**UNITEDSTATES****SECURITIES AND EXCHANGECOMMISSIONWashington, D.C. 20549**

**FORM 10-Q**

**x****        QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES**

**EXCHANGEACT OF 1934**

 

**For the Quarterly Period Ended September 30, 2006**

# **OR**

 

**o****        TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES**

**EXCHANGEACT OF 1934**

 

**For thetransition period from                 to                 **

 

# **CommissionFile No. 000-33275**

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

 

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

 

Registrant’s telephonenumber, including area code:

**(212)697-9660**

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

 

Yes xNo o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer (asdefined in Rule 12b-2 of the Exchange Act).
| Large accelerated filer o |   | Accelerated filer x |   | Non-accelerated filer o |
|---------------------------|--------|---------------------|--------|-------------------------|

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

 

Yes oNo x

 

The aggregate number of Registrant’s outstanding shares on November 1,2006 was 54,120,082 shares of Common Stock, $0.0001 par value.

 

----

**WARRENRESOURCES, INC.**

**INDEX**
|                     | ** ** | ** **                                                                                              | ** ** |
|---------------------|------------|---------------------------------------------------------------------------------------------------------|------------|
| ** **          | ** ** | ** **                                                                                              | ** ** |
| PART I—        |       | FINANCIAL INFORMATION                                                                                   |       |
|                |       |                                                                                                    |       |
|                |       | Item 1. Financial  Statements                                                                           |       |
|                |       |                                                                                                    |       |
|                |       | Consolidated  Balance Sheets as of September 30, 2006 and December 31, 2005                             |       |
|                |       |                                                                                                    |       |
|                |       | Consolidated  Statements of Operations for the three and nine months ended September 30,  2006 and 2005 |       |
|                |       |                                                                                                    |       |
|                |       | Consolidated  Statements of Cash Flows for the nine months ended September 30, 2006 and  2005           |       |
|                |       |                                                                                                    |       |
|                |       | Notes to  the Consolidated Financial Statements                                                         |       |
|                |       |                                                                                                    |       |
|                |       | Item 2.  Management’s Discussion and Analysis of Financial Conditions and Results of  Operations   |       |
|                |       |                                                                                                    |       |
|                |       | Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                     |       |
|                |       |                                                                                                    |       |
|                |       | Item 4.  Evaluation of Disclosure Controls and Procedures                                               |       |
|                |       |                                                                                                    |       |
|  PART II— |       | OTHER INFORMATION                                                                                       |       |
|                |       |                                                                                                    |       |
|                |       | Item 1. Legal  Proceedings                                                                              |       |
|                |       |                                                                                                    |       |
|                |       | Item  1A. Risk Factors                                                                                  |       |
|                |       |                                                                                                    |       |
|                |       | Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                    |       |
|                |       |                                                                                                    |       |
|                |       | Item 3.  Defaults upon Senior Securities                                                                |       |
|                |       |                                                                                                    |       |
|                |       | Item 4.  Submission of Matters to a Vote of Security Holders                                            |       |
|                |       |                                                                                                    |       |
|                |       | Item 5. Other  Information                                                                              |       |
|                |       |                                                                                                    |       |
|                |       | Item  6. Exhibits                                                                                       |       |
|                |       |                                                                                                    |       |
|                |       | Signatures                                                                                              |       |

 

2

----

**PART I—FINANCIAL INFORMATION**

###### **ITEM1. FINANCIAL STATEMENTS**

**WarrenResources, Inc. and SubsidiariesCONSOLIDATED BALANCE SHEETS**

**(Unaudited)**
| ** **                                                                                                                                                                                                                                 | ** ** | **September 30,  2006** | ** **      | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|-----------------|-----------------------------|------------|
| ASSETS                                                                                                                                                                                                                                     |       |                         |            |                        |       |
| Current Assets                                                                                                                                                                                                                             |       |                         |            |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                                                 |       | $                            | 61,768,229      |                        | $          | 114,632,099 |   |
| Accounts receivable -  trade                                                                                                                                                                                                               |       | 3,008,197                    |            | 3,945,862                   |       |
| Accounts receivable  from affiliated partnerships                                                                                                                                                                                          |       | 40,266                       |            | 118,356                     |       |
| Trading securities                                                                                                                                                                                                                         |       | 745,147                      |            | —                      |       |
| Restricted investments  in U.S. Treasury Bonds—available-for-sale, at fair value                                                                                                                                                      |       | 120,292                      |            | 125,771                     |       |
| Other current assets                                                                                                                                                                                                                       |       | 3,322,552                    |            | 2,356,583                   |       |
|                                                                                                                                                                                                                                       |       |                         |            |                        |       |
| Total current assets                                                                                                                                                                                                                       |       | 69,004,683                   |            | 121,178,671                 |       |
|                                                                                                                                                                                                                                       |       |                         |            |                        |       |
| Other Assets                                                                                                                                                                                                                               |       |                         |            |                        |       |
| Oil and gas  properties—at cost, based on successful efforts method of accounting, net of  accumulated depreciation, depletion and amortization                                                                                       |       | 243,803,909                  |            | 185,904,194                 |       |
| Property and  equipment—at cost, net                                                                                                                                                                                                  |       | 1,785,461                    |            | 559,612                     |       |
| Restricted investments  in U.S. Treasury Bonds—available for sale, at fair value                                                                                                                                                      |       | 1,082,630                    |            | 1,821,181                   |       |
| Deferred bond offering  costs                                                                                                                                                                                                              |       | 262,763                      |            | 277,700                     |       |
| Goodwill                                                                                                                                                                                                                                   |       | 3,430,246                    |            | 3,430,246                   |       |
| Other assets                                                                                                                                                                                                                               |       | 3,679,489                    |            | 7,592,799                   |       |
|                                                                                                                                                                                                                                       |       |                         |            |                        |       |
| Total other assets                                                                                                                                                                                                                         |       | 254,044,498                  |            | 199,585,732                 |       |
|                                                                                                                                                                                                                                       | ** ** | **$**                        | **323,049,181** | ** **                  | **$**      | **320,764,403** | ** ** |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                                                             | ** ** | ** **                   | ** **      | ** **                  | ** ** |
| Current Liabilities                                                                                                                                                                                                                        |       |                         |            |                        |       |
| Current maturities of debentures                                                                                                                                                                                                           |       | $                            | 249,600         |                        | $          | 260,600 |   |
| Current maturities of  other long-term liabilities                                                                                                                                                                                         |       | 154,441                      |            | 325,994                     |       |
| Accounts payable and  accruals                                                                                                                                                                                                             |       | 17,504,521                   |            | 25,042,379                  |       |
| Deferred income—turnkey  drilling contracts with affiliated partnerships                                                                                                                                                              |       | 1,016,587                    |            | 1,765,829                   |       |
|                                                                                                                                                                                                                                       |       |                         |            |                        |       |
| Total current  liabilities                                                                                                                                                                                                                 |       | 18,925,149                   |            | 27,394,802                  |       |
|                                                                                                                                                                                                                                       |       |                         |            |                        |       |
| Long-Term Liabilities                                                                                                                                                                                                                      |       |                         |            |                        |       |
| Debentures, less  current portion                                                                                                                                                                                                          |       | 2,246,400                    |            | 2,345,400                   |       |
| Other long-term  liabilities, less current portion                                                                                                                                                                                         |       | 6,503,042                    |            | 5,974,493                   |       |
|                                                                                                                                                                                                                                       |       |                         |            |                        |       |
|                                                                                                                                                                                                                                       |       | 8,749,442                    |            | 8,319,893                   |       |
|                                                                                                                                                                                                                                       |       |                         |            |                        |       |
| Minority Interest                                                                                                                                                                                                                          |       | —                       |            | 7,009,634                   |       |
|                                                                                                                                                                                                                                       |       |                         |            |                        |       |
| Commitments and  Contingencies                                                                                                                                                                                                             |       |                         |            |                        |       |
|                                                                                                                                                                                                                                       |       |                         |            |                        |       |
| Stockholders’ Equity                                                                                                                                                                                                                  |       |                         |            |                        |       |
| 8%  convertible preferred stock, par value $.0001; authorized 10,000,000 shares,  issued and outstanding, 295,852 shares in 2006 and 652,336 shares in 2005  (aggregate liquidation preference  $3,550,224 in 2006 and $7,828,032 in 2005) |       | 3,536,913                    |            | 7,629,622                   |       |
| Common stock - $.0001  par value; authorized, 100,000,000 shares; issued 54,118,024 in 2006 and  52,738,384 shares in 2005                                                                                                                 |       | 5,412                        |            | 5,274                       |       |
| Additional  paid-in-capital                                                                                                                                                                                                                |       | 370,778,573                  |            | 353,714,161                 |       |
| Accumulated deficit                                                                                                                                                                                                                        |       | (78,358,996                  | )               | (82,861,220                 | )          |
| Accumulated other  comprehensive income, net of applicable income taxes of $92,000 in 2006 and  $185,000 in 2005                                                                                                                           |       | 140,743                      |            | 280,292                     |       |
|                                                                                                                                                                                                                                       |       | 296,102,645                  |            | 278,768,129                 |       |
|                                                                                                                                                                                                                                       |       |                         |            |                        |       |
| Less common stock in  Treasury—at cost; 632,250 shares in 2006 and 2005                                                                                                                                                               |       | 728,055                      |            | 728,055                     |       |
| Total  stockholders’ equity                                                                                                                                                                                                           |       | 295,374,590                  |            | 278,040,074                 |       |
|                                                                                                                                                                                                                                       | ** ** | **$**                        | **323,049,181** | ** **                  | **$**      | **320,764,403** | ** ** |

The accompanyingnotes are an integral part of these financial statements.

 

3

----

**Warren Resources, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF OPERATION**
| ** **                                                             | ** ** | **Three Months Ended  September 30, (Unaudited)** | ** ** | **Nine Months Ended  September 30, (Unaudited)** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2006**                                                              | ** ** | **2005**                                                             | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues                                                               | ** ** | ** **                                                            | ** ** | ** **                                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Oil and gas  sales                                                     |       | $                                                                     | 8,424,271  |                                                                 | $          | 3,818,082 |   | $ | 22,867,872 |   | $ | 8,923,993 |   |
| Turnkey  contracts with affiliated partnerships                        |       | 58,365                                                                |       | 2,680,722                                                            |       | 604,875 |   | 6,284,577 |   |
| Oil and gas  sales from marketing activities                           |       | 393,884                                                               |       | 2,434,392                                                            |       | 1,912,298 |   | 6,940,887 |   |
| Well services                                                          |       | 274,858                                                               |       | 374,147                                                              |       | 732,779 |   | 1,199,442 |   |
| Net gain on  investments                                               |       | 60,362                                                                |       | 56,987                                                               |       | 110,169 |   | 417,888 |   |
| Interest and  other income                                             |       | 1,019,482                                                             |       | 653,400                                                              |       | 3,528,663 |   | 2,244,010 |   |
| Gain on sale of  oil and gas properties                                |       | —                                                                |       | —                                                               |       | — |   | 89,441 |   |
|                                                                   |       | 10,231,222                                                            |       | 10,017,730                                                           |       | 29,756,656 |   | 26,100,238 |   |
|                                                                   |       |                                                                  |       |                                                                 |       |   |   |   |   |
| Expenses                                                               |       |                                                                  |       |                                                                 |       |   |   |   |   |
| Production &  exploration                                          |       | 3,395,102                                                             |       | 2,235,296                                                            |       | 9,550,730 |   | 4,908,330 |   |
| Turnkey  contracts                                                     |       | 51,742                                                                |       | 2,919,731                                                            |       | 852,339 |   | 6,686,941 |   |
| Cost of marketed  oil and gas purchased from affiliated partnerships   |       | 377,527                                                               |       | 2,400,824                                                            |       | 1,854,200 |   | 6,844,269 |   |
| Well services                                                          |       | 216,810                                                               |       | 475,627                                                              |       | 677,133 |   | 841,658 |   |
| Depreciation,  depletion, amortization and impairment                  |       | 1,750,921                                                             |       | 1,034,725                                                            |       | 4,969,747 |   | 2,714,877 |   |
| General and  administrative                                            |       | 2,061,946                                                             |       | 1,792,295                                                            |       | 6,692,851 |   | 4,724,646 |   |
| Interest                                                               |       | 191,334                                                               |       | 95,863                                                               |       | 564,432 |   | 1,702,140 |   |
| Retirement of debt                                                     |       | —                                                                |       | —                                                               |       | — |   | 1,524,270 |   |
|                                                                   |       | 8,045,382                                                             |       | 10,954,361                                                           |       | 25,161,432 |   | 29,947,131 |   |
|                                                                   |       |                                                                  |       |                                                                 |       |   |   |   |   |
| Income (loss) before  provision for income taxes and minority interest |       | 2,185,840                                                             |       | (936,631                                                             | )          | 4,595,224 |   | (3,846,893 | ) |
|                                                                   |       |                                                                  |       |                                                                 |       |   |   |   |   |
| Deferred income tax  expense (benefit)                                 |       | (30,000                                                               | )          | 143,000                                                              |       | 93,000 |   | 143,000 |   |
|                                                                   |       |                                                                  |       |                                                                 |       |   |   |   |   |
| Income  (loss) before minority interest                                |       | 2,215,840                                                             |       | (1,079,631                                                           | )          | 4,502,224 |   | (3,989,893 | ) |
|                                                                   |       |                                                                  |       |                                                                 |       |   |   |   |   |
| Minority  interest                                                     |       | —                                                                |       | (18,890                                                              | )          | — |   | (219,227 | ) |
|                                                                   |       |                                                                  |       |                                                                 |       |   |   |   |   |
| Net  income (loss)                                                     |       | 2,215,840                                                             |       | (1,098,521                                                           | )          | 4,502,224 |   | (4,209,120 | ) |
|                                                                   |       |                                                                  |       |                                                                 |       |   |   |   |   |
| Less  dividends and accretion on preferred shares                      |       | 73,304                                                                |       | 404,041                                                              |       | 289,452 |   | 3,646,664 |   |
|                                                                   |       |                                                                  |       |                                                                 |       |   |   |   |   |
| Net  income (loss) applicable to common stockholders                   |       | $                                                                     | 2,142,536  |                                                                 | $          | (1,502,562 | ) | $ | 4,212,772 |   | $ | (7,855,784 | ) |
|                                                                   |       |                                                                  |       |                                                                 |       |   |   |   |   |
| Earnings  (loss) per share – Basic                                |       | $                                                                     | 0.04       |                                                                 | $          | (0.04 | ) | $ | 0.08 |   | $ | (0.21 | ) |
| Earnings  (loss) per share – Diluted                              |       | 0.04                                                                  |       | (0.04                                                                | )          | 0.08 |   | (0.21 | ) |
|                                                                   |       |                                                                  |       |                                                                 |       |   |   |   |   |
| Weighted  average common shares outstanding – Basic               |       | 53,317,367                                                            |       | 42,001,928                                                           |       | 52,786,511 |   | 37,325,880 |   |
| Weighted average common  shares outstanding – Diluted             |       | 54,890,425                                                            |       | 42,001,928                                                           |       | 54,450,850 |   | 37,325,880 |   |

 

The accompanyingnotes are an integral part of these financial statements.

4

----

**Warren Resources, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF CASH FLOWS**
| ** **                                                                                           | ** ** | **For the nine months ended  September 30, (Unaudited)** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                                                                                           | ** ** | **2006**                                                                               | ** ** | **2005** | ** ** |
| Cash flows from  operating activities:                                                               |       |                                                                                   |       |   |   |
| Net income  (loss)                                                                                   |       | $                                                                                      | 4,502,224  |   | $ | (4,209,120 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |       |                                                                                   |       |   |   |
| Accretion of  discount on available-for-sale debt securities                                         |       | (59,965                                                                                | )          | (458,908 | ) |
| Amortization and  write-off of deferred bond offering costs                                          |       | 14,937                                                                                 |       | 973,061 |   |
| Gain on sale of  US treasury bonds—available for sale                                           |       | —                                                                                 |       | (470,268 | ) |
| Depreciation,  depletion, amortization and impairment                                                |       | 4,969,747                                                                              |       | 2,714,877 |   |
| Accretion of  asset retirement obligation                                                            |       | 261,852                                                                                |       | 40,876 |   |
| Gain on sale of  oil and gas properties                                                              |       | —                                                                                 |       | (89,441 | ) |
| Expense on the  issuance of warrants                                                                 |       | —                                                                                 |       | 21,705 |   |
| Common stock  cancelled                                                                              |       | (70,670                                                                                | )          | — |   |
| Stock option  expense                                                                                |       | 443,271                                                                                |       | — |   |
| Deferred tax  expense                                                                                |       | 93,000                                                                                 |       | 143,000 |   |
| Change in assets  and liabilities:                                                                   |       |                                                                                   |       |   |   |
| Increase in  trading securities                                                                      |       | (745,147                                                                               | )          | (199,442 | ) |
| (Incrase)  decrease in accounts receivable—trade                                                |       | 1,012,664                                                                              |       | (449,502 | ) |
| Decrease in  accounts receivable from affiliated partnerships                                        |       | 78,090                                                                                 |       | 22,673 |   |
| (Increase)  decrease in other assets                                                                 |       | 2,947,340                                                                              |       | (2,966,208 | ) |
| Decrease in  accounts payable and accruals                                                           |       | (6,804,243                                                                             | )          | (243,186 | ) |
| Decrease in  deferred income from affiliated partnerships                                            |       | (749,242                                                                               | )          | (6,670,928 | ) |
| Decrease in  other long term liabilities                                                             |       | 327,095                                                                                |       | (13,069 | ) |
|                                                                                                 |       |                                                                                   |       |   |   |
| Net cash  provided by (used in) operating activities                                                 |       | 6,220,953                                                                              |       | (11,853,880 | ) |
|                                                                                                 |       |                                                                                   |       |   |   |
| Cash flows from  investing activities:                                                               |       |                                                                                   |       |   |   |
| Purchase,  exploration and development of oil and gas properties                                     |       | (64,798,687                                                                            | )          | (32,001,917 | ) |
| Purchase of  property and equipment                                                                  |       | (509,252                                                                               | )          | (342,833 | ) |
| Proceeds from  the sale of property and equipment                                                    |       | —                                                                                 |       | 180,000 |   |
| Proceeds from  U.S. Treasury Bonds—available-for-sale                                           |       | 571,447                                                                                |       | 11,427,399 |   |
|                                                                                                 |       |                                                                                   |       |   |   |
| Net cash used in investing activities                                                                |       | (64,736,492                                                                            | )          | (20,737,351 | ) |
|                                                                                                 |       |                                                                                   |       |   |   |
| Cash flows from  financing activities:                                                               |       |                                                                                   |       |   |   |
| Payments on debt  and debentures                                                                     |       | (173,880                                                                               | )          | (17,006,025 | ) |
| Issuance of  common stock, net                                                                       |       | 5,825,549                                                                              |       | 1,611,989 |   |
| Dividends paid  on preferred stock                                                                   |       | —                                                                                 |       | (1,574,594 | ) |
|                                                                                                 |       |                                                                                   |       |   |   |
| Net cash  provided by (used in) financing activities                                                 |       | 5,651,669                                                                              |       | (16,968,630 | ) |
|                                                                                                 |       |                                                                                   |       |   |   |
| Net decrease in cash and cash equivalents                                                            |       | (52,863,870                                                                            | )          | (49,559,861 | ) |
|                                                                                                 |       |                                                                                   |       |   |   |
| Cash and cash  equivalents at beginning of period                                                    |       | 114,632,099                                                                            |       | 99,920,885 |   |
|                                                                                                 |       |                                                                                   |       |   |   |
| Cash and cash  equivalents at end of period                                                          |       | $                                                                                      | 61,768,229 |   | $ | 50,361,024 |   |
|                                                                                                 |       |                                                                                   |       |   |   |
| Supplemental  disclosure of cash flow information                                                    |       |                                                                                   |       |   |   |
| Cash paid for  interest, net of amount capitalized                                                   |       | $                                                                                      | 287,643    |   | $ | 1,386,029 |   |
| Cash paid for  income taxes                                                                          |       | —                                                                                 |       | — |   |
| Noncash  investing and financing activities                                                          |       |                                                                                   |       |   |   |
| Accrued  preferred stock dividend                                                                    |       | $                                                                                      | 71,004     |   | $ | — |   |
| Common stock  issued for acquisition of property                                                     |       | 6,385,908                                                                              |       | — |   |
| Common stock issued on  conversion of preferred stock                                                |       | 4,276,920                                                                              |       | — |   |

 

The accompanyingnotes are an integral part of these financial statements.

5

----

**WARRENRESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**NOTE 1—ORGANIZATION**

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

Theaccompanying unaudited financial statements and related notes present theCompany’s consolidated financial position as of September 30, 2006 and December31, 2005, the consolidated results of operations for the three and nine monthsended September 30, 2006 and 2005 and consolidated cash flows for the ninemonths ended September 30, 2006 and 2005. The unaudited financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States of America for interim financial information and with theinstructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, theydo not include all of the information and footnotes required by accounting principlesgenerally accepted in the United States of America for complete financialstatements. In the opinion of management, all adjustments (consisting of normalrecurring accruals) considered necessary for a fair presentation have beenincluded. Operating results for the three and nine months ended September 30,2006, are not necessarily indicative of the results that may be expected forthe fiscal year ending December 31, 2006. The accounting policies followed bythe Company are set forth in Note A to the Company’s financial statementsincluded in Form 10-K for the year ended December 31, 2005. These interimfinancial statements and notes thereto should be read in conjunction with theconsolidated financial statements presented in the Company’s 2005 Annual Reporton Form 10-K.

##### **NOTE2—STOCK OPTIONS**

Prior to January 1, 2006,we accounted for our nonqualified stock options using the intrinsic valuemethod under Accounting Principles Board Opinion No. 25, *Accountingfor Stock Issued to Employees* (“APB 25”).  Under APB 25, if the exercise price ofemployee stock options equaled the market price of the underlying stock on thegrant date, no compensation expense was recorded.  We had adopted the disclosure-only provisionsof Statement of Financial Accounting Standards No. 123, *Accountingfor Stock-Based Compensation* (“SFAS 123”).  No stock-based compensation cost for ournonqualified stock options was recognized in the Consolidated Statements ofOperations for the three and nine months ended September 30, 2005.  Effective January 1, 2006, we adopted thefair value recognition provisions of Statement of Financial AccountingStandards No. 123(R), *Accounting for Stock-BasedCompensation* (“SFAS 123(R)”), using themodified-prospective-transition method. Under that transition method, compensation cost recognized in the firstnine months of 2006 includes:  (a)compensation cost for all share-based payments granted prior to, but not yetvested as of January 1, 2006 and (b) compensation cost for all share-basedpayments granted subsequent to January 1, 2006. The compensation cost is based on the grant-date fair value calculatedusing a Black-Scholes-Merton option-pricing formula and is amortized over thevesting period in accordance with provisions of Statement 123(R).  For the three and nine months ended September30, 2006, we recognized approximately $208,000 and $443,000 in compensationexpense related to our non-qualified stock option plans.

Thefollowing table illustrates the effect on net income and earnings per share ifwe had applied the fair value recognition provisions of SFAS 123(R) to optionsgranted under our stock option plans for the three and nine months endedSeptember 30, 2005.  For purposes of thepro forma disclosure, the fair value of each option grant is estimated on thedate of grant and amortized to expense over the options’ vesting periods.

6

----

 
| ** **                                                                                                                                    | ** ** | **Three months ended  September 30,  2005** | ** ** | **Nine months ended  September 30,  2005** | ** ** | ** **  |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-------------|
|                                                                                                                                          |       |                                                       |       |                                                      |       |        |
| Net loss,  applicable to common stockholders, as reported                                                                                     |       | $                                                          | (1,502,562 | )                                                         | $          | (7,855,784  | ) |   |
|                                                                                                                                          |       |                                                       |       |                                                      |       |        |
| Deduct: Total  stock-based employee compensation expense determined under fair-value-based  method for all awards, net of related tax effects |       | —                                                     |       | (2,614,482                                                | )          |        |
| Pro forma net  loss applicable to common stockholders, as reported                                                                            |       | $                                                          | (1,502,562 | )                                                         | $          | (10,470,266 | ) |   |
|                                                                                                                                          |       |                                                       |       |                                                      |       |        |
| Basic and  diluted loss per share:                                                                                                            |       |                                                       |       |                                                      |       |        |
| As reported -                                                                                                                                 |       | $                                                          | (0.04      | )                                                         | $          | (0.21       | ) |   |
| Pro forma -                                                                                                                                   |       | $                                                          | (0.04      | )                                                         | $          | (0.28       | ) |   |

 

Thefollowing assumptions were used to value stock options:

 

|                          | ** ** | **Nine months ended September 30,** | ** ** |
|--------------------------|------------|---------------------------------------------------------|------------|
| ** **               | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| Dividend yield           |       | 0%                                                      |       | 0% |   |
| Expected  volatility     |       | 48.2%                                                   |       | 28.72% |   |
| Risk-free  interest rate |       | 4.66%                                                   |       | 3.66% |   |
| Fair value of  options   |       | $                                                       | 5.57       |   | $ | 2.97 |   |
| Expected life            |       | 3.5 years                                               |       | 5 years |   |
|                          |            |                                                         |            |  |  |  |  |

 
| ** **                        | ** ** | ** **     | ** ** | **Weighted** | ** ** | **Weighted**    | ** ** | ** **          | ** ** |
|-----------------------------------|------------|----------------|------------|--------------|------------|-----------------|------------|---------------------|------------|
| ** **                        | ** ** | ** **     | ** ** | **Average**  | ** ** | **Average**     | ** ** | ** **          | ** ** |
| ** **                        | ** ** | **Number**     | ** ** | **Exercise** | ** ** | **Remaining**   | ** ** | **Aggregate**       | ** ** |
| ** **                        | ** ** | **of Options** | ** ** | **Price**    | ** ** | **Term**        | ** ** | **Intrinsic Value** | ** ** |
| ** **                        | ** ** | ** **     | ** ** | ** **   | ** ** | **(in  years)** | ** ** | **(in  thousands)** | ** ** |
| Outstanding at December 31, 2005  |       | 2,510,721      |       | $            | 7.23       |            |       |                |       |   |
| Granted                           |       | 417,250        |       | 13.85        |       |            |       |                |       |
| Exercised                         |       | (456,699       | )          | 8.92         |       |            |       |                |       |
| Forfeited or expired              |       | (47,489        | )          | 13.49        |       |            |       |                |       |
| Outstanding at September 30, 2006 |       | 2,423,783      |       | $            | 7.93       |            | 2.85       |                | $          | 11,036 |   |
|                              |       |           |       |         |       |            |       |                |       |
| Exercisable at September 30, 2006 |       | 2,028,283      |       | $            | 6.77       |            | 2.54       |                | $          | 11,036 |   |

 

The total intrinsic value of optionsexercised during the nine months ended September 30, 2006 and 2005 was $1.8million and $2.8 million respectively.

 

As ofSeptember 30, 2006 there was $1.9 million of total unrecognized compensationcost related to non-vested stock options granted under the Plans. This cost isexpected to be recognized over a weighted average period of 3 years.

7

----

Cashreceived from option exercises under all stock-based payment arrangements forthe nine months ended September 30, 2006 was $4.1 million. We issue new sharesof common stock to settle option exercises.

Thefollowing table summarizes information about the Company’s stock optionsoutstanding at September 30, 2006.
| **Options Outstanding**                                                        | ** ** | **Options Exercisable** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                          | ** ** | ** **                   | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                          | ** ** | ** **                   | ** ** | **Weighted** | ** ** | **Average** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                                                          | ** ** | ** **                   | ** ** | **Average** | ** ** | **Remaining ** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Exercise**                                                                        | ** ** | **Options**                  | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Options** | ** ** | **Exercise** | ** ** |
| **Price**                                                                           | ** ** | **Outstanding**              | ** ** | **Price** | ** ** | **Life (Years)** | ** ** | **Exercisable** | ** ** | **Price** | ** ** |
|                                                                                |       |                         |       |   |   |   |   |   |   |   |   |
| $             4.00 |       | 695,283                      |       | $ | 4.00 |   | 1.65 |   | 695,283 |   | $ | 4.00 |   |
| 7.00                                                                                |       | 614,000                      |       | 7.00 |   | 2.52 |   | 614,000 |   | 7.00 |   |
| 9.05                                                                                |       | 689,000                      |       | 9.05 |   | 3.36 |   | 689,000 |   | 9.05 |   |
| 11.00                                                                               |       | 10,000                       |       | 11.00 |   | 3.97 |   | 10,000 |   | 11.00 |   |
| 14.85                                                                               |       | 35,000                       |       | 14.85 |   | 4.13 |   | 20,000 |   | 14.85 |   |
| 13.85                                                                               |       | 380,500                      |       | 13.85 |   | 4.47 |   | — |   | — |   |
|                                                                                |       | 2,423,783                    |       | $ | 7.93 |   | 2.85 |   | 2,028,283 |   | $ | 6.77 |   |

 

**Securities Authorized forIssuance Under Compensation Plans**

The table below includesinformation about our equity compensation plans as of September 30, 2006:
| **Plans**                               | ** ** | **Number of Shares  Authorized for  Issuance under plan** | ** ** | **Number of securities  to be issued upon   exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available  for future issuance  under equity  compensation plans** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|
| 2000 Equity  Incentive Plan             |       | 1,975,000                                                                          |       | 704,750                                                                                                                                                |       | $                                                                                                           | 10.65      |                                                                                                                                    | 649,250    |   |
| 2001 Stock  Incentive Plan              |       | 2,500,000                                                                          |       | 437,283                                                                                                                                                |       | $                                                                                                           | 7.92       |                                                                                                                                    | 1,307,977  |   |
| 2001 Key  Employee Stock Incentive Plan |       | 2,500,000                                                                          |       | 1,281,750                                                                                                                                              |       | $                                                                                                           | 6.43       |                                                                                                                                    | 1,008,250  |   |
| Total                                   |       | 6,975,000                                                                          |       | 2,423,783                                                                                                                                              |       | $                                                                                                           | 7.93       |                                                                                                                                    | 2,965,477  |   |

####  

#### **NOTE3—CHANGES IN STOCKHOLDERS’ EQUITY**

During the nine monthsended September 30, 2006, holders of 356,484 shares of convertible preferredstock have converted into common stock on a basis of 0.75 shares of commonstock for one share of convertible preferred stock or 0.50 shares of commonstock for one share of convertible preferred stock for conversions after July1, 2006. As of September 30, 2006, 295,852 shares of convertible preferredstock remain outstanding.  Preferreddividends of approximately $0.1 million and $0.4 million were accrued atSeptember 30, 2006 and December 31, 2005, respectively.

Effective as of June 30,2006, the 8% preferred stockholders agreed by greater than the requisite 66.67%majority to amend their Articles Supplementary filed with the State of Marylandto allow for a dividend on the preferred stock to be paid in kind with WarrenResources’ common stock for the dividends accrued for the four quarters endedJune 30, 2006, which amount equals $.96 per share, or $592,065 in theaggregate. Therefore, in lieu of paying cash,

8

----

during the three monthsended September 30, 2006, Warren issued a total of 46,823 shares of its commonstock as a preferred dividend for the four quarters ended June 30, 2006.

The preferred stock paysan 8% cumulative dividend and is treated as a deduction in additional paid in capital.The holders of the preferred stock are not entitled to vote except as definedby the agreement or as provided by applicable law.  The preferred stock may be voluntarilyconverted, at the election of the holder into common stock of the Company basedon the table below.  The conversion rateis subject to adjustment from time to time as defined by the agreement.

| Period                              | ** ** | **Preferred to Common** | ** ** |
|-------------------------------------|------------|-----------------------------------|------------|
| July 1, 2005  through June 30, 2006 |       | 1  to .75                         |       |
| July 1, 2006 through  redemption    |       | 1 to .50                          |       |

 

Additionally, commencingseven years after the date of issuance (October 1, 2009), holders of thepreferred stock may elect to require the Company to redeem their preferredstock at a redemption price equal to the liquidation value of $12.00 per share,plus accrued but unpaid dividends, if any (“Redemption Price”).  Upon the receipt of a redemption election,the Company, at its option, shall either: (1) pay the holder cash in the amountequal to the Redemption Price or (2) issue to holder shares of common stock inan amount equal to 125% of the redemption price and any accrued and unpaiddividends, based on the weighted average closing “bid” price of the Company’scommon stock for the thirty trading days immediately preceding the date of thewritten redemption election by the holder up to a maximum of 1.5 shares ofcommon stock for each one share of preferred stock redeemed. The Company isaccreting the carrying value of its preferred stock to its redemption priceusing the effective interest method with changes recorded to additional paid incapital. The accretion of preferred stock results in a reduction of earningsper share applicable to common stockholders.

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

At September 30, 2006,there were 295,852 preferred shares outstanding that the Company may berequired to redeem at the aggregate redemption price of $3,550,224 between July1, 2010 and January 1, 2011. As noted above, the Company could, at its option,settle the redemption requests in shares of its common stock.

During the nine monthsended September 30, 2006, employees and directors exercised a total of 456,699options at exercise prices between $4 and $10 per share. Additionally for thenine months ended September 30, 2006, investors exercised a total of 160,573warrants at exercise prices of $10 and $12.50 per share. The Company receivedproceeds of approximately $5.8 million from these two exercises.

During the first quarterof 2006, the investor partners of the 1998 drilling partnerships voted toapprove the sale of all of the oil and gas assets of the drilling partnershipsto us. As a result, the Company issued 383,072 restricted shares of commonstock under Regulation D (restricted for at least one year) with a value of$5.5 million in exchange for both producing and non-producing properties. Thenumber of shares issued was determined based upon a 20% discount from theweighted average sales price for Warren’s publicly traded common stock for theforty-five (45) calendar days ending March 31, 2006. The Company booked thetransaction based on the undiscounted weighted average price of its commonstock for the forty-five (45) calendar days ending March 31, 2006. The Companyalso issued 44,691 shares to an individual in exchange for his interest in onedrilling partnership during the three months ended March 31, 2006. These shareswere valued at $680,644 based on the price of our stock on the date of issuance.

Also, during the threemonths ended March 31, 2006, the Company acquired all minority interests in the1994 thru 1997 drilling partnerships for approximately $1.4 million in cash.The minority interest relating to these partnerships was recorded as a reductionin the cost basis of the assets acquired.

9

----

**NOTE 4—INCOME (LOSS) PER SHARE**

Basic income (loss) pershare is computed by dividing net income (loss) applicable to commonstockholders by the weighted average number of shares of common stockoutstanding during the period. Diluted income (loss) per share is based on theassumption that stock options and warrants are converted into common sharesusing the treasury stock method and convertible bonds and preferred stock areconverted using the if-converted method. Conversion is not assumed if theresults are anti-dilutive.  Potentialcommon shares for the three and nine months ended September 30, 2006 andSeptember 30, 2005 of 219,240 and 2,789,784 respectively, relating toconvertible bonds and preferred stock, were excluded from the computation ofdiluted income (loss) per share because they are anti-dilutive. Potentialcommon shares of 415,500 and 6,194,696, relating to stock options and warrants,respectively, were excluded from the computation of diluted income (loss) pershare for the three and nine months ended September 30, 2006 and September 30,2005 because they are anti-dilutive. Stock options have a weighted averageexercise price of $7.93 and $6.63 at September 30, 2006 and September 30, 2005,respectively. Anti-dilutive warrants have a weighted average exercise price of$11.31 and $11.17 at September 30, 2006 and September 30, 2005, respectively.At September 30, 2006, the convertible bonds may be converted from the date ofissuance until maturity at 100% of principal amount into common stock of theCompany at prices ranging from $35 to $50. The preferred stock may be converted at the discretion of the holder orupon meeting certain conditions at the discretion of the Company (see Note 3).

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

|                                                     | ** ** | **Three Months  Ended  September 30,  2006** | ** ** | **Nine Months  Ended  September 30,  2006** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|
|                                                |       |                                                   |       |                                                  |       |
| Net income  available to shareholders               |       | $                                                      | 2,142,536  |                                                  | $          | 4,212,772 |   |
|                                                |       |                                                   |       |                                                  |       |
| Weighted average  shares outstanding - basic        |       | 53,317,367                                             |       | 52,786,511                                            |       |
| Effect of  dilutive securities – stock options |       | 536,866                                                |       | 600,784                                               |       |
| Effect of  dilutive securities – warrants      |       | 1,036,192                                              |       | 1,063,555                                             |       |
|                                                |       |                                                   |       |                                                  |       |
| Weighted average  shares outstanding - diluted      |       | 54,890,425                                             |       | 54,450,850                                            |       |
|                                                |       |                                                   |       |                                                  |       |
| Basic and diluted net  income per share             |       | $                                                      | 0.04       |                                                  | $          | 0.08 |   |

 

**NOTE 5—LONG-TERM DEBT**

The convertible bonds may beconverted from the date of issuance until maturity at 100% of principal amountinto common stock of the Company at prices ranging from $35 to $50. Each yearthe holders of the convertible bonds may tender to the Company up to 10% of theaggregate bonds issued and outstanding.

Bondsoutstanding are as follows:

|                                                       | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                                  |       |                         |       |                        |       |
| 12% Secured  Convertible Bonds, due December 31, 2020 |       | $                            | 1,390,000  |                        | $          | 1,470,000 |   |
| 12% Secured  Convertible Bonds, due December 31, 2022 |       | 1,106,000                    |       | 1,136,000                   |       |
|                                                  |       |                         |       |                        |       |
|                                                  |       | 2,496,000                    |       | 2,606,000                   |       |
| Less current  portion                                 |       | 249,600                      |       | 260,600                     |       |
|                                                  |       |                         |       |                        |       |
| Long-term portion                                     |       | $                            | 2,246,400  |                        | $          | 2,345,400 |   |

 

10

----

#### **NOTE6—CONTINGENCIES**

**Litigation**

We are a party to legalactions arising in the ordinary course of our business. In the opinion of ourmanagement, based in part on consultation with legal counsel, the liability, ifany, under these claims is either adequately covered by insurance or would nothave a material adverse effect on the Company’s financial condition or resultsof operations.

**Repurchase Agreements**

Forrepurchase agreements relating to partnerships formed from 1999 to 2001,investor partners have a right to have their interests repurchased by theCompany at a formula price seven years from the date of the originalpartnership formation.  In determiningthe amount of the repurchase obligation, the obligation is computed based onthe lesser of a formula purchase price or the estimated cash flows discountedat 10% (“PV-10”) from proved developed and undeveloped reserves of eachpartnership. At September 30, 2006, the formula purchase price with respect tothese partnerships was approximately $74.1 million. However, this amount islimited to approximately $36.4 million based on the PV-10 of the assets inthese partnerships at December 31, 2005. This limitation does not includereserves for 1.3 net wells remaining to be drilled or 49 net wells awaiting to beplaced on production on behalf of these seven drilling partnerships, and willfluctuate due to the variables in determining discounted cash flows, such asprice changes, reserve revisions, etc. In the event of repurchase, the Company receives the investor’s interestin the partnership and the investor’s pro rata share of the partnershipsreserves and related future cash flows.

**NOTE 7—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 partnerships and retains an interest in each well. Also, the Companymarkets natural gas for affiliated drilling partnerships. The Company chargesCompany-sponsored drilling partnerships and other third parties competitiveindustry rates for well operations and gas gathering. Segment information is asfollows: 
| ** **             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **             | ** ** | **September 30,  2006**     | ** ** | **September 30,  2005**    | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
| ** **             |       |                             |       |                            |       |   |   |   |   |
| **Revenue**            |       |                             |       |                            |       |   |   |   |   |
| Oil and Gas Operations |       | $                                | 8,424,271  |                            | $          | 3,818,082 |   | $ | 22,867,872 |   | $ | 9,013,434 |   |
| Turnkey Contracts      |       | 58,365                           |       | 2,680,722                       |       | 604,875 |   | 6,284,577 |   |
| Oil and Gas Marketing  |       | 393,884                          |       | 2,434,392                       |       | 1,912,298 |   | 6,940,887 |   |
| Well Services          |       | 274,858                          |       | 374,147                         |       | 732,779 |   | 1,199,442 |   |
| Other                  |       | 1,079,844                        |       | 710,387                         |       | 3,638,832 |   | 2,661,898 |   |
|                   |       |                             |       |                            |       |   |   |   |   |
|                   |       | $                                | 10,231,222 |                            | $          | 10,017,730 |   | $ | 29,756,656 |   | $ | 26,100,238 |   |

 
| ** **                     | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
|--------------------------------|------------|------------------------------|------------|------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                     |       |                         |       |                         |       |                         |       |                         |       |
| **Operating  Income / (Loss)** |       |                         |       |                         |       |                         |       |                         |       |
| Oil and Gas  Operations        |       | $                            | 3,322,700  |                         | 595,352    |                         | 8,446,865  |                         | 1,480,599  |   |
| Turnkey  Contracts             |       | (6,497                       | )          | (265,344                     | )          | (312,192                     | )          | (481,706                     | )          |
| Oil and Gas  Marketing         |       | 16,357                       |       | 33,567                       |       | 58,098                       |       | 96,618                       |       |
| Well Services                  |       | 4,843                        |       | (101,480                     | )          | (103,945                     | )          | 357,784                      |       |
| Other                          |       | (1,151,563                   | )          | (1,198,726                   | )          | (3,493,602                   | )          | (5,300,188                   | )          |
|                           |       |                         |       |                         |       |                         |       |                         |       |
|                           |       | $                            | 2,185,840  |                         | $          | (936,631                     | )          | $                            | 4,595,224  |   | $ | (3,846,893 | ) |
|                                |            |                              |            |                              |            |                              |            |                              |            |  |  |  |  |

 

11

----

**NOTE 8—COMPREHENSIVE INCOME(LOSS)**

Other comprehensiveincome (loss) consists primarily of net unrealized investment gains and losses,net of income tax effect. Total comprehensive income (loss) for the periods areas follow:
| ** **                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| Nine Months  ending September 30,  |       | $        | 4,362,675  |     | $          | (4,422,998 | ) |
| Three Months ending  September 30, |       | $        | 2,262,302  |     | $          | (1,312,173 | ) |

 

**NOTE 9—GOODWILL**

The Companyaccounts for goodwill under SFAS No. 142, *Goodwill and OtherIntangible Assets,*and only adjusts the carrying amount of goodwillor indefinite life intangible assets upon an impairment. During the threemonths ended September 30, 2006 no events occurred which would indicate that animpairment of goodwill existed.

**NOTE 10—****RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS**

In September 2006,the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”)No. 108, *Considering the Effects ofPrior Year Misstatements when Quantifying Current Year Misstatements.*SAB No. 108 requires analysis of misstatements using both an incomestatement (rollover) approach and a balance sheet (iron curtain) approach inassessing materiality and provides for a one-time cumulative effect transitionadjustment. SAB No. 108 is effective for our fiscal year 2006 annualfinancial statements. The adoption of SAB No. 108 will not have a materialimpact on the Company’s consolidated financial position or results ofoperations.

In June 2006, theFASB issued Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes*(“FIN 48”). The interpretationclarifies the accounting for uncertainty in income taxes recognized in acompany’s financial statements in accordance with Statement of FinancialAccounting Standards No. 109, *Accountingfor Income Taxes*. The interpretation is effective for fiscal yearsbeginning after December 15, 2006. The adoption of FIN 48 is not expectedto have a material impact on the Company’s consolidated financial position orresults of operations.

In September 2006, theFASB finalized SFAS No. 157, *Fair Value Measurements*whichwill become effective in 2008. This Statement defines fair value, establishes aframework for measuring fair value, and expands disclosures about fair valuemeasurements; however, it does not require any new fair value measurements. Theprovisions of SFAS No. 157 will be applied prospectively to fair valuemeasurements and disclosures in the company’s Consolidated Financial Statementsbeginning in the first quarter of 2008. The adoption of SFAS No. 157 is notexpected to have a material impact on the Company’s consolidated financialposition or results of operations.

12

----

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

**FORWARD-LOOKINGINFORMATION**

Forward-lookingstatements for 2006 and later periods are made in this document. Suchstatements represent estimates by management based on the Company’s historicaloperating trends, its proved oil and gas reserves and other informationcurrently available to management. The Company cautions that theforward-looking statements provided herein are subject to all the risks anduncertainties incident to the acquisition, development and marketing of, andexploration for oil and gas reserves. These risks include, but are not limitedto, oil and natural gas price risk, environmental risks, drilling risk, reservequantity risk and operations and production risk. For all the above reasons,actual results may vary materially from the forward-looking statements andthere is no assurance that the assumptions used are necessarily the most likelyto occur.

**OVERVIEW:**

During 2005, we began totransition ourselves from being a provider of turnkey contract services intomore of a traditional exploration and production company.  As a result, oil and gas sales and productionand exploration expense have become more material during the transition.  Additionally, turnkey contract revenues andexpenses have become less material.

Our future success depends upon the development of ourcore acreage.  During 2006 and subsequentyears, we plan to continue to develop our core acreage, which includes ourcoalbed methane (“CBM”) acreage in the Atlantic Rim and Pacific Rim in theWashakie Basin in Wyoming.  Additionally,our core acreage includes our secondary recovery water flood projects in theWilmington Townlot Unit and the North Wilmington Townlot Unit in southernCalifornia.  As of September 30, 2006, weowned natural gas and oil leasehold interests in approximately 270,121 gross(150,258 net) acres. Substantially all of our undeveloped acreage is located inthe Rocky Mountains.  Our total netproved reserves are located on less than 10% of our net acreage.

**LIQUIDITYAND CAPITAL RESOURCES:**

During December 2005, wesold 6.9 million shares in a secondary offering raising net proceeds of $95.0million.

Our cash and cashequivalents decreased $52.9 million during the first nine months of 2006. Cashused in investing activities of $64.7 million results primarily fromexpenditures on oil and gas properties. Cash provided by operating activities of $6.2 million primarily relatesto increased profits relating to higher oil and gas production offset by adecrease in accounts payable and accruals of $6.8 million. Cash provided byfinancing activities of $5.6 million results from the exercise of stock optionsand warrants.

Currentlyour assets are unencumbered, except for restricted investments in US TreasuryBonds which secure our bonds. As a result the Company may seek to obtain bankfinancing to fund future activities.

Another commitment offunds relates to the drilling partnerships. Our deferred income balancerelating to our drilling commitments totaled $1.0 million at September 30,2006. This commitment approximates 1.3 net wells, primarily in the WashakieBasin, to be drilled on behalf of our drilling partnerships formed in 2003 andprior.

During the first quarterof 2006, effective as of the last drilling partnership distribution date in thefourth quarter of 2005 and closing on March 31, 2006, the investor partners ofthe 1998 drilling partnerships voted to approve the sale of all of the oil andgas assets of the drilling partnerships to us. The aggregate purchase price was $8.2 million.  As a result, net of our interest, the Companyissued 383,072 shares of restricted common stock and paid $2.7 million in cashin exchange for both producing and non-producing properties. The number ofshares issued was determined based upon a 20% discount from the weightedaverage sales price for Warren’s publicly traded common stock for theforty-five (45) calendar days ending March 31, 2006. The Company booked thetransaction based on the undiscounted weighted average price of its commonstock for the forty-five (45) calendar days ending March 31, 2006. The Companyreceived oil and gas properties having a PV-10 value of approximately $7.6million as determined by Williamson Petroleum Consultants, Inc., as well assome unproved properties.

Additionally during thefirst quarter of 2006, we purchased for cash the remaining minority oil and gasinterests not already owned by Warren from the drilling program LLC’soriginally formed between 1994 and 1997 based upon

13

----

their PV-10 value asdetermined by Williamson Petroleum Consultants, Inc., independent petroleumengineers.  We paid an aggregate cashpurchase price of $1.1 million. The remaining minority interest relating tothese partnerships was recorded as a reduction in the cost basis of the assetsacquired.

The Company had netincome of $2.1 million (including preferred dividends and accretion of $0.1million) for the third quarter of 2006, as compared to a net loss of $1.5million (including preferred dividends of $0.4 million) for the comparableperiod of 2005. At September 30, 2006, current assets exceeded currentliabilities by approximately $50.1 million. We expect our cash and cashequivalents, cash flows from operating activities and bank financings to besufficient to fund our operations for more than the next twelve months.

At September 30, 2006, wehad approximately 2.0 million vested outstanding stock options issued under ourstock based equity compensation plans. Of the total 2.0 million outstandingvested options, only 20,000 options had exercise prices above the closingmarket price ($12.18) of our common stock on September 30, 2006. If the optionswith exercise prices below the closing market price on September 30, 2006 areexercised by the holders, we would receive $13.4 million in cash.

*Contractual Obligations*

The contractualobligations table below assumes the maximum amount is tendered each year. Thetable does not give effect to the conversion of any bonds to common stock whichwould reduce payments due. All bonds are secured at maturity by zero couponU.S. treasury bonds deposited into an escrow account equaling the parvalue of the bonds maturing on or before the maturity of the bonds. Such U.S.treasury bonds had a fair market value of $1.2 million at September 30,2006.  The table below reflects therelease of U.S. treasury bonds to us upon redemption.
| ** **                                                                     | ** ** | **Payments due by period** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations  As of September 30, 2006** | ** ** | **Total**                                 | ** ** | **Less Than  1 Year** | ** ** | **1-3  Years** | ** ** | **3-5  Years** | ** ** | **More Than  5 Years** | ** ** |
|                                                                           |       |                                      |       |   |   |   |   |   |   |   |   |
| Bonds                                                                          |       | $                                         | 2,496,000  |   | $ | 249,600 |   | $ | 426,816 |   | $ | 345,721 |   | $ | 1,473,863 |   |
| Drilling  Commitments                                                          |       | 2,656,252                                 |       | 2,656,252 |   | — |   | — |   | — |   |
| Leases                                                                         |       | 442,248                                   |       | 54,527 |   | 304,775 |   | 82,946 |   | — |   |
| Total                                                                          |       | $                                         | 5,594,500  |   | $ | 2,960,379 |   | $ | 731,591 |   | $ | 428,667 |   | $ | 1,473,863 |   |

 

**Off-Balance Sheet Arrangements**

Under the terms of our drilling partnerships formedfrom 1999 to 2001, investors have the right to tender their interest back tothe drilling partnership and other program investors during the periodseven years after the date of the partnership’s formation. The tenderrights were included to make such partnerships more attractive to potentialinvestor partners, thereby enabling the Company to obtain more capital to drillmore oil and gas wells. To the extent that an investor tenders a drillingpartnership interest for sale and the drilling partnership and other investorselect not to repurchase the withdrawing partner’s interest, we will be requiredto repurchase the interest from the investor. The price of our repurchase isfixed by the drilling partnership agreement to be the lower of the PV-10 valueof the assets of the partnership and a formula based on the amount of theinvestor’s cash investment reduced by the amount of any cash distributionsreceived. As of September 30, 2006, based on the December 31, 2005 reservereports of the respective seven drilling partnerships, the aggregate PV-10value of the assets in these partnerships is $36.4 million. Because this PV-10value is less than the formula price of $74.1 million at September 30, 2006,the maximum repurchase price obligation at September 30, 2006 was $36.4 millionbased on the December 31, 2005 reserve report. This PV-10 value would be higherif current prices for crude oil and natural gas were to increase when we drillthe remaining 1.3 net wells or place receive additional proved reserves for the49 net wells that were waiting to be placed on production as of December 31,2005. In the event of repurchase, we receive the investor’s interest in thepartnership, which includes the investor’s beneficial share of the partnership’sreserves and related future net cash flows. There are no known events thatwould result in termination of the material benefits of our off-balance sheetarrangements except for a decrease in oil and gas pricing that occurs after anacquisition. The only material off-balance sheet benefit of this arrangement isthe acquisition of proved reserves. To the extent that we acquire interests fortheir PV-10 value based on this arrangement, and declining oil and natural gasprices, or other factors, render

14

----

those interests less valuable, a material reduction inthe benefits of this arrangement to the Company would occur.

The table belowpresents the projected timing of our maximum potential repurchase commitmentassociated with these partnerships as of September 30, 2006:
| ** **                                   | ** ** | **Amount of repurchase commitment per period** | ** ** |
|----------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **Total**                                                               | ** ** | **Less Than  1 Year** | ** ** | **1-3  Years** | ** ** | **3-5  Years** | ** ** | **More Than  5 Years** | ** ** |
|                                         |       | **(in thousands)**                                                      |       |
|                                         |       |                                                                    |       |   |   |   |   |   |   |   |   |
| Maximum potential  repurchase commitment (1) |       | $                                                                       | 36,439     |   | $ | 4,530 |   | $ | 31,909 |   | $ | — |   | $ | — |   |
|                                              |            |                                                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)                      Based on thepartnership reserves taken from the Williamson partnership reserve report as ofDecember 31, 2005 and using pricing at that date. This report does not includeproved reserves for remaining 1.3 net wells or additional proved reserves forthe 49 net wells that were waiting to be placed on production as of December31, 2005.

Commencing January1, 2007, we are obligated to purchase drilling partnership interests in twodrilling programs formed in 1999, if requested by the investor. This obligationis calculated using the PV-10 value of the assets in these programs as ofDecember 31, 2006.  At December 31, 2005,this obligation was estimated at $4.5 million. As a result, the followingfactors may affect the liquidity and capital resources of the Company:

·                  An increase inthe price of oil and natural gas, or an increase in the amount of provedreserves (from drilling the remaining 1.3 net wells that are scheduled to bedrilled for these drilling partnerships during 2006, from the 49 net wells thatwere waiting to be placed on production as of December 31, 2005, or from otherfactors) may increase the PV-10 value of the drilling partnerships and, as aresult, increase the price of our repurchase. After the acquisition of the drilling partnership interests, oil andnatural gas prices may decline resulting in a decline in the expected futurenet cash flow or fair market value of the assets acquired in the repurchase anda possible recording of impairment expense.

·                  Ifour existing working capital is inadequate to fund the repurchase of drillingpartnership interests, we may be unable to obtain financing, or obtainfinancing on terms acceptable to us, to purchase the drilling partnershipinterests at their PV-10 value.

**RESULTS OF OPERATIONS:**

**Three months Ended September 30,2006 Compared to Three Months Ended September 30, 2005**

*Oil and gas sales.*Revenue from oil and gas sales increased $4.6 million in the third quarter of2006 to $8.4 million, a 121% increase compared to the same quarter in2005.  This increase in productionresulted from significantly increasing our drilling activity in the WilmingtonTownlot Unit (“WTU”) in southern California. Additionally, this increase results from acquiring the North WilmingtonUnit (“NWU”) which is adjacent to the WTU. Prior to July 2005, all wells were syndicated to our drillingpartnerships which resulted in lower working interest percentages allocatedus.  Net oil production for the threemonths ended September 30, 2006 and 2005 was 117 Mbbls and 35 Mbbls,respectively.  Net gas production forthree months ended September 30, 2006 and 2005 was 246 and 288 Mmcf,respectively.  The average realized priceper barrel of oil for the three months ended September 30, 2006 and 2005 was$60.82 and $53.43, respectively. Additionally, the average realized price per Mcf of gas for the threemonths ended September 30, 2006 and 2005 was $5.28 and $6.86, respectively.

*Production & exploration.*Production and exploration expense increased $1.2 million in the third quarterof 2006 to $3.4 million, a 52% increase compared to the same quarter in2005.  Primarily, this increase resultedfrom an

15

----

increase in production ofoil and gas.  Production increased to 949Mmcfe for the third quarter of 2006 compared to 495 Mmcfe for the third quarterof 2005, an increase of 92%. Additionally, we incurred increases in lease operating expenses relatedto the Wilmington Field in California. The Company has incurred significantstart up, repair and maintenance costs associated with the implementation ofour drilling plan.

*Turnkey contract revenue andexpenses.* Turnkey contract revenue decreased $2.6 million inthe third quarter of 2006 to $0.1 million, a 98% decrease compared to thecorresponding quarter of the preceding year. Additionally, turnkey contractexpense decreased $2.9 million during the third quarter to $0.1 million, a 98%decrease compared to the same period in 2005 The drilling activity on behalf of the drilling partnerships was lessactive during the third quarter of 2006 compared to the corresponding quarterof 2005.  Net income from turnkeyactivities was $7 thousand for the third quarter of 2006. This compares to anet loss of $0.2 million for the corresponding quarter in 2005.

*Oil and gas sales and costs frommarketing activities.* Oil and gas sales from marketingactivities decreased $2.0 million in the third quarter of 2006 to $0.4 million,an 84% decrease compared to the same period last year. Cost of oil and gasmarketing activities decreased $2.0 million in the quarter to $0.4 million, an84% decrease compared to the same quarter in 2005. The decrease results fromacquiring the assets in our 1998 drilling partnerships.  Additionally, we acquired all of theremaining assets in our drilling partnerships formed between 1994 and1997.  Gas production from the wells inthe drilling partnerships in which we earn a marketing fee for the three monthsended September 30, 2006 and 2005 was 0.1 Mmcfe and 0.4 Mmcfe, respectively.The average price per Mcfe during the third quarter of 2006 and 2005 was $5.30and $6.32, respectively.  The grossprofit from marketing activities for the third quarter of 2006 was $16 thousandas compared to $33 thousand in the same period last year.

*Well services activities.*Well services revenue decreased $0.1 million in the third quarter of 2006 to$0.3 million, a 27% decrease compared to the corresponding quarter of thepreceding year. Well services expense decreased $0.3 million in the thirdquarter of 2006 to $0.2 million, a 54% decrease compared with the prior year.Well services expense decreased because charges relating to compression andsales lines decreased during the period.

Net income from wellservices activities was $58 thousand for the third quarter of 2006. Thiscompared to a net loss of $101 thousand for the corresponding quarter of lastyear.  The increase in net income during2006 results from the decrease in well services expense discussed above.

*Net gain on investments.*Netgain on investments was $60 thousand for the third quarter of 2006 compared toa net gain of $57 thousand for the same period of 2005.  Primarily, investments represent zero couponU.S. treasury bonds. Fluctuations in net gain or loss on investments resultedfrom changes in long-term interest rates on the securities sold during theperiod.

*Interest and other income.*Interest and other income increased $0.4 million in the third quarter of 2006to $1.0 million, a 56% increase compared to the same quarter in 2005. Thisrepresents an increase in interest earned due to higher cash and cashequivalents during the quarter as compared to the corresponding quarter lastyear.

*Depreciation, depletion,amortization and impairment.* Depreciation, depletion,amortization and impairment expense increased $0.7 million for the thirdquarter of 2006 to $1.8 million, a 69% increase compared to the correspondingquarter last year. This increase results from increased production during thethird quarter of 2006 compared to the corresponding period of 2005.  Production increased 92% during this period.

*General and administrativeexpenses.* General and administrative expenses increased $0.3million in the third quarter of 2006 to $2.1 million, a 15% increase comparedto the corresponding quarter last year. This reflects a decrease in the allocation of certain general andadministrative expenses to turnkey expenses during 2006.  Additionally, this results from an increasein personnel as a result of increased drilling activities.  Lastly, expenses relating to the issuance ofstock options were $0.2 million in the third quarter of 2006 compared to $0 inthe corresponding period of 2005.

*Interest expense.*Interest expense increased $0.1 million in the third quarter of 2006 to $0.2million compared to the same quarter last year. The increase results from accreting interest related to our plugging andabandonment obligation.

16

----

**Nine months Ended September 30,2006 Compared to Nine Months Ended September 30, 2005**

*Oil and gas sales.*Revenue from oil and gas sales increased $14.0 million in the third quarter of2006 to $22.9 million, a 157% increase compared to the same quarter in2005.  This increase in productionresulted from significantly increasing our drilling activity in the WilmingtonTownlot Unit (“WTU”) in southern California. Additionally, this increase results from acquiring the North WilmingtonUnit (“NWU”) which is adjacent to the WTU. Prior to July 2005, all wells were syndicated to our drillingpartnerships which resulted in lower working interest percentages allocatedus.  Net oil production for the ninemonths ended September 30, 2006 and 2005 was 315 Mbbls and 98 Mbbls,respectively.  Net gas production fornine months ended September 30, 2006 and 2005 was 812 and 789 Mmcf,respectively.  The average realized priceper barrel of oil for the nine months ended September 30, 2006 and 2005 was$57.87 and $43.54, respectively. Additionally, the average realized price per Mcf of gas for the ninemonths ended September 30, 2006 and 2005 was $5.71 and $5.88, respectively.

*Production & exploration.*Production and exploration expense increased $4.6 million in the third quarterof 2006 to $9.6 million, a 95% increase compared to the same quarter in2005.  This increase resulted from anincrease in production.  Productionincreased to 2.7 Bcfe for the first nine months of 2006 compared to 1.4 Bcfefor the comparable period of 2005, an increase of 92%.  Additionally, we incurred increases in leaseoperating expenses related to the Wilmington Field in California. The Companyhas incurred significant start up, repair and maintenance costs associated withthe implementation of our drilling plan.

*Turnkey contract revenue andexpenses.* Turnkey contract revenue decreased $5.7 million inthe first nine months of 2006 to $0.6 million, a 90% decrease compared to thecorresponding period of the preceding year. Additionally, turnkey contractexpense decreased $5.8 million during the first nine months of 2006 to $0.9million, an 87% decrease compared to the same period in 2005  The drilling activity on behalf of thedrilling partnerships was less active during the first nine months of 2006compared to the corresponding quarter of 2005.

Net lossfrom turnkey activities was $0.2 million and $0.4 million for the first ninemonths of 2006 and 2005, respectively. The net loss from turnkey activities during 2006 results from higherthan anticipated drilling costs.

*Oil and gas sales and costs frommarketing activities.* Oil and gas sales from marketingactivities decreased $5.0 million in the first nine months of 2006 to $1.9million, a 72% decrease compared to the same period last year. Cost of oil andgas marketing activities decreased $5.0 million in the first nine months of2006 to $1.9 million, a 73% decrease compared to the same period in 2005. Thedecrease results from acquiring the assets in our 1998 drillingpartnerships.  Additionally, we acquiredall of the remaining assets in our drilling partnerships formed between 1994and 1997.  Gas production from the wellsin the drilling partnerships in which we earn a marketing fee for the ninemonths ended September 30, 2006 and 2005 was 0.3 Bcfe and 1.4 Bcfe, respectively.The average price per Mcfe during the first nine months of 2006 and 2005 was$7.09 and $4.94, respectively.

The gross profit frommarketing activities for the first nine months of 2006 was $58 thousand ascompared to $97 thousand in the same period last year.

*Well services activities.*Well services revenue decreased $0.5 million in the first nine months of 2006to $0.7 million, a 39% decrease compared to the corresponding period of thepreceding year. Well services expense decreased $0.2 million in the first ninemonths to $0.7 million, a 20% decrease compared to the corresponding period ofthe preceding year. The decrease in well services revenue results from drillingmore wells for our own account and not charging our personnel to thirdparties.  Additionally, revenue decreasedbecause we acquired all investor’s interests in oil and gas properties in our1994 through 1998 drilling partnerships, resulting in a reduction in overheadincome.

Net income from wellservices activities was $56 thousand and $358 thousand for the first ninemonths of 2006 and 2005, respectively. The decrease in net income during 2006 results from the decrease in wellservices revenue discussed above.

*Net gain on investments.*Netgain on investments was $110 thousand for the first nine months of 2006compared to a net gain of $418 thousand for the same period of 2005.  Primarily, investments represent zero couponU.S. treasury bonds. Fluctuations in net gain or loss on investments resultedfrom changes in long-term interest rates on the securities sold during theperiod.

17

----

*Interest and other income.*Interest and other income increased $1.3 million in the first nine months of2006 to $3.5 million, a 57% increase compared to the same period in 2005. Thisrepresents an increase in interest earned on cash and cash equivalents.

*Depreciation, depletion,amortization and impairment.* Depreciation, depletion,amortization and impairment expense increased $2.3 million for the first ninemonths of 2006 to $5.0 million, an 83% increase compared to the correspondingquarter last year. This increase results from increased production during thefirst nine months of 2006 compared to the corresponding period of 2005.  Production increased 92% during this period.

*General and administrativeexpenses.* General and administrative expenses increased $2.0million in the first nine months of 2006 to $6.7 million, a 42% increasecompared to the corresponding period last year. This reflects a decrease in the allocation of certain general andadministrative expenses to turnkey expenses during 2006.  Additionally, this results from an increasein personnel as a result of increased drilling activities.  Lastly, expenses relating to the issuance ofstock options were $0.4 million in the first nine months of 2006 compared to $0in the corresponding period of 2005.

*Interest expense.*Interest expense decreased $1.1 million in the first nine months of 2006 to$0.6 million, a 67% decrease compared to the same period last year.  The Company reduced long-term debt byapproximately $44 million during 2005. As a result, interest expense decreased significantly.

*Retirement of debt.*Retirement of debt expense was $1.5 million during the first nine months of2005.  This expense represents a premiumpaid on the redemption of bonds and the write off of unamortized deferredoffering costs associated with the retired bonds during 2005.

**CRITICAL ACCOUNTING POLICIES**

Our discussion andanalysis of our financial condition and results of operations are based onconsolidated financial statements that have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses. Webelieve that certain accounting policies affect our more significant judgmentsand estimates used in the preparation of our consolidated financial statements.Our 2005 Form 10-K includes a discussion of our critical accounting policies.

**Item 3. *Quantitative and QualitativeDisclosure About Market Risk***

## *Commodity Risk*

**Our major market risk exposure is the commodity pricingapplicable to our natural gas and oil production. Realized commodity pricesreceived for our production are primarily driven by the prevailing worldwideprice for crude oil and spot prices applicable to natural gas. The effects ofprice volatility are expected to continue as we do not hedge any of our futureproduction.**

## *Interest Rate Risk*

**We hold investments in U.S. treasury bonds available forsale, which represents securities held in escrow accounts on behalf ofpurchasers of certain bonds. Additionally, we hold U.S. treasury bonds trading securities, whichpredominantly represent U.S. treasury bonds released from escrow accounts.  The fair market value of these securitieswill generally increase if the federal discount rate decreases and decrease ifthe federal discount rate increases.  Allof our convertible debt has fixed interest rates, so consequently we are notexposed to cash flow risk from market interest rate changes on this debt.**

## *Inflation and Changes in Prices*

#### The generallevel of inflation affects our costs. Salaries and other general and administrative expenses are impacted byinflationary trends and the supply and demand of qualified professionals andprofessional services.  Inflation and

18

----

#### pricefluctuations affect the costs associated with exploring for and producingnatural gas and oil, which have a material impact on our financial performance.

***Item 4. Evaluation of Disclosure Controls and Procedures***

 

Our management,under the supervision and with the participation of our Chief Executive Officer(“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness ofour disclosure controls and procedures as defined in Securities and ExchangeCommission (“SEC”) Rule 13a-15(e) and 15d-15(e) as of the end of the periodcovered by this report.  Based upon thatevaluation, management  has concludedthat our  disclosure  controls and  procedures  are effective  to ensure  that information  we are required to disclose in reports thatwe file or submit under the Securities Exchange Act is communicated tomanagement, including the CEO and CFO, as appropriate to allow timely decisions  regarding required disclosure and is  recorded, processed,  summarized  and reported  within the time periodsspecified in the SEC’s rules and forms.

In addition, there havebeen no changes in our internal controls over financial reporting or in otherfactors that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

## **PART II—OTHER INFORMATION**

**Item 1. *Legal Proceedings***

We are 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.

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

For informationregarding risk factors, please refer to Item 1A in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2005.

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

a.  On July 12, 2006 , Warren issued 9,534 sharesof our unregistered common stock (“Common Stock”) to a single AccreditedInvestor. The number of shares issued was determined based upon a 20% discountfrom the weighted average sales price for Warren’s publicly traded common stockfor the forty-five (45) calendar days ending March 31, 2006. During thatperiod, the weighted average sales price was $14.37 per share, and the 20%discounted price was $11.49 per share. The Common Stock was issued pursuant tothe private placement exceptions from registration provided inRegulation D, Rule 506, under Section 4(2) of the Securities Actof 1933, as amended (the “Act”).

b.             Not applicable

c.             Not applicable

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

Not applicable.

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

Not applicable.

**Item 5. *Other Information***

Not applicable.

19

----

**Item 6. *Exhibits***
| **a)**     | **Exhibits**                                                                                                                                                                                                     |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                       |
|       | Exhibits not incorporated by reference to a prior  filing are designated by an (*) and are filed herewith; all exhibits not so  designated are incorporated herein by reference to a prior filing as  indicated. |

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

 

----

*               Filed herewith.

 

**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                        | WARREN RESOURCES, INC. |
|------------------------|------------------------|
|                   | (Registrant)           |
|                   |                   |
|                   |                   |
| Date: November 2, 2006 |                   | /s/ Timothy A. Larkin | * * |
|                   | By:                    | Timothy A. Larkin*Executive Vice President,  Chief Financial Officer and  Principal Accounting Officer* |

 

20

----