Warren Resources (WRES) 10-Q 2008 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the transition period from           to           

Commission File No. 000-33275

WARREN RESOURCES, INC.
(Exact Name of Registrant as Specified in its Charter.)

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

Registrant’s telephone number, including area code:

(212) 697-9660

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

Yes x No o

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

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

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

Yes o No x

The aggregate number of Registrant’s outstanding shares on May 6, 2008 was 58,274,680 shares of Common Stock, $0.0001 par value.

WARREN RESOURCES, INC.

TABLE OF CONTENTS

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

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PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Warren Resources, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(Unaudited)

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

The accompanying notes are an integral part of these financial statements.

3

Warren Resources, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

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

The accompanying notes are an integral part of these financial statements.

4

Warren Resources, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

The accompanying notes are an integral part of these financial statements.

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WARREN RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE A—ORGANIZATION

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

The accompanying unaudited financial statements and related notes present the Company’s consolidated financial position as of March 31, 2008 and December 31, 2007, the consolidated results of operations for the three months ended March 31, 2008 and 2007 and consolidated cash flows for the three months ended March 31, 2008 and 2007. The unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2008, are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2008. The accounting policies followed by the Company are set forth in Note A to the Company’s financial statements included in Form 10-K for the year ended December 31, 2007. These interim financial statements and notes thereto should be read in conjunction with the consolidated financial statements presented in the Company’s 2007 Annual Report on Form 10-K.

NOTE B – CHANGE IN ACCOUNTING PRINCIPLE

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

As prescribed by full cost accounting rules, all costs associated with property acquisition, exploration and development activities are capitalized. Exploration and development costs include dry hole costs, geological and geophysical costs, direct overhead related to exploration and development activities and other costs incurred for the purpose of finding oil and gas reserves. Salaries and benefits paid to employees directly involved in the exploration and development of oil and gas properties as well as other internal costs that can be specifically identified with acquisition, exploration and development activities are also capitalized. Proceeds received from disposals are credited against accumulated cost except when the sale represents a significant disposal of reserves, in which case a gain or loss is recognized. The sum of net capitalized costs and estimated future development and dismantlement costs are depleted on the equivalent unit-of-production method, based on proved oil and gas reserves as determined by independent petroleum engineers.

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

The costs of certain unevaluated oil and gas properties and exploratory wells being drilled are not included in the costs subject to amortization. Warren assesses costs not being amortized for possible impairments or reductions in

6

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

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

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

Income Statement

Three months ended March 31, 2008

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

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Income Statement

Three months ended March 31, 2007

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

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Balance Sheet

March 31, 2008

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

Balance Sheet

December 31, 2007

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

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NOTE C—STOCK BASED COMPENSATION

Stock Options

Compensation expense related to stock options and restricted stock awards recognized in operating results (general and administrative expenses) under SFAS No. 123R was approximately $507,000 and $207,000 for the three months ended March 31, 2008 and 2007, respectively.

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

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

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

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

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

Restricted Shares

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

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

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

NOTE D—CHANGES IN STOCKHOLDERS’ EQUITY

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

The preferred stock pays an 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 defined by the agreement or as provided by applicable law. The preferred stock may be voluntarily converted, at the election of the holder into common stock of the Company based on a conversion rate of 1share of preferred stock for 0.50 shares of common stock.

Additionally, commencing seven years after the date of issuance (October 1, 2009), holders of the preferred stock may elect to require the Company to redeem their preferred stock 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 amount equal to the Redemption Price or (2) issue to the holder shares of common stock in an amount equal to 125% of the redemption price and any accrued and unpaid dividends, based on the weighted average closing “bid” price of the Company’s common stock for the thirty trading days immediately preceding the date of the written redemption election by the holder up to a maximum of 1.5 shares of common stock for each one share of preferred stock redeemed. The Company is accreting the carrying value of its preferred stock to its redemption price using the effective interest method with changes recorded to additional paid in capital. The accretion of preferred stock results in a reduction of earnings per share applicable to common stockholders.

Notwithstanding the forgoing, if the closing “bid” price of the Company’s publicly traded common stock as reported by the NASDAQ stock market, or any exchange on which the shares of common stock are traded, exceeds 133% of the conversion price then in effect for the convertible preferred shares for at least 10 days during any 30-day trading period, the Company has the right to redeem in whole or in part the convertible preferred stock at a redemption price of $12 per share (plus any accrued unpaid dividends) or convert the convertible preferred shares (plus any accrued unpaid dividends) into common stock at the then applicable conversion rate.

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

NOTE E—INCOME PER SHARE

Basic income per share is computed by dividing net income applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted income per share is based on the assumption that stock options and warrants are converted into common shares using the treasury stock method and convertible bonds and preferred stock are converted using the if-converted method. Conversion is not assumed if the results are anti-dilutive. Potential common shares for the three months ended March 31, 2008 and March 31, 2007 of 180,319 and 207,032 respectively, relating to convertible bonds and preferred stock, were excluded from the computation of diluted income per share because they are anti-dilutive. Potential common shares of 1,601,576 and 2,315,030 respectively, relating to stock options, warrants and restricted stock were excluded from the computation of diluted income per share for the three months ended March 31, 2008 and 2007, respectively, because they are anti-dilutive. Stock options have a weighted average exercise price of $9.21 and $8.46 at March 31, 2008 and March 31, 2007, respectively. At March 31, 2008, the convertible bonds may be converted from the date of issuance until maturity at 100% of principal amount into common stock of the Company at a price of $35 to $50. The preferred stock may be converted at the discretion of the holder or upon meeting certain conditions at the discretion of the Company (see Note D).

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

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

NOTE F—LONG-TERM LIABILITIES

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

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

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

The Company is subject to certain covenants under the terms of the Credit Facility which include, but are not limited to the maintenance of the following financial ratios (1) minimum current ratio (including unused borrowing base in current assets) of 1.0 to 1.0 and (2) a minimum annualized consolidated EBITDAX (as defined by the Credit Facility) to net interest expense to of 2.5 to 1.0. As of March 31, 2008, the Company has borrowed $82.4 million under the Credit Facility and was in compliance with all covenants.

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Depending on the current level of borrowing base usage, the annual interest rate on each base rate borrowing under the Credit Facility will be at our option either: (a) the higher of (i) the Agent’s prime rate of interest announced from time to time, or (ii) the Federal Funds rate most recently determined by the Agent, plus 0.5% per annum, plus an applicable margin that ranges from 0.25% to 1.0%, or (b) Eurodollar Loan rate plus an applicable margin that ranges from 1.25% to 2.0%. Credit line interest of approximately $0.6 million was accrued for as of March 31, 2008.

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

NOTE G—CONTINGENCIES

State of California v. Warren E&P, Inc., et al.   On January 30, 2008, the Los Angeles city attorney filed a complaint against Warren E&P, Inc., a subsidiary of the Company, and six of its individual employees and independent contractors in the Superior Court of California, County of Los Angeles. The complaint alleges eight misdemeanor violations concerning four alleged events in Wilmington, California during 2007. The complaint asserts one count of failing to report the discharge or threatened discharge of oil into marine waters for an event occurring on or about March 7, 2007; one count of failing to prepare and implement an oil spill contingency plan; four counts of violating the California Fish and Game Code by placing petroleum or its by-products in or at a place where they can pass into waters of the state; and two similar violations of the California Clean Water Act. The complaint alleges all eight counts against Warren E&P, Inc. and one to four counts against each of the individuals.

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

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

In 2005, Warren recorded a provision for $1,800,000 relating to a contingent liability that it may face as a result of a lawsuit originally filed in 1998 by Gotham Insurance Company in the 81st Judicial District Court of Frio County, Texas seeking a refund of approximately $1.8 million paid by Gotham and other insurers for a well blow-out policy that occurred in 1997. After several appeals to the Texas Court of Appeals and the Texas Supreme Court, the case has been remanded to the trial court for further proceedings which are expected to occur in 2008.

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

For partnerships formed from 1999 to 2001, investor partners previously had a right to have their interests repurchased by the Company at a formula price seven years from the date of the original partnership formation. During the second quarter of 2007, Warren acquired the respective oil and gas assets of all of the partnerships formed from 2000 to 2003. The acquisitions were accounted for as the purchase of a business. The Company accounted for the transaction using the non-discounted closing price of its publicly traded common stock based upon the average closing price as defined in the referenced acquisition agreements. As consideration for the oil and gas

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properties acquired, Warren issued an aggregate of 3,365,231 shares of our unregistered restricted common stock to the five separate partnerships. The restricted shares of Common Stock were valued based upon a 20% discount from the weighted average sales price for Warren’s publicly traded Common Stock for the sixty-one (61) calendar days ended May 31, 2007. During that period, the weighted average sales price was $13.50 per share, and the 20% discounted price was $10.80 per share. The effective date of those acquisitions was April 1, 2007 and their closing date was June 20, 2007. The reserves attributable to the oil and gas properties of the five drilling partnerships are approximately 9.9 Bcfe of proved developed producing reserves. Warren also attributed an estimated fair market value for related water injection wells and unproved dewatering wells that were in the partnerships. In accordance with their five respective partnership agreements, the sale of substantially all of the oil and gas properties by the five partnerships formed from 2000 to 2003 terminated any repurchase rights that their investor partners previously held.

Also, during the second quarter of 2007, Warren acquired the respective oil and gas assets of the two partnerships formed in 1999. The acquisitions are accounted for as the purchase of a business. The Company accounted for the transaction using the non-discounted closing price of its publicly traded common stock based upon the average closing price as defined in the referenced acquisition agreements. As consideration, Warren paid an aggregate of $1.6 million in cash and the balance by issuing 447,031 shares of our unregistered restricted common stock to the two separate partnerships. The restricted shares of Common Stock were valued based upon a 20% discount from the weighted average sales price for Warren’s publicly traded Common Stock for the period January 1, 2007 through March 31, 2007. During that period, the weighted average sales price was $11.22 per share, and the 20% discounted price was $8.98 per share. The effective date of those two acquisitions was April 1, 2007 and their closing date was June 30, 2007. In accordance with their respective partnership agreements, the sale of substantially all of the oil and gas properties by the two partnerships formed in 1999 terminated any repurchase rights that their investor partners previously held.

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

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

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

NOTE H—BUSINESS SEGMENT INFORMATION

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

NOTE I—COMPREHENSIVE INCOME

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

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

NOTE J – RECENTLY ISSUE ACCOUNTING STANDARDS

Effective January 1, 2008, we implemented Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for its measurement and expands disclosures about fair value measurements. We elected to implement this Statement with the one-year deferral permitted by FASB Staff Position (FSP) 157-2 for nonfinancial assets and nonfinancial liabilities measured at fair value, except those that are recognized or disclosed on a recurring basis (at least annually). The deferral applies to nonfinancial assets and liabilities measured at fair value in a business combination; impaired properties, plants and equipment; intangible assets and goodwill; and initial recognition of asset retirement obligations and restructuring costs for which we use fair value. We do not expect any significant impact to our consolidated financial statements when we implement SFAS No. 157 for these assets and liabilities.

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

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

FORWARD-LOOKING INFORMATION

The Company has made in this report, and may from time to time otherwise make in other public filings, press releases and discussions with Company management, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 concerning the Company’s operations, economic performance and financial condition. These forward-looking statements include information concerning future production and reserves, schedules, plans, timing of development, contributions from oil and gas properties, and those statements preceded by, followed by or that otherwise include the words “believes,” “expects,” “anticipates,” “intends,” “estimates,” “projects,” “target,” “goal,” “plans,” “objective,” “should” or similar expressions or variations on such expressions. For such statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company’s expectations include, but are not limited to, the Company’s assumptions about energy markets, production levels, reserve levels, operating results, competitive conditions, technology, the availability of capital resources, capital expenditures and other contractual obligations, the supply and demand for and the price of oil, natural gas and other products or services, the weather, inflation, the availability of goods and services, drilling risks, future processing volumes and pipeline throughput, general economic conditions, either internationally or nationally or in the jurisdictions in which the Company or its subsidiaries are doing business, legislative or regulatory changes, including changes in environmental regulation, environmental risks and liability under federal, state and foreign environmental laws and regulations, potential environmental obligations, the securities or capital markets, our ability to repay debt and other factors discussed in “Risk Factors” and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s 2007 Annual Report on Form 10-K, this Form 10-Q and in the Company’s other public filings, press releases and discussions with Company management. Warren undertakes no obligation to publicly update or revise any
forward-looking statements.

Overview

We are a growing independent energy company engaged in the exploration and development of domestic onshore oil and natural gas reserves. We focus our efforts primarily on our waterflood oil recovery programs and horizontal drilling in the Wilmington field within the Los Angeles Basin of California and on the exploration and development of coalbed methane (“CBM”) properties located in the Rocky Mountain region. As of March 31, 2008, we owned natural gas and oil leasehold interests in approximately 230,000 gross, 130,000 net acres, 90% of which are undeveloped. Substantially all our undeveloped acreage is located in the Rocky Mountains. Our total net proved reserves are located on less than 10% of our net acreage.

Liquidity and Capital Resources

Our cash and cash equivalents increased $14.5 million during the first three months of 2008. This resulted from cash provided by financing activities of $33.9 million and cash provided by operating activities of $9.9 million.  This was partially offset by cash used in investing activities of $29.3 million.

Cash used in investing activities primarily results from expenditures on oil and gas properties and equipment.  Cash provided by operating activities primarily relates to oil and gas operations.  Cash provided by financing activities primarily results from proceeds received from our Credit Facility as discussed in more detail below and from the exercise of stock options and warrants.

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

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

Depending on the current level of borrowing base usage, the annual interest rate on each base rate borrowing under the Credit Facility will be at our option either: (a) the higher of (i) the Agent’s prime rate of interest announced from time to time, or (ii) the Federal Funds rate most recently determined by the Agent, plus 0.5% per annum, plus an applicable margin that ranges from 0.25% to 1.0%, or (b) Eurodollar Loan rate plus an applicable margin that ranges from 1.25% to 2.0%. Credit line interest of approximately $0.6 million was accrued for as of March 31, 2008.

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

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

Contractual Obligations

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

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

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RESULTS OF OPERATIONS:

Three months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007

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

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

Interest and other income. Interest and other income decreased $0.5 million in the first quarter of 2008 to $0.3 million, a 59% decrease compared to the same quarter in 2007. This represents a decrease in interest earned due to lower cash and cash equivalents balances and lower interest rates during the quarter as compared to the corresponding quarter last year.

Depreciation, depletion and amortization .Depreciation, depletion and amortization expense increased $1.9 million for the first quarter of 2008 to $3.9 million, a 95% increase compared to the corresponding quarter last year. This increase results from increased production and increased capitalized costs during the first quarter of 2008 compared to the corresponding period of 2007.  Production increased 58% during this period.

General and administrative expenses. General and administrative expenses increased $0.6 million in the first quarter of 2008 to $3.3 million, a 24% increase compared to the corresponding quarter last year.  This reflects an increase in personnel as a result of increased drilling activities.  Also, this reflects an increase in stock option expense of $0.3 million.

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

CRITICAL ACCOUNTING POLICIES

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

Change in Accounting Principle

In the second quarter of 2007, we converted from the successful efforts method of accounting for our oil and gas properties to the full cost method. We believe that the full cost method is preferable for our company as we devote a significant portion of our time and capital budget to exploration activities.

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

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estimated future development and dismantlement costs are depleted on the equivalent unit-of-production method, based on proved oil and gas reserves as determined by independent petroleum engineers.

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

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

Certain reclassifications have been made to the prior period’s financial statements to conform to the full cost presentation.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Energy Price Risk

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

Commodity Risk

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

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

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

The Company has not elected to designate the aforementioned derivative as a hedge. The change in fair value resulted in approximately $70,000 of net losses recorded to oil and gas revenue for the three months ended March 31, 2008. Our remaining anticipated production for 2008 and beyond is subject to commodity price fluctuations.

Interest Rate Risk

We have exposure to changes in interest rates from our floating rate debt under our Credit Facility with GE Capital Corporation. All of our convertible debt has fixed interest rates, so consequently we are not exposed to cash flow risk from market interest rate changes on this convertible debt. We also hold investments in U.S. treasury bonds available for sale, which represents securities held in escrow accounts on behalf of purchasers of certain bonds.  Additionally, we may hold U.S. treasury bonds trading securities, which predominantly represent U.S. treasury bonds released from escrow accounts.  The fair market value of these securities will generally increase if the federal discount rate decreases and decrease if the federal discount rate increases.

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Financial Instruments

Our financial instruments consist of cash and cash equivalents, U.S. treasury bonds and other long-term liabilities. The carrying amounts of cash and cash equivalents, U.S. treasury bonds and other long-term liabilities, approximate fair market value due to the highly liquid nature of these short-term instruments or they are reported at fair value.

Inflation and Changes in Prices

The general level of inflation affects our costs. Salaries and other general and administrative expenses are impacted by inflationary trends and the supply and demand of qualified professionals and professional services. Inflation and price fluctuations affect the costs associated with exploring for and producing natural gas and oil, which have a material impact on our financial performance.

Forward-Looking Statements and Risk

Certain statements in this report, including statements of the future plans, objectives, and expected performance of the company, are forward-looking statements that are dependent upon certain events, risks and uncertainties that may be outside the company’s control, and which could cause actual results to differ materially from those anticipated. Some of these include, but are not limited to, the market prices of oil and gas, economic and competitive conditions, exploration risks such as drilling unsuccessful wells, higher-than-expected costs, potential liability for remedial actions under existing or future environmental regulations and litigation, potential liability resulting from pending or future litigation,  environmental and regulatory uncertainties that could delay or prevent drilling, and not successfully completing, or any material delay of, any development of new or existing fields, expansion, or capital expenditure, legislative and regulatory changes, financial market conditions, political and economic uncertainties of foreign governments, future business decisions, and other uncertainties, all of which are difficult to predict. Forward-looking statements are generally accompanied by words such as “estimate”, “project”, “predict”, “will”, “anticipate”, “plan”, “intend”, “believe”, “expect” or similar expressions that convey the uncertainty of future events or outcomes. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. Unless legally required, Warren does not undertake any obligation to update any forward-looking statements, as a result of new information, future events or otherwise. Certain risks that may affect Warren’s results of operations and financial position appear in Part 1, Item 1A “Risk Factors” of Warren’s 2007 Annual Report on Form 10-K.

 There are numerous uncertainties inherent in estimating quantities of proved oil and gas reserves and in projecting future rates of production and the timing of development expenditures. The total amount or timing of actual future production may vary significantly from reserves and production estimates. The drilling of exploratory wells can involve significant risks, including those related to timing, success rates and cost overruns. Lease and rig availability, complex geology and other factors can affect these risks. Fluctuations in oil and natural gas prices or a prolonged continuation of low prices may adversely affect the company’s financial position, results of operations and cash flows

Item 4.  Controls and Procedures

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 of our disclosure controls and procedures as defined in Securities and Exchange Commission (“SEC”) Rule 13a-15(e) and 15d-15(e) as of the end of the period covered by this report.  Based upon that evaluation, management  has concluded that our  disclosure  controls  and  procedures  are  effective to ensure  that information  we are required to disclose in reports that we file or submit under the Securities Exchange Act is communicated to management, including the CEO and CFO, as appropriate to allow timely decisions  regarding required disclosure and is  recorded,  processed,  summarized  and  reported  within the time periods specified in the SEC’s rules and forms.

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Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

State of California v. Warren E&P, Inc., et al.    On January 30, 2008, the Los Angeles city attorney filed a complaint against Warren E&P, Inc., a subsidiary of the Company, and six of its individual employees and independent contractors in the Superior Court of California, County of Los Angeles. The complaint alleges eight misdemeanor violations concerning four alleged events in Wilmington, California during 2007. The complaint asserts one count of failing to report the discharge or threatened discharge of oil into marine waters for an event occurring on or about March 7, 2007; one count of failing to prepare and implement an oil spill contingency plan; four counts of violating the California Fish and Game Code by placing petroleum or its by-products in or at a place where they can pass into waters of the state; and two similar violations of the California Clean Water Act. The complaint alleges all eight counts against Warren E&P, Inc. and one to four counts against each of the individuals.

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

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

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

Item 1A. Risk Factors

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

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

a.     Not applicable

b.     Not applicable

c.     Not applicable

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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.

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

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

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