,365,435               |   |
| Restricted  Cash                                                                                                                                                                                                                                  |   | —              |            | 3,637,775               |   |
|                                                                                                                                                                                                                                              |   |                |            |                    |   |
| Total  other assets                                                                                                                                                                                                                               |   | 103,286,782         |            | 74,318,170              |   |
|                                                                                                                                                                                                                                              |   |                |            |                    |   |
|                                                                                                                                                                                                                                              |   | **$**               | **133,602,663** |                    | **$**  | **108,262,294** | ** ** |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                                    |   |                |            |                    |   |
|                                                                                                                                                                                                                                              |   |                |            |                    |   |
| CURRENT  LIABILITIES                                                                                                                                                                                                                              |   |                |            |                    |   |
| Current  maturities of debentures                                                                                                                                                                                                                 |   | $                   | 5,297,970       |                    | $      | 5,466,970 |   |
| Current  maturities of other long-term liabilities                                                                                                                                                                                                |   | 267,163             |            | 178,980                 |   |
| Accounts  payable and accrued expenses                                                                                                                                                                                                            |   | 3,394,066           |            | 3,822,809               |   |
| Deferred  income-turnkey drilling contracts with affiliated partnerships                                                                                                                                                                          |   | 31,402,528          |            | 32,265,725              |   |
|                                                                                                                                                                                                                                              |   |                |            |                    |   |
| Total  current liabilities                                                                                                                                                                                                                        |   | 40,361,727          |            | 41,734,484              |   |
|                                                                                                                                                                                                                                              |   |                |            |                    |   |
| LONG-TERM  LIABILITIES                                                                                                                                                                                                                            |   |                |            |                    |   |
| Debentures,  less current portion                                                                                                                                                                                                                 |   | 47,681,730          |            | 49,202,730              |   |
| Other  long-term liabilities, less current portion                                                                                                                                                                                                |   | 1,786,318           |            | 1,353,129               |   |
|                                                                                                                                                                                                                                              |   |                |            |                    |   |
|                                                                                                                                                                                                                                              |   | 49,468,048          |            | 50,555,859              |   |
|                                                                                                                                                                                                                                              |   |                |            |                    |   |
| MINORITY  INTEREST                                                                                                                                                                                                                                |   | 14,544,324          |            | 8,970,078               |   |
|                                                                                                                                                                                                                                              |   |                |            |                    |   |
| STOCKHOLDERS’  EQUITY                                                                                                                                                                                                                        |   |                |            |                    |   |
| 8% convertible preferred stock, par value $.00001;  authorized 20,000,000 shares, issued and outstanding, 3,817,555 shares in  2003 and 1,784,197 shares in 2002  (aggregate  liquidation preference $45,810,660 in 2003 and $21,410,364 in 2002) |   | 45,213,128          |            | 20,955,838              |   |
| Common  Stock  - $.0001 par value; authorized,  100,000,000 shares; issued 17,576,805 in 2003 and 17,581,996 shares in 2002)                                                                                                                 |   | 1,758               |            | 1,758                   |   |
| Additional  paid-in-capital                                                                                                                                                                                                                       |   | 51,611,351          |            | 52,424,147              |   |
| Accumulated  deficit                                                                                                                                                                                                                              |   | (67,764,117         | )               | (66,529,795             | )      |
| Accumulated  other comprehensive income, net of applicable income taxes of $649,000 in  2003 and $646,000 in 2002                                                                                                                                 |   | 975,393             |            | 971,508                 |   |
|                                                                                                                                                                                                                                              |   | 30,037,513          |            | 7,823,456               |   |
| Less  common stock in Treasury-at cost; 702,500 shares in 2003 and 707,691 shares  in 2002                                                                                                                                                        |   | 808,949             |            | 821,583                 |   |
| Total  shareholders’ equity                                                                                                                                                                                                                  |   | 29,228,564          |            | 7,001,873               |   |
|                                                                                                                                                                                                                                              |   | **$**               | **133,602,663** |                    | **$**  | **108,262,294** | ** ** |

 

The accompanyingnotes are an integral part of these financial statements

 

3

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**Warren Resources, Inc. andSubsidiaries**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 
|                                                                                                               |   | **Three  Months Ended  March 31 (Unaudited)** |       |
|--------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|------------|
|                                                                                                               |   | **2003**                                      |       | **2002** |   |
| **REVENUES**                                                                                                       |   |                                          |       |   |   |
| Turnkey  contracts with affiliated partnerships                                                                    |   | $                                             | 863,197    |   | $ | 3,743,949 |   |
| Oil  and gas sales from marketing activities                                                                       |   | 1,409,891                                     |       | 2,877,611 |   |
| Well  services                                                                                                     |   | 242,727                                       |       | 719,814 |   |
| Oil  and gas sales                                                                                                 |   | 1,535,011                                     |       | 67,835 |   |
| Net  gain on investments                                                                                           |   | 73,544                                        |       | 137,332 |   |
| Interest  and other income                                                                                         |   | 313,311                                       |       | 545,851 |   |
|                                                                                                               |   |                                          |       |   |   |
|                                                                                                               |   | 4,437,681                                     |       | 8,092,392 |   |
|                                                                                                               |   |                                          |       |   |   |
| **EXPENSES**                                                                                                       |   |                                          |       |   |   |
| Turnkey  contracts                                                                                                 |   | 910,849                                       |       | 2,724,696 |   |
| Cost  of marketed oil and gas purchased from affiliated partnerships                                               |   | 1,376,662                                     |       | 2,831,446 |   |
| Well  services                                                                                                     |   | 168,197                                       |       | 399,424 |   |
| Production  & exploration                                                                                      |   | 960,738                                       |       | 1,543,157 |   |
| Depreciation,  depletion and amortization                                                                          |   | 159,975                                       |       | 327,363 |   |
| General  and administrative                                                                                        |   | 1,030,258                                     |       | 1,288,072 |   |
| Interest                                                                                                           |   | 946,913                                       |       | 1,353,475 |   |
| Contingent  repurchase obligation                                                                                  |   | —                                        |       | (3,064,661 | ) |
|                                                                                                               |   |                                          |       |   |   |
|                                                                                                               |   | 5,553,592                                     |       | 7,402,972 |   |
|                                                                                                               |   |                                          |       |   |   |
| Income  (Loss) before provision for income taxes, minority interest and cumulative  change in accounting principle |   | (1,115,911                                    | )          | 689,420 |   |
|                                                                                                               |   |                                          |       |   |   |
| DEFERRED  INCOME TAX EXPENSE (BENEFIT)                                                                             |   | (3,000                                        | )          | 115,000 |   |
|                                                                                                               |   |                                          |       |   |   |
| INCOME  (LOSS) BEFORE MINORITY INTEREST AND CHANGE IN ACCOUNTING PRINCIPLE                                         |   | (1,112,911                                    | )          | 574,420 |   |
|                                                                                                               |   |                                          |       |   |   |
| MINORITY  INTEREST                                                                                                 |   | (33,193                                       | )          | — |   |
|                                                                                                               |   |                                          |       |   |   |
| INCOME  (LOSS) BEFORE CHANGE IN ACCOUNTING PRINCIPLE                                                               |   | (1,146,104                                    | )          | 574,420 |   |
|                                                                                                               |   |                                          |       |   |   |
| CUMULATIVE  EFECT OF CHANGE IN ACCOUNTING PRINCIPLE                                                                |   | (88,218                                       | )          | — |   |
|                                                                                                               |   |                                          |       |   |   |
| NET  INCOME (LOSS)                                                                                                 |   | (1,234,322                                    | )          | 574,420 |   |
|                                                                                                               |   |                                          |       |   |   |
| LESS  DIVIDENDS ON PREFERRED SHARES                                                                                |   | 800,162                                       |       | — |   |
|                                                                                                               |   |                                          |       |   |   |
| NET  INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS                                                               |   | $                                             | (2,034,484 | ) | $ | 574,420 |   |
|                                                                                                               |   |                                          |       |   |   |
| BASIC  AND DILUTED INCOME (LOSS) PER COMMON SHARE                                                                  |   |                                          |       |   |   |
| INCOME (LOSS) BEFORE ACCOUNTING CHANGE                                                                             |   | $                                             | (0.12      | ) | $ | 0.03 |   |
| CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING  PRINCIPLE                                                               |   | $                                             | —     |   | $ | — |   |
| NET INCOME (LOSS) AFTER ACCOUNTING CHANGE                                                                          |   | $                                             | (0.12      | ) | $ | 0.03 |   |
|                                                                                                               |   |                                          |       |   |   |
| WEIGHTED  AVERAGE COMMON SHARES OUTSTANDING                                                                        |   |                                          |       |   |   |
| Basic  & Diluted                                                                                               |   | 16,874,305                                    |       | 17,534,641 |   |

 

The accompanyingnotes are an integral part of these financial statements

 

4

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**Warren Resources, Inc. andSubsidiaries**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
|                                                                                                 |   | **For the  three months ended  March 31, (Unaudited)** |       |
|------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------|------------|
|                                                                                                 |   | **2003**                                               |       | **2002** |   |
| Cash  flows from operating activities:                                                               |   |                                                   |       |   |   |
| Net  Income (loss)                                                                                   |   | $                                                      | (1,234,322 | ) | $ | 574,420 |   |
| Adjustments  to reconcile net income (loss) to net cash provided by (used in) operating  activities: |   |                                                   |       |   |   |
| Accretion  of discount on available-for-sale debt securities                                         |   | (125,486                                               | )          | (129,565 | ) |
| Amortization  and write-off of deferred bond offering costs                                          |   | 180,569                                                |       | 104,902 |   |
| (Gain)  Loss on sale of US treasury bonds—available for sale                                    |   | (102,810                                               | )          | 3,571 |   |
| Depreciation,  depletion and amortization                                                            |   | 159,975                                                |       | 327,363 |   |
| Deferred  tax expense (benefit)                                                                      |   | (3,000                                                 | )          | 115,000 |   |
| Leases  contributed to partnerships                                                                  |   | —                                                 |       | 254,332 |   |
| Change  in assets and liabilities:                                                                   |   |                                                   |       |   |   |
| Decrease  in trading securities                                                                      |   | 38,690                                                 |       | 191,900 |   |
| Decrease  in accounts receivable—trade                                                          |   | 3,442,064                                              |       | 1,636,952 |   |
| (Increase)  Decrease in accounts receivable from affiliated partnerships                             |   | 536,592                                                |       | (30,647 | ) |
| Decrease  in other assets                                                                            |   | 97,565                                                 |       | 13,265 |   |
| Decrease  in accounts payable and accrued expenses                                                   |   | (1,228,904                                             | )          | (4,339,811 | ) |
| Decrease  in deferred income from affiliated partnerships                                            |   | (863,197                                               | )          | (3,743,949 | ) |
| Decrease  in contingent repurchase obligation to affiliated partnerships                             |   | —                                                 |       | (3,318,993 | ) |
| Increase  (Decrease) in other long term liabilities                                                  |   | (316,914                                               | )          | 1,609,500 |   |
|                                                                                                 |   |                                                   |       |   |   |
| Net  cash provided by (used in) operating activities                                                 |   | 580,822                                                |       | (6,731,760 | ) |
| Cash  flows from investing activities:                                                               |   |                                                   |       |   |   |
| Purchases  of U.S. Treasury Bonds—available-for-sale                                            |   | —                                                 |       | (14,906 | ) |
| Purchases  of oil and gas properties                                                                 |   | (1,125,477                                             | )          | (1,794,920 | ) |
| Purchase  of property and equipment                                                                  |   | —                                                 |       | (241 | ) |
| 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                               |   | 28,087                                                 |       | — |   |
| Proceeds  from U.S. Treasury Bonds—available-for-sale                                           |   | 573,621                                                |       | 74,546 |   |
|                                                                                                 |   |                                                   |       |   |   |
| Net  cash provided by (used in) investing activities                                                 |   | (523,769                                               | )          | 1,541,348 |   |
|                                                                                                 |   |                                                   |       |   |   |
| Cash  flows from financing activities:                                                               |   |                                                   |       |   |   |
| Payments  on other long-term debt                                                                    |   | (937,511                                               | )          | (563,524 | ) |
| Issuance  of preferred stock, net                                                                    |   | 853,418                                                |       | — |   |
| Repurchase  of common stock                                                                          |   | —                                                 |       | (2,624 | ) |
|                                                                                                 |   |                                                   |       |   |   |
| Net  cash used in financing activities                                                               |   | (84,093                                                | )          | (566,148 | ) |
|                                                                                                 |   |                                                   |       |   |   |
| Net  Decrease in cash and cash equivalents                                                           |   | (27,040                                                | )          | (5,756,560 | ) |
| Cash  and cash equivalents at beginning of period                                                    |   | 23,184,936                                             |       | 22,923,605 |   |
|                                                                                                 |   |                                                   |       |   |   |
| Cash  and cash equivalents at end of period                                                          |   | $                                                      | 23,157,896 |   | $ | 17,167,045 |   |
| Supplemental  disclosure of cash flow information                                                    |   |                                                   |       |   |   |
| Cash  paid for interest, net of amount capitalized                                                   |   | $                                                      | 766,344    |   | $ | 1,245,277 |   |
| Cash  paid for income taxes                                                                          |   | —                                                 |       | — |   |

 

The accompanyingnotes are an integral part of these financial statements

 

5

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**WARREN RESOURCES, INC. ANDSUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**MARCH 31, 2003**

**NOTE 1—ORGANIZATION**

 

Warren Resources, Inc.(the “Company”), was formed on June 12, 1990 under the laws of the state of NewYork for the purpose of acquiring and developing oil and gas properties. OnSeptember 5th, 2002, the Company changed its state of incorporation to Delaware.As a result, all shares of the Company’s stock were converted into shares ofthe Delaware corporation. The Company’s properties are primarily located in NewMexico, Texas, Wyoming and California. In addition, the Company serves as themanaging general partner (the “MGP”) to affiliated partnerships and jointventures.

 

The accompanyingunaudited financial statements and related notes present the Company’sconsolidated financial position as of March 31, 2003 and December 31, 2002, theresults of operations for the three months ended March 31, 2003 and 2002 andcash flows for the three months ended March 31, 2003 and 2002. The unauditedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information and with the instructions of Form 10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates of America for complete financial statements. In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included. Operatingresults for the three months ended March 31, 2003 are not necessarilyindicative of the results that may be expected for the fiscal year endingDecember 31, 2003. Certain reclassifications have been made to the 2002 amountsto conform to the 2003 presentation. The accounting policies followed by the Companyare set forth in Note A to the Company’s financial statements in Form 10-K forthe year ended December 31, 2002. These interim financial statements and notesthereto should be read in conjunction with our annual consolidated financialstatements presented in our 2002 Annual Report on Form 10-K.

 

##### **NOTE 2 — STOCK OPTIONS**

 

At March 31, 2003, theCompany had stock-based compensation plans. The Company accounts for thoseplans under the recognition and measurement principles of Accounting PrinciplesBoard (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” andrelated interpretations. The following table illustrates the effect on netincome and earnings per share if the Company had applied the fair-valuerecognition provisions of Financial Accounting Standards Board (FASB) StatementNo. 123, “Accounting for Stock-Based Compensation,” to stock-based employeecompensation:

 
|                                                                                                                                          |   | **Period  ended March 31,** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|------------|
|                                                                                                                                          |   | **2003**                    |       | **2002** |   |
|                                                                                                                                          |   |                        |       |   |   |
| Net  Income (Loss), as reported                                                                                                               |   | $                           | (2,034,484 | ) | $ | 574,420 |   |
|                                                                                                                                          |   |                        |       |   |   |
| Deduct:  Total stock-based employee compensation expense determined under  fair-value-based method for all awards, net of related tax effects |   | 0                           |       | $ | (102,420 | ) |
|                                                                                                                                          |   |                        |       |   |   |
| Pro  forma Net Income (Loss)                                                                                                                  |   | $                           | (2,034,484 | ) | $ | 472,000 |   |
|                                                                                                                                          |   |                        |       |   |   |
| Earnings  Per Share:                                                                                                                          |   |                        |       |   |   |
| As  Reported -                                                                                                                                |   | $                           | (0.12      | ) | $ | 0.03 |   |
| Pro  Forma -                                                                                                                                  |   | $                           | (0.12      | ) | $ | 0.03 |   |

 

6

----

 

#### **NOTE3—MANAGEMENT’S PLANS**

 

The Company had a netloss of $1.2 million for the quarter ended March 31, 2003, as compared to aprofit of $0.6 million for the corresponding quarter ending March 31, 2002. AtMarch 31, 2003, current liabilities exceeded current assets by approximately$10.0 million. During 2002, the Company raised $5.4 million for its drillingprograms compared to $18.1 million and $46.5 million in 2001 and 2000,respectively. As a result, the Company’s turnkey revenue and total gross profitin 2003 will be less than in 2002 and 2001 and the number of the Company’s oiland gas properties developed through partnership arrangements will be reduced.

 

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

 

•             Raise additionalcapital through the sale of preferred stock.

 

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

 

•             Continue to privatelyplace drilling programs, which based on prior experience management anticipatesraising approximately $7.5 million in 2003.

 

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

 

•             Reduce fixed overheadexpenses and primarily conduct developmental drilling operations in theCompany’s two main target areas, coalbed methane properties in Wyoming and oilformations in the Wilmington field in California.

 

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

 

**NOTE 4—REPURCHASE OBLIGATION**

 

Certain Company sponsoredoil and gas partnerships provide investor partners a right to tender theirinterest to the Company for repurchase at specified future dates. In the eventthe Company does repurchase the investor interest, the Company will be entitledto receive any future cash flows from the underlying oil and gas properties.The determination of whether a contingent repurchase obligation exists is basedupon the estimated discounted present value of future net revenues of proveddeveloped and undeveloped reserves of each partnership, net of future capitalcosts and the Company’s working interest, from reserve studies prepared bypetroleum engineers compared to the formula purchase price. A contingentrepurchase obligation expense and liability of $3,318,993 was recognized atDecember 31, 2001 based on oil and gas pricing at March 15, 2002. During thefirst quarter of 2002, the Company assigned additional proved undevelopedleases located in the Wilmington Unit to various partnerships to satisfy thecontingent repurchase obligation. Based upon this calculation using prices atMarch 31, 2002, the Company’s contingent repurchase obligation wasextinguished. As a result, a gain of approximately $3,065,000 was recognizedfor the three-month period ending March 31, 2002. As a result of the recentrecapitalization of thirteen of our drilling programs (See Note 15), we believethat we will have no liability resulting from a repurchase obligation in thefuture.

 

**NOTE 5—PLUGGING AND ABANDONMENT LIABILITY**

 

In June 2001, theFinancial Accounting Standard Board issued SFAS No. 143, “Accounting for AssetRetirement Obligations” which requires entities to record the fair value of aliability for an asset retirement obligation in the period in which it isincurred and a corresponding increase in the carrying amount of the relatedlong-lived asset. This statement is effective for fiscal years beginning afterJune 15, 2002. The Company adopted SFAS No. 143 on January 1, 2003 and recordeda net asset of $557,000, a related liability of $645,000 (using a 10% discountrate) and a cumulative effect on change in accounting principle on prior yearsof $88,000. The new standard had nomaterial impact on income before the cumulative effect of adoption in the firstquarter of 2003, nor would it have had a material impact in the first quarterof 2002 assuming an adoption of this accounting standard on a proforma basis. Duringthe period ending March 31, 2003, the asset retirement liability was increasedby approximately $21,000, as a result of accretion and recorded as interestexpense.

 

7

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#### **NOTE6 —CONVERTIBLE PREFERRED STOCK**

 

As of March 31, 2003,3,817,555 shares of convertible preferred stock were issued and outstanding,with dividends in arrears of $800,337 at March 31, 2003. During the threemonths ended March 31, 2003, the Company issued 2,033,358 preferred shares;1,886,756 relating to the recapitalization of our drilling programs, 63,731relating to bond conversions and 82,871 for cash consideration of $994,452. 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 issubject to 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, commencingseven years after the date of issuance, holders of the preferred stock mayelect to require the Company to redeem their preferred stock at a redemptionprice equal to the liquidation value of $12.00 per share, plus accrued butunpaid dividends, if any (“Redemption Price”). Upon the receipt of a redemption election, the Company, at its option,shall either: (1) pay the holder cash in the amount equal to the RedemptionPrice or (2) issue to holder shares of common stock as defined by theagreement. The Company is accreting the carrying value of its preferred stockto its redemption price using the effective interest method with changesrecorded to additional paid in capital.

 

**NOTE 7—EARNINGS PER SHARE**

 

Basic net earnings (loss)per share is computed by dividing net earnings (loss) by the weighted averagenumber of shares of common stock outstanding during the period. Dilutedearnings (loss) per share is based on the assumption that stock options areconverted into common shares using the treasury stock method and convertiblebonds, debentures and preferred stock are converted using the if-convertedmethod. Conversion is not assumed if the results are anti-dilutive.  Potential common shares at March 31, 2003and March 31, 2002, of 9,336,916 and 6,197,773, respectively, relating toconvertible bonds, debentures and preferred stock and 1,514,459 and 810,000,respectively, relating to incentive stock options, were excluded from thecomputation of diluted earnings (loss) per share because they areanti-dilutive. Incentive stock options have a weighted average exercise priceof $5.59 and $4.51 at March 31, 2003 and March 31, 2002, respectively. 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 $50.00. The preferred stock may be converted at the discretion of the holder(See note 6).

 

8

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**NOTE 8—LONG TERM DEBT**

 

The Convertible Bonds andDebentures may be converted from the date of issuance until maturity at 100% ofprincipal amount into common stock of the Company at prices ranging from $5.00to $50. Each year the holders of the Convertible Debentures may tender to theCompany up to 10% of the aggregate Debenture issued.

 
|                                                               |   | **March 31,  2003** |       | **December  31,  2002** |   |
|--------------------------------------------------------------------|--------|---------------------|------------|-------------------------|--------|
|                                                               |   |                |       |                    |   |
| 12%  Sinking Fund Debentures, due December 31, 2007                |   | $                   | 12,996,000 |                    | $      | 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 |   | 12,062,500          |       | 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    |   | 6,425,000           |       | 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               |   |
|                                                               |   |                |       |                    |   |
|                                                               |   | 52,979,700          |       | 54,669,700              |   |
| Less:  Current Portion                                             |   | 5,297,970           |       | 5,466,970               |   |
|                                                               |   |                |       |                    |   |
| Long  Term Portion                                                 |   | $                   | 47,681,730 |                    | $      | 49,202,730 |   |

 

#### **NOTE9 — CAPITALIZED INTEREST**

 

Interest of approximately$900,000 and $570,000 was capitalized during the three months ended March 31,2003 and 2002, respectively, relating to our California and Wyoming properties.

 

**NOTE 10—INCOME TAXES**

For the quarters endedMarch 31, 2003 and 2002, the Company’s effective income tax rate differed fromthe federal statutory rate due to changes in the valuation allowance fordeferred tax assets.

 

**NOTE 11—LITIGATION**

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

 

9

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**NOTE 12—BUSINESS SEGMENT INFORMATION**

 

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

 
|                    |   | **Three  Months Ended** |      |
|-------------------------|--------|-------------------------|-----------|
|                    |   | **March 31,  2003**     |      | **March 31,  2002** |   |
| **Revenue**             |   |                    |      |   |   |
| Turnkey  Contracts      |   | $                       | 863,197   |   | $ | 3,743,949 |   |
| Oil  and Gas Marketing  |   | 1,409,891               |      | 2,877,611 |   |
| Oil  and Gas Operations |   | 1,535,011               |      | 67,835 |   |
| Well  Services          |   | 242,727                 |      | 719,814 |   |
| Other                   |   | 386,855                 |      | 683,183 |   |
|                    |   |                    |      |   |   |
|                    |   | $                       | 4,437,681 |   | $ | 8,092,392 |   |

 
|                         |   | **March 31,  2003** |       | **March 31,  2002** |   |
|------------------------------|--------|---------------------|------------|---------------------|--------|
| **Operating  Income (Loss)** |   |                |       |                |   |
| Turnkey  Contracts           |   | $                   | (73,218    | )                   | $      | 4,059,763 |   |
| Oil  and Gas Marketing       |   | 33,229              |       | 46,165              |   |
| Oil  and Gas Operations      |   | 453,199             |       | (1,719,342          | )      |
| Well  Services               |   | 74,530              |       | 244,790             |   |
| Other                        |   | (1,603,651          | )          | (1,941,956          | )      |
|                         |   |                |       |                |   |
|                         |   | $                   | (1,115,911 | )                   | $      | 689,420 |   |

 

**NOTE 13—NEW ACCOUNTING PRONOUNCEMENTS:**

 

In November 2002, FASBInterpretation 45, *Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others*(FIN 45), was issued. FIN 45 requires a guarantor entity, at the inception of aguarantee covered by the measurement provisions of the interpretation, torecord a liability for the fair value of the obligation undertaken in issuingthe guarantee. The Company previously did not record a liability whenguaranteeing obligations unless it became probable that the Company would haveto perform under the guarantee. FIN 45 applies prospectively to guarantees theCompany issued or modifies subsequent to December 31, 2002, but has certaindisclosure requirements effective for interim and annual periods ending afterDecember 15, 2002. The Company has historically issued guarantees only on alimited basis and does not anticipate FIN 45 will have a material effect on its2003 financial statements. Disclosures required by FIN 45 are not requiredbecause the Company does not have any existing guarantees at March 31, 2003.

 

In January 2003, the FASBissued FASB Interpretation 46 (FIN 46), *Consolidation of Variable Interest Entities*.FIN 46 clarifies the application of Accounting Research Bulletin 51, *ConsolidatedFinancial Statements*, for certain entities that do not havesufficient equity at risk for the entity to finance its activities withoutadditional subordinated financial support from other parties or in which equityinvestors do not have the characteristics of a controlling financial interest(“variable interest entities”). Variable interest entities within the scope ofFIN 46 will be required to be consolidated by their primary beneficiary. Theprimary beneficiary of a variable interest entity is determined to

 

10

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be the party that absorbs a majority of the entity’s expected losses,receives a majority of its expected returns, or both. FIN 46 appliesimmediately to variable interest entities created after January 31, 2003, andto variable interest entities in which an enterprise obtains an interest afterthat date. It applies in the first fiscal year or interim period beginningafter June 15, 2003, to variable interest entities in which an enterprise holdsa variable interest that it acquired before February 1, 2003. The Company is inthe process of determining what impact, if any, the adoption of the provisionsof FIN 46 will have upon its financial condition or results of operationsrelating to drilling programs formed in 1998 and after.

 

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

 

Other comprehensive income(loss) consists primarily of net unrealized investment gains and losses, net ofincome tax effect. Total comprehensive income (losses) for the periods endingMarch 31 are as follow:

 
|                          |   | **2003** |       | **2002** |   |
|-------------------------------|--------|----------|------------|----------|--------|
| Three  Months ending March 31 |   | $        | (1,230,437 | )        | $      | 402,628 |   |
|                               |        |          |            |          |        |  |  |

 

**NOTE 15—CONSENT SOLICITAION:**

 

In late 2002, each of the13 drilling programs formed from 1994 through 1997 commenced a VoteSolicitation of their partners to: (i) obtain the requisite 2/3rds affirmativevote of their respective partners to convert their drilling program from aDelaware limited partnership to an LLC wherein all LLC members would havelimited liability, including Warren, and (ii) allow partners to select whetherthey wanted to be (a) a standard member in the LLC with substantially the samerights and obligations that they had as partners in their respective drillingfund, or (b) a Preferred Member in the LLC having certain preferential rightsby consenting to Warren’s contribution of additional capital to the LLC uponconversion (the “Recapitalization”) in the form of its unregistered PreferredShares in an amount equal to between 110% to 120% of the potential repurchaseprice of consenting partner’s interests calculated as of December 31, 2002. Forits additional capital contribution, Warren received additional standardmembership interests in the LLC and was specially allocated a prorata interestas a standard member in the wells and oil leases formerly allocable to thepartners who elected to become Preferred Members. Election by a partner tobecome a Preferred Member terminated their repurchase rights under the originalbuy/sell agreements. At December 31, 2002, six of the thirteen programsobtained the requisite votes to convert to LLCs and were consolidated in thefinancial statements for the year ended December 31, 2002. At March 31, 2003,all 13 programs obtained the requisite votes to convert to LLCs and on average72.9% of the program members elected to become Preferred Members in their LLC.As a result of recapitalization, Warren issued 3,229,716 Preferred Shares in2002 and 2003. During the first quarter the Company issued 1,641,628 preferredshares to the remaining 7 LLCs as a capital contribution, with an estimatedfair value of $19,699,536 and received its prorata share of additional standardmembership interests in the LLCs. The fair value of the preferred shares wasbased on actual cash sales to independent parties in this time period. Due tothe increase in control of these thirteen affiliated partnerships, the Companyhas consolidated these entities for financial reporting purposes at March 31,2003. The Company accounted for the remaining 7 LLCs as a purchase transactionwith the estimated fair value of the assets and liabilities assumed in theacquisition as follows:

 

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

 

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The following summarizespro forma unaudited results of operations for the period ended March 31, 2003and 2002 as if these acquisitions had been consummated immediately prior toJanuary 1, 2002.

 

These pro forma resultsare not necessarily indicative of future results.

 
|                                                   |   | **Pro Forma  (unaudited)**  |       |
|--------------------------------------------------------|--------|-----------------------------|------------|
|                                                   |   | **Period  ended March 31,** |       |
|                                                   |   | **2003**                    |       | **2002** |   |
|                                                   |   |                        |       |   |   |
| Revenues                                               |   | $                           | 6,765,628  |   | $ | 9,179,996 |   |
|                                                   |   |                        |       |   |   |
| Net  Income (Loss)                                     |   | $                           | (1,536,013 | ) | $ | 723,749 |   |
|                                                   |   |                        |       |   |   |
| Income  (Loss) Per Common Share—Basic and diluted |   | $                           | (0.09      | ) | $ | 0.04 |   |

 

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

 

**FORWARD-LOOKING INFORMATION**

 

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

 

•financial position; 

•business strategy; 

•budgets; 

•amount, nature and timing of capital expenditures; 

•drilling of wells; 

•natural gas and oil reserves; 

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

•operating costs and other expenditures; 

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

•cash flow and anticipated liquidity; and 

•prospect development and property acquisitions.

 

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

 

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

•risks associated with oil and gas exploration; 

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

•availability and cost of material and equipment; 

• uncertainty of reserve estimates andin the projection of future rates of production and timing of development   expenditures; 

•operating hazards;

•climactic conditions; 

•availability of capital and unexpected substantial variances in capitalrequirements; 

•the strength and financial resources of our competitors; 

•regulatory developments; 

•environmental risks; and 

•general economic conditions.

 

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Actual results,performance or achievements could differ materially from those contemplated,expressed or implied by the forward-looking statements contained in this Reportand our other filings with the SEC. Important factors that could cause actualresults to differ materially from our forward-looking statements are set forthin this Report and our other filings with the SEC, including under the heading“Risk Factors” in our annual report on Form 10-K. These factors are notintended to represent a complete list of the general or specific factors thatmay affect us. It should be recognized that other factors, including generaleconomic factors and business strategies, may be significant, presently or inthe future, and the factors set forth in this report and our other filings withthe SEC may affect us to a greater extent than indicated. All forward-lookingstatements attributable to us or persons acting on our behalf are expresslyqualified in their entirety by the cautionary statements set forth in thisReport and our other filings with the SEC. Except as required by law, weundertake no obligation to update any forward-looking statement, whether as aresult of new information, future events or otherwise.

 

**LIQUIDITY AND CAPITAL RESOURCES:**

 

We have funded ouractivities primarily with the proceeds raised through privately placed drillingprograms and our private sale of our equity and debt securities. These privateplacements primarily were made through a network of independent broker dealers.Since 1992, we have raised approximately $222 million through the privateplacements of interests in 30 drilling programs. Additionally, we have raised$58.7 million through the issuance of our debt securities and $56.5 millionthrough the issuance of our equity securities. In our drilling programs, wefund the costs associated with acreage acquisition and the tangible portion ofdrilling activities, while investors in the drilling programs fund allintangible drilling costs.

 

In late 2002, each of the13 drilling programs formed from 1994 through 1997 commenced a VoteSolicitation of their partners to: (i) obtain the requisite 2/3rds affirmativevote of their respective partners to convert their drilling program from aDelaware limited partnership to an LLC wherein all LLC members would 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 upon conversion(the “Recapitalization”) in the form of its unregistered Preferred Shares in anamount equal to between 110% to 120% of the potential repurchase price ofconsenting partner’s interests calculated as of December 31, 2002. For itsadditional capital contribution, Warren received additional standard membershipinterests in the LLC and was specially allocated a prorata interest as astandard member in the wells and oil leases formerly allocable to the partnerswho elected to become Preferred Members. Election by a partner to become aPreferred Member terminated their repurchase rights under the original buy/sellagreements. At March 31, 2003, all 13 programs obtained the requisite votes toconvert to LLCs and on average 72.9% of the program members elected to becomePreferred Members in their LLC. As a result of the Recapitalization, Warrenissued 3,229,716 Preferred Shares in the aggregate, 1,886,756 during the firstquarter of 2003, to the 13 LLCs as an additional capital contribution andreceived its prorata share of additional standard membership interests in theLLCs.

 

Our cash and cashequivalents decreased $27 thousand for the three months ended March 31, 2003.This resulted from a $0.6 million increase in cash provided from operatingactivities offset by a $0.5 million decrease in cash provided from investingactivities and a $0.1 million decrease in cash provided by financingactivities.

 

Cash provided fromoperating activities increased due to the receipt of life insurance fundsrelating to our Executive Vice President, James C. Johnson, Jr. who passed awayin December 2002.  This increase wasoffset by drilling wells on behalf of the drilling programs and the relatedrecognition of deferred revenue during the first three months of 2003.Additionally, the funds raised through our drilling programs are primarilyraised during the last quarter of our calendar year. As a result, during thefirst three months of the calendar year, we incur turnkey expenses related todrilling programs and do not raise additional funds through drilling programs.

 

Cash provided frominvesting activities decreased due to the purchase of certain oil and gasproperties during the first quarter of 2003. This decrease was partially offset by the receipt of U.S. Treasury Bondspreviously held in escrow on behalf of our drilling program investors.  Primarily, the U.S. Treasury Bonds werereleased to us as a result of the Recapitalization discussed above.

 

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Our most material commitmentof funds relates to the drilling programs. Our deferred revenue balancerelating to our drilling commitments totaled $31.4 million at March 31, 2003.This commitment varies pro rata with the amount of funds raised through ourdrilling programs.

 

The Company had a netloss of $1.2 million for the quarter ended March 31, 2003, as compared to netincome of $0.6 million for the corresponding quarter ending March 31, 2002. AtMarch 31, 2003, current liabilities exceeded current assets by approximately $10.0million.  During the quarter,shareholders’ equity increased $22.2 million from $7.0 million to $29.2 million, primarily from the Recapitalizationdiscussed above.

 

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

 

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

 

•Raise additional capital through the sale of preferred stock.

 

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

 

•Continue to privately place drilling programs, which based on prior experiencemanagement anticipates raising approximately $7.5 million in 2003.

 

•  Generate turnkey profit from turnkeydrilling contracts equal to approximately 25% of the total amount of totalturnkey 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.

 

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

 

**RESULTS OF OPERATIONS:**

 

Three months Ended March31, 2003 Compared to Three Months Ended March 31, 2002

 

*Turnkey contract revenue and expenses.*Turnkey contract revenue decreased $2.9 million in the first quarter to $0.9million, a 77% decrease compared to the corresponding quarter of the precedingyear. Additionally, turnkey contract expense decreased $1.8 million during thefirst quarter to $0.9 million, a 67% decrease compared to the same period in2002. These decreases resulted from a lower level of drilling activity duringthe first quarter compared to the corresponding quarter 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) fromturnkey contract revenue and expenses was $(48) thousand or (6)% for the firstquarter. This compares to gross profit of $1.0 million or 27% for thecorresponding quarter in 2002. The decrease in gross profit percentage resultsfrom a higher percentage of overhead expenses allocated to turnkey expenseduring the first quarter.  This resultedfrom significantly less drilling activity during the first quarter as comparedto the corresponding quarter of the preceding year.

 

*Oil and gas sales and costs from marketing activities.*Oil and gas sales from marketing activities decreased $1.5  million in the first quarter to $1.4million, a 51% decrease compared to the same period last year. Cost of oil andgas marketing activities decreased $1.5 million in the quarter to $1.4 million,a 51% 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 three months endedMarch 31, 2003 and 2002 was

 

14

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226 Bcfe and 415 Bcfe, respectively. This decrease was offset by higher average gas prices.  The average price per Mcf during the firstquarter of 2003 and 2002 was $3.25 and $1.44, respectively.

 

The gross profit frommarketing activities for the first quarter of 2003 was $33 thousand as comparedto $46 thousand in the same period last year.

 

*Well services activities.* Well servicesrevenue decreased $0.5 million in the first quarter to $0.2 million, a 66%decrease compared to the corresponding quarter of the preceding year. Wellservices expense decreased $0.2 million for the first quarter to $0.2 million,a 58% decrease compared to the same period in 2002. These decreases in wellservices revenue and expense resulted from the sale of certain assets of ourdrilling subsidiary, 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 wellservices activities was $0.1 million for the first quarter. This compared togross profit of $0.3 million for the corresponding quarter last year. Thisdecrease in gross profit resulted from the sale of Pinnacle’s operations inFebruary 2002.

 

*Oil and gas sales.* Revenue from oil andgas sales for the first quarter increased to $1.5 million, due to increasedownership in our drilling programs. We obtained oil and gas interests from ourdrilling programs as a result of the Recapitalizations referred to above.  Our share of pre-payout production fromdrilling programs formed subsequent to 1998 is generally 25% of the productionallocated to these drilling programs.

 

*Net gain (loss) on investments.* Net gainon investments was $0.1 million for the first quarters of 2003 and 2002.  Primarily, investments represent zero couponU.S. treasury bonds held in our inventory. Fluctuations in net gain or loss oninvestments resulted from changes in long-term interest rates.

 

*Interest and other income.* Interest incomedecreased $0.2 million in the first quarter to $0.3 million, a 43% decreasecompared to the same quarter in 2002. Primarily, this decrease is attributableto a decrease in interest income from U.S. Treasuries.

 

*General and administrative expenses.*General and administrative expenses decreased $0.3 million in the first quarterof 2003 to $1.0 million, a 20% decrease compared to 2002. This decrease resultedfrom a reduced number of employees. During the first quarter of 2003 and 2002, we employed approximately 35and 40 individuals,  respectively.

 

*Depreciation, Depletion and Amortization.*Depreciation, depletion and amortization expense decreased $0.2 million for thequarter to $0.2 million, a 51% decrease compared to the corresponding quarterlast year. This decrease resulted from lower depreciation expense recorded onthe Pinnacle assets due to sale of its assets in February 2002, as mentionedabove.  Additionally, this expense wasreduced by a settlement payment from an unrelated oil Company.

 

*Interest expense.* Interest expensedecreased $0.4 million in the first quarter to $0.9 million, a 30% decreasecompared to the same quarter last year. Primarily, this decrease reflects anincrease in the amount of interest capitalized to our Wyoming and Californiaproperties of $0.3 million.

 

*Production & exploration.* Productionand exploration expense decreased $0.6 million, resulting from the recording ofplugging and abandonment liabilities during the first quarter of 2002.

 

*Contingent Repurchase Obligation.*Repurchaseobligation expense of $3.3 million was recorded in 2001 based on pricing atMarch 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.

 

15

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

 

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

 

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

 

**Quarterly evaluation of the Company’s Disclosure Controls andInternal Controls.**Within the 90 days prior to the filing ofthis Quarterly Report on Form 10-Q, the Company evaluated the effectiveness of thedesign and operation of its “disclosure controls and procedures” (DisclosureControls), and its “internal controls and procedures for financial reporting”(Internal Controls). This evaluation (the Controls Evaluation) was done underthe supervision and with the participation of management, including our ChiefExecutive Officer (CEO) and Chief Financial Officer (CFO). Rules adopted by theSEC require that in this section of the Quarterly Report we present theconclusions of the CEO and the CFO about the effectiveness of our DisclosureControls and Internal Controls based on and as of the date of the ControlsEvaluation.

 

**CEO and CFO Certifications.**Appearingimmediately following the Signatures section of this Quarterly Report, thereare two separate forms of “Certifications” of the CEO and the CFO. The firstform of Certification is required in accordance with Section 302 of theSarbanes-Oxley Act of 2002 (the Section 302 Certification). This section of theQuarterly Report which you are currently reading is the information concerningthe Controls Evaluation referred to in the Section 302 Certifications and thisinformation should be read in conjunction with the Section 302 Certificationsfor a more complete understanding of the topics presented.

 

**Disclosure Controls and Internal Controls.**DisclosureControls are procedures that are designed with the objective of ensuring thatinformation required to be disclosed in our reports filed under the SecuritiesExchange Act of 1934 (Exchange Act), such as this Quarterly Report, isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s (SEC) rules and forms. DisclosureControls are also designed with the objective of ensuring that such informationis accumulated and communicated to our management, including the CEO and CFO,as appropriate to allow timely decisions regarding required disclosure.  Internal Controls are procedures which aredesigned with the objective of providing reasonable assurance that (1) ourtransactions are properly authorized; (2) our assets are safeguarded againstunauthorized or improper use; and (3) our transactions are properly recordedand reported, all to permit the preparation of our financial statements inconformity with generally accepted accounting principles.

 

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

 

**Scope of the Controls Evaluation.**TheCEO/CFO evaluation of our Disclosure Controls and our Internal Controlsincluded a review of the controls’ objectives and design, the controls’implementation by the Company and the effect of the controls on the informationgenerated for use in this Quarterly Report. In the course of the ControlsEvaluation, we sought to identify data errors, controls problems or acts offraud and to confirm that appropriate corrective action, including processimprovements, were being undertaken. This type of evaluation will be done on a

 

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quarterly basis so that the conclusions concerning controlseffectiveness can be reported in our Quarterly Reports on Form 10-Q and Annual****Reporton Form 10-K. Our Internal Controls are also evaluated on an ongoing basis byother personnel in our organization and by our independent auditors inconnection with their audit and review activities. The overall goals of thesevarious evaluation activities are to monitor our Disclosure Controls and ourInternal Controls and to make modifications as necessary; our intent in this regardis that the Disclosure Controls and the Internal Controls will be maintained asdynamic systems that change (including with improvements and corrections) asconditions warrant.

 

Among other matters, wesought in our evaluation to determine whether there were any “significantdeficiencies” or “material weaknesses” in the Company’s Internal Controls, orwhether the Company had identified any acts of fraud involving personnel whohave a significant role in the Company’s Internal Controls. This informationwas important both for the Controls Evaluation generally and because items 5and 6 in the Section 302 Certifications of the CEO and CFO require that the CEOand CFO disclose that information to our Board’s Audit Committee and to ourindependent auditors and to report on related matters in this section of theQuarterly Report. In the professional auditing literature, “significantdeficiencies” are referred to as “reportable conditions”; these are controlissues that could have a significant adverse effect on the ability to record,process, summarize and report financial data in the financial statements. A“material weakness” is defined in the auditing literature as a particularlyserious reportable condition where the internal control does not reduce to a relativelylow level the risk that misstatements caused by error or fraud may occur inamounts that would be material in relation to the financial statements and notbe detected within a timely period by employees in the normal course ofperforming their assigned functions. We also sought to deal with other controlsmatters in the Controls Evaluation, and in each case if a problem wasidentified, we considered what revision, improvement and/or correction to makein accord with our on-going procedures.

 

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

 

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

 

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**PART II—OTHER INFORMATION**

**Item1. *LegalProceedings***

 

Except as provided below,we are not engaged in any material legal proceedings to which we or oursubsidiaries are a party or to which any of our property is subject.

 

On September 28, 1999,Magness Petroleum Company, our joint venture partner in the Wilmington Field,filed a complaint against Warren, Warren E & P, and certain Warrensubsidiaries in the Superior Court of Los Angeles County, alleging that we hadbreached our joint venture agreement with Magness and an alleged oral agreementregarding advance payment of expenses for drilling and completionoperations.  Magness sought dissolutionof the joint venture, an accounting and a declaratory judgment as to the rightsof the parties under the joint venture agreement.  We were successful in enforcing the arbitration provision in thejoint venture agreement and entered into an agreement with Magness to submitthe matter for arbitration by the Judicial Arbitration Mediation Services, or“JAMS,” before the Honorable Keith J. Wisot, a retired Los Angeles SuperiorCourt Judge.  Judge Wisot, as thearbitrator, ruled that the joint venture agreement is a valid enforceableagreement, declined to dissolve the joint venture, denied Magness’ claims forbreach of contract, and held that he and JAMS would retain jurisdiction toenforce the award. On August 8, 2001, Magness filed a demand with the AmericanArbitration Association, or “AAA,” reasserting its claims for dissolution ofthe joint venture and breach of contract. On August 20, 2001, Warren filed a request to resume arbitration beforeJudge Wisot and Magness filed an objection to such jurisdiction.  On September 19, 2001, Warren petitioned theSuperior Court of California for Los Angeles County to compel Magness to enterbinding arbitration with Warren before Judge Wisot and JAMS.  On October 5, 2001, Magness cross-petitionedto compel Warren to enter binding arbitration with Magness before AAA.  On January 3, 2002, the Los Angeles SuperiorCourt granted Warren’s petition, denied Magness’ petition and ordered Magnessto discontinue its efforts to remove the controversy from the jurisdiction ofJAMS and to proceed forthwith to arbitration before Judge Wisot of JAMS.  Magness appealed this ruling by the SuperiorCourt and on February 6, 2002, the Court of Appeal of the State of Californiastayed the 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 of Appealrendered its opinion that the written agreement to arbitrate before JAMS (the“JAMS Agreement”) entered into in December 1999 only covered matters and issuespresented in and relating to the JAMS arbitration and that pursuant to the arbitrationclause of the Joint Venture Agreement new issues or disputes not covered by theJAMS Agreement should be brought before the AAA. In response to a Motion forRehearing filed by Warren, the Court of Appeal ordered on December 17, 2002that its original opinion be modified to clarify that there has not been adetermination whether Magness has complied in full with the JAMS arbitrator’sFinal Award. Warren believes that Magness has not fully complied and is indefault of the JAMS Final Award and is seeking enforcement of the Final Award,along with damages incurred by reason of Magness’ failure to comply. In orderto clarify what specific matters continue under JAMS jurisdiction pursuant tothe original written stipulation for arbitration, on January 12, 2003, Warrenfiled a Motion for Clarification in the Superior Court of California along witha Motion for Enforcement of Final Award with JAMS. A initial hearing of theMotion for Clarification was held before Judge Buckner of the Superior Court onFebruary 20, 2003. The parties presented their proposed Orders and supportingbriefs regarding the Motion to Judge Buckner on April 4, 2003 and are awaitinghis issuance of an executed Order. Accordingly, pending final resolution, further development of the WilmingtonField will be curtailed.

 

In 1998, Warren E & Pwas sued in the 81st Judicial District Court of Frio County, Texasby Stricker Drilling Company, Inc. and Manning Safety Systems to recover thevalue of lost equipment based on a well blow out.  Warren was later joined in the suit as a defendant.  As a result of the lawsuit, Gotham InsuranceCompany, Warren E & P’s well blow-out insurer, intervened.  The suit was settled in 1999 with allparties except Gotham.  Gotham paid over$1.7 million under the insurance policy and now seeks a refund of approximately$1.5 million of monies paid, denying coverage, and alleging fraud andmisrepresentation and a failure of Warren E & P to act with due 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 policy proceeds,interest and attorney fees.  Gotham hasappealed the final judgment.  Warren E& P is defending the judgment on

 

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appeal although seeking to reverse the ruling denying its bad faithclaim.  The case on appeal was orallyargued on March 28, 2002. We are awaiting the appeals court decision.

 

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

 

**Item2. *Changesin Securities***

 

a. Not applicable

 

b.  Notapplicable

 

c. At March 31, 2003, theCompany had issued 3,817,555 shares of Series A 8% Cumulative ConvertiblePreferred Stock (the “Convertible Preferred Stock”), with a value of $12.00 pershare of which, 422,325 shares were issued to accredited investors for cashconsideration of $5,067,900, 165,514 shares were issued to bond converters and3,229,716 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 theConvertible Preferred Stock transaction is contained in the Company’s Form 8-Kfiled on December 17, 2002 and in this Form 10-Q for the quarterly period endedMarch 31, 2003 in “Part 1 Financial Information” under the caption “ Notes toConsolidated Financial Statements” under “Note 6: Convertible Preferred Stock”and is incorporated herein by reference.

 

**Item3. *Defaultsupon Senior Securities***

 

Not applicable.

 

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

 

No matters were submittedto a vote of security holders during the first quarter of 2003.

 

**Item5. *OtherInformation***

 

In accord with Section10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 ofthe Sarbanes-Oxley Act of 2002, the Company is responsible for listing thenon-audit services approved in the Second Quarter by the Company’s AuditCommittee to be performed by Grant Thornton LLP, the Company’s externalauditor. Non-audit services are defined in the law as services other than thoseprovided in connection with an audit or a review of the financial statements ofthe Company. The non-audit services approved by the Audit Committee in theThird Quarter are each considered by the Company to be audit-related serviceswhich are closely related to the financial audit process. Each of the serviceshas been approved in accord with a pre-approval from the Committee’s Chairmanpursuant to delegated authority by the Committee.

 

During the quarterlyperiod covered by this filing, the Audit Committee approved additionalengagements of Grant Thornton LLP for the following non-audit services: (1) taxmatter consultations and (2) income tax return preparations.

 

**Item6. *Exhibitsand Reports on Form 8-K***

 

The registrant did notfile any reports on Form 8-K during the quarter ended March 31, 2003.

 

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

 

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

 

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

 

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

 

**SIGNATURES**

 

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

 
|               | WARREN RESOURCES, INC. |
|--------------------|------------------------|
|               | (Registrant)           |
|               |                   |
|               |                   |
|               |                   |
| Date: May 14, 2003 | By:                    | /s/ Timothy A. Larkin |   |
|               |                   | Timothy A. Larkin |
|               |                   | *Senior Vice President,* |
|               |                   | *Chief Financial Officer and Principal* |
|               |                   | *Accounting Officer* |

 

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# **CERTIFICATION OF CHIEF EXECUTIVE OFFICER**

# ** **

I,Norman F. Swanton, certify that:

 

1.I have reviewed this quarterly report on Form 10-Q of Warren Resources, Inc.

 

2.Based on my knowledge, this quarterly report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this quarterlyreport;

 

3.Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

4.The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

(a)designed such disclosure controls and procedures to ensure that materialinformation relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

(b)evaluated the effectiveness of the registrant’s disclosure controls andprocedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

(c)presented in this quarterly report our conclusions about the effectiveness ofthe disclosure controls and procedures based on our evaluation as of theEvaluation Date;

 

5.The registrant’s other certifying officers and I have disclosed, based on ourmost recent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

(a)all significant deficiencies in the design or operation of internal controlswhich could adversely affect the registrant’s ability to record, process,summarize and report financial data and have identified for the registrant’sauditors any material weaknesses in internal controls; and

 

(b)any fraud, whether or not material, that involves management or other employeeswho have a significant role in the registrant’s internal controls; and

 

6.The registrant’s other certifying officers and I have indicated in thisquarterly report whether there were significant changes in internal controls orin other factors that could significantly affect internal controls subsequentto the date of our most recent evaluation, including any corrective actionswith regard to significant deficiencies and material weaknesses.

 
| Date:  May 14, 2003 |                                    |
|---------------------|-----------------------------------------|
|                |                                    |
|                |                                    |
|                | /s/ Norman F. Swanton                   |   |
|                | Norman  F. Swanton                      |
|                | *Chairman  and Chief Executive Officer* |

 

A signed original of thisoriginal statement required by Section 302 has been provided to WarrenResources, Inc., and will be retained by Warren Resources, Inc. and furnishedto the Securities and Exchange Commission or its staff upon request.

 

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CERTIFICATION OFCHIEF FINANCIAL OFFICER

 

I,Timothy A. Larkin, certify that:

 

1.I have reviewed this quarterly report on Form 10-Q of Warren Resources, Inc.

 

2.Based on my knowledge, this quarterly report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this quarterlyreport;

 

3.Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

4.The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

(a)designed such disclosure controls and procedures to ensure that materialinformation relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

(b)evaluated the effectiveness of the registrant’s disclosure controls andprocedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

(c)presented in this quarterly report our conclusions about the effectiveness ofthe disclosure controls and procedures based on our evaluation as of theEvaluation Date;

 

5.The registrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

(a)all significant deficiencies in the design or operation of internal controlswhich could adversely affect the registrant’s ability to record, process,summarize and report financial data and have identified for the registrant’sauditors any material weaknesses in internal controls; and

 

(b)any fraud, whether or not material, that involves management or other employeeswho have a significant role in the registrant’s internal controls; and

 

6.The registrant’s other certifying officers and I have indicated in thisquarterly report whether there were significant changes in internal controls orin other factors that could significantly affect internal controls subsequentto the date of our most recent evaluation, including any corrective actionswith regard to significant deficiencies and material weaknesses.

 
| Date:  May 14, 2003 |                            |
|---------------------|---------------------------------|
|                |                            |
|                |                            |
|                | /s/ Timothy A. Larkin           |   |
|                | Timothy  A. Larkin              |
|                | *Senior  Vice President,*       |
|                | *Chief  Financial Officer and*  |
|                | *Principal  Accounting Officer* |

 

A signed original of thisoriginal statement required by Section 302 has been provided to WarrenResources, Inc., and will be retained by Warren Resources, Inc. and furnishedto the Securities and Exchange Commission or its staff upon request.

 

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**WARREN RESOURCES, INC.**

 

CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with theQuarterly Report of Warren Resources, Inc. (the “Company”) on Form 10-Q for theperiod ending March 31, 2003 as filed with the Securities and ExchangeCommission on the date hereof (the “Report”), I, Norman F. Swanton, Chairman ofthe Board and Chief Executive Officer of the Company, certify, pursuant to 18U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002,that:

 
| (1)    |   | The Report fully  complies with the requirements of section 13(a) or 15(d) of the Securities  Exchange Act of 1934; and                               |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                  |
| (2)    |   | The information  contained in the Report fairly presents, in all material respects, the  financial condition and result of operations of the Company. |

 

 
| /s/ Norman F. Swanton         |   |
|-------------------------------|--------|
| Norman F. Swanton             |
| ***Chairman of the Board***   |
| *And Chief Executive Officer* |

 

May 14, 2003

 

A signed original of thisoriginal statement required by Section 906 has been provided to WarrenResources, Inc., and will be retained by Warren Resources, Inc. and furnishedto the Securities and Exchange Commission or its staff upon request.

 

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**WARREN RESOURCES, INC.**

 

CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with theQuarterly Report of Warren Resources, Inc. (the “Company”) on Form 10-Q for theperiod ending March 31, 2003 as filed with the Securities and ExchangeCommission on the date hereof (the “Report”), I, Timothy A. Larkin, Senior VicePresident, Chief Financial Officer and Principal Accounting Officer of theCompany, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 ofthe Sarbanes-Oxley Act of 2002, that:

 

 
| (1)    |   | The Report fully  complies with the requirements of section 13(a) or 15(d) of the Securities  Exchange Act of 1934; and                               |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                  |
| (2)    |   | The information  contained in the Report fairly presents, in all material respects, the  financial condition and result of operations of the Company. |

 

 
| /s/ Timothy A. Larkin                     |   |
|-------------------------------------------|--------|
| Timothy A. Larkin                         |
| ***Senior Vice President,***              |
| ***Chief Financial Officer***             |
| *And Principal Accounting   Officer* |

 

May 14, 2003

 

A signed original of thisoriginal statement required by Section 906 has been provided to WarrenResources, Inc., and will be retained by Warren Resources, Inc. and furnishedto the Securities and Exchange Commission or its staff upon request.

 

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