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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

Form 10-Q

|ý                                                 | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|------------------------------------------------- | ----------------------------------------------------------------------------------------
|For the quarterly period ended September 30, 2007
|or                                               
|o                                                 | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 333-123711

Venoco, Inc.

|Delaware(State or other jurisdiction of
incorporation or organization)               |  | 77-0323555(I.R.S. Employer
Identification Number)
|------------------------------------------------------------------------------------ |  | -------------------------------------------------
|370 17th Street, Suite 3900
Denver, Colorado(Address of principal executive offices) |  | 80202-1370(Zip Code)                             

Registrant's
telephone number, including area code:(303) 626-8300

N/A(Former name or former address, and former fiscal year, if changed since last report)

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

YES ý NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in
Rule 12b-2 of the Exchange Act).

Large Accelerated Filer o

Accelerated Filer o

Non-accelerated filer ý


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

YES o NO ý

As of October 31, 2007, there were 50,351,435 shares of the issuer's common stock, par value $0.01 per share, issued and outstanding.



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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report on Form 10-Q contains "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995.
The use of any statements containing the words "anticipate," "intend," "believe," "estimate," "project," "expect," "plan," "should" or similar expressions are intended to identify such statements.
Forward-looking statements included in this report relate to, among other things, (i) expected production and expenses in 2007 and 2008, (ii) the nature, timing and results of capital
expenditure projects and amounts of future capital expenditures and (iii) our plans with respect to a master limited partnership. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, those expectations may prove to be incorrect. Disclosure of important factors that could cause actual results to differ materially from our expectations, or
cautionary statements, are included under the heading "Risk Factors" in this report and our Annual Report on Form 10-K for the year ended December 31, 2006. Certain
cautionary statements are also included elsewhere in this report, including, without limitation, in conjunction with the forward-looking statements. All forward-looking statements speak only as of the
date made. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements.
Except as required by law, we undertake no obligation to update any forward-looking statement. Factors that could cause actual results to differ materially from our expectations include, among others,
those factors referenced in the "Risk Factors" section of this report and our Annual Report on Form 10-K for the year ended December 31, 2006 and such things as:



2

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VENOCO, INC.

Form 10-Q for the Quarterly Period Ended September 30, 2007

TABLE OF CONTENTS



|PART I.    |  | FINANCIAL INFORMATION                                                                                                           
|---------- |  | --------------------------------------------------------------------------------------------------------------------------------
|Item 1.    |  | Financial Statements (Unaudited)                                                                                                
|           |  | Condensed Consolidated Balance Sheets at December 31, 2006 and September 30, 2007                                               
|           |  | Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2006 and 2007                 
|           |  | Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2006 and 2007
|           |  | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2007                           
|           |  | Notes to Condensed Consolidated Financial Statements                                                                            
|Item 2.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                           
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                                                                      
|Item 4.    |  | 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

3

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PART IFINANCIAL INFORMATION

VENOCO, INC. AND SUBSIDIARIES        CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)        (In thousands, except shares and per share amounts)

|                                           |                                                                                                                                                                                                 | December 31,
2006                   |                                   | September 30,
2007 |        
|------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------- | --------------------------------- | ------------------ | -------
|ASSETS                                     |                                                                                                                                                                                                 |                                     |                                   |                    |        
|CURRENT ASSETS:                            |                                                                                                                                                                                                 |                                     |                                   |                    |        
|                                           | Cash and cash equivalents                                                                                                                                                                       |                                     | $                                 | 8,364              |        
|                                           | Accounts receivable, net of allowance for doubtful accounts of $1,250 and $800 at December 31, 2006 and September 30, 2007, respectively                                                        |                                     |                                   | 48,042             |        
|                                           | Inventories                                                                                                                                                                                     |                                     |                                   | 3,211              |        
|                                           | Prepaid expenses and other current assets                                                                                                                                                       |                                     |                                   | 7,226              |        
|                                           | Income tax receivable                                                                                                                                                                           |                                     |                                   | 8,098              |        
|                                           | Deferred income taxes                                                                                                                                                                           |                                     |                                   | 879                |        
|                                           | Commodity derivatives                                                                                                                                                                           |                                     |                                   | 10,348             |        
|                                           |                                                                                                                                                                                                 |                                     |                                   |                    |        
|                                           |                                                                                                                                                                                                 | Total current assets                |                                   |                    | 86,168 
|PROPERTY, PLANT AND EQUIPMENT, AT COST:    |                                                                                                                                                                                                 |                                     |                                   |                    |        
|                                           | Oil and natural gas properties (full cost method, of which $4,850 and $7,877 for unproved properties were excluded from amortization at December 31, 2006 and September 30, 2007, respectively) |                                     |                                   | 881,570            |        
|                                           | Drilling equipment                                                                                                                                                                              |                                     |                                   | 13,731             |        
|                                           | Other property and equipment                                                                                                                                                                    |                                     |                                   | 12,380             |        
|                                           |                                                                                                                                                                                                 |                                     |                                   |                    |        
|                                           |                                                                                                                                                                                                 | Total property, plant and equipment |                                   |                    | 907,681
|                                           | Accumulated depletion, depreciation, amortization and impairment                                                                                                                                |                                     |                                   | (133,428           | )      
|                                           |                                                                                                                                                                                                 |                                     |                                   |                    |        
|                                           |                                                                                                                                                                                                 |                                     | Net property, plant and equipment |                    |        
|OTHER ASSETS:                              |                                                                                                                                                                                                 |                                     |                                   |                    |        
|                                           | Commodity derivatives                                                                                                                                                                           |                                     |                                   | 8,591              |        
|                                           | Deferred loan costs                                                                                                                                                                             |                                     |                                   | 17,318             |        
|                                           | Other                                                                                                                                                                                           |                                     |                                   | 6,863              |        
|                                           |                                                                                                                                                                                                 |                                     |                                   |                    |        
|                                           |                                                                                                                                                                                                 | Total other assets                  |                                   |                    | 32,772 
|                                           |                                                                                                                                                                                                 |                                     |                                   |                    |        
|TOTAL ASSETS                               |                                                                                                                                                                                                 | $                                   | 893,193                           |                    | $      
|                                           |                                                                                                                                                                                                 |                                     |                                   |                    |        
|LIABILITIES AND STOCKHOLDERS' EQUITY       |                                                                                                                                                                                                 |                                     |                                   |                    |        
|CURRENT LIABILITIES:                       |                                                                                                                                                                                                 |                                     |                                   |                    |        
|                                           | Accounts payable and accrued liabilities                                                                                                                                                        |                                     | $                                 | 53,406             |        
|                                           | Undistributed revenue payable                                                                                                                                                                   |                                     |                                   | 15,596             |        
|                                           | Interest payable                                                                                                                                                                                |                                     |                                   | 5,295              |        
|                                           | Current maturities of long-term debt                                                                                                                                                            |                                     |                                   | 3,557              |        
|                                           | Commodity and interest derivatives                                                                                                                                                              |                                     |                                   | 8,907              |        
|                                           |                                                                                                                                                                                                 |                                     |                                   |                    |        
|                                           |                                                                                                                                                                                                 | Total current liabilities           |                                   |                    | 86,761 
|LONG-TERM DEBT                             |                                                                                                                                                                                                 |                                     | 529,616                           |                    |        
|DEFERRED INCOME TAXES                      |                                                                                                                                                                                                 |                                     | 40,424                            |                    |        
|COMMODITY AND INTEREST DERIVATIVES         |                                                                                                                                                                                                 |                                     | 7,092                             |                    |        
|ASSET RETIREMENT OBLIGATIONS               |                                                                                                                                                                                                 |                                     | 38,984                            |                    |        
|                                           |                                                                                                                                                                                                 |                                     |                                   |                    |        
|                                           |                                                                                                                                                                                                 | Total liabilities                   |                                   |                    | 702,877
|COMMITMENTS AND CONTINGENCIES              |                                                                                                                                                                                                 |                                     |                                   |                    |        
|STOCKHOLDERS' EQUITY:                      |                                                                                                                                                                                                 |                                     |                                   |                    |        
|                                           | Common stock, $.01 par value (200,000,000 shares authorized; 42,783,300 and 50,261,435 shares issued and outstanding at December 31, 2006 and September 30, 2007, respectively)                 |                                     |                                   | 428                |        
|                                           | Additional paid-in capital                                                                                                                                                                      |                                     |                                   | 181,444            |        
|                                           | Retained earnings (accumulated deficit)                                                                                                                                                         |                                     |                                   | 10,910             |        
|                                           | Accumulated other comprehensive loss                                                                                                                                                            |                                     |                                   | (2,466             | )      
|                                           |                                                                                                                                                                                                 |                                     |                                   |                    |        
|                                           |                                                                                                                                                                                                 | Total stockholders' equity          |                                   |                    | 190,316
|                                           |                                                                                                                                                                                                 |                                     |                                   |                    |        
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |                                                                                                                                                                                                 | $                                   | 893,193                           |                    | $      
|                                           |                                                                                                                                                                                                 |                                     |                                   |                    |        

See notes to condensed consolidated financial statements.

4

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VENOCO, INC. AND SUBSIDIARIES        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)        (In thousands, except per share amounts)

|                                            |                                                        | Three Months Ended
September 30, |        | Nine Months Ended
September 30, |       
|------------------------------------------- | ------------------------------------------------------ | -------------------------------- | ------ | ------------------------------- | ------
|
|REVENUES:                                   |                                                        |                                  |        |                                 |       
|                                            | Oil and natural gas sales                              |                                  | $      | 75,895                          |       
|                                            | Commodity derivative gains (losses), net               |                                  |        | 21,415                          |       
|                                            | Other                                                  |                                  |        | 1,329                           |       
|                                            |                                                        |                                  |        |                                 |       
|                                            |                                                        | Total revenues                   |        |                                 | 98,639
|EXPENSES:                                   |                                                        |                                  |        |                                 |       
|                                            | Oil and natural gas production                         |                                  |        | 27,049                          |       
|                                            | Transportation expense                                 |                                  |        | 629                             |       
|                                            | Depletion, depreciation and amortization               |                                  |        | 18,350                          |       
|                                            | Accretion of asset retirement obligations              |                                  |        | 657                             |       
|                                            | General and administrative, net of amounts capitalized |                                  |        | 7,445                           |       
|                                            |                                                        |                                  |        |                                 |       
|                                            |                                                        | Total expenses                   |        |                                 | 54,130
|                                            |                                                        |                                  |        |                                 |       
|Income from operations                      |                                                        |                                  | 44,509 |                                 |       
|FINANCING COSTS AND OTHER:                  |                                                        |                                  |        |                                 |       
|                                            | Interest expense, net                                  |                                  |        | 15,290                          |       
|                                            | Amortization of deferred loan costs                    |                                  |        | 1,099                           |       
|                                            | Interest rate derivative losses, net                   |                                  |        | 1,381                           |       
|                                            | Loss on extinguishment of debt                         |                                  |        |                                |       
|                                            |                                                        |                                  |        |                                 |       
|                                            |                                                        | Total financing costs and other  |        |                                 | 17,770
|                                            |                                                        |                                  |        |                                 |       
|Income (loss) before income taxes           |                                                        |                                  | 26,739 |                                 |       
|Income tax provision (benefit)              |                                                        |                                  | 10,500 |                                 |       
|                                            |                                                        |                                  |        |                                 |       
|Net income (loss)                           |                                                        | $                                | 16,239 |                                 | $     
|                                            |                                                        |                                  |        |                                 |       
|Earnings per common share:                  |                                                        |                                  |        |                                 |       
|                                            | Basic                                                  |                                  | $      | 0.50                            |       
|                                            | Diluted                                                |                                  | $      | 0.47                            |       
|Weighted average common shares outstanding: |                                                        |                                  |        |                                 |       
|                                            | Basic                                                  |                                  |        | 32,693                          |       
|                                            | Diluted                                                |                                  |        | 34,663                          |       

See
notes to condensed consolidated financial statements.

5

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VENOCO, INC. AND SUBSIDIARIES        CONDENSED CONSOLIDATED STATEMENTS OF  COMPREHENSIVE INCOME (LOSS) (UNAUDITED)        (In thousands)

|                                                      |                                                                             | Three Months Ended
September 30, |        | Nine Months Ended
September 30, |  
|----------------------------------------------------- | --------------------------------------------------------------------------- | -------------------------------- | ------ | ------------------------------- | -
|
|Net income (loss)                                     |                                                                             | $                                | 16,239 |                                 | $
|OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAX: |                                                                             |                                  |        |                                 |  
|Hedging activities:                                   |                                                                             |                                  |        |                                 |  
|                                                      | Reclassification adjustments for settled contracts                          |                                  |        | 888                             |  
|                                                      | Changes in fair value of effective portion of outstanding hedging positions |                                  |        | 10,008                          |  
|                                                      |                                                                             |                                  |        |                                 |  
|Other comprehensive income (loss)                     |                                                                             |                                  | 10,896 |                                 |  
|                                                      |                                                                             |                                  |        |                                 |  
|Comprehensive income (loss)                           |                                                                             | $                                | 27,135 |                                 | $
|                                                      |                                                                             |                                  |        |                                 |  

See
notes to condensed consolidated financial statements.

6

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VENOCO, INC. AND SUBSIDIARIES    CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)    (In thousands)

|                                                  |                                                                                          | Nine Months Ended
September 30,                                                                          |                                          
|------------------------------------------------- | ---------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------- | -----------------------------------------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:             |                                                                                          |                                                                                                          |                                          
|                                                  | Net income (loss)                                                                        |                                                                                                          | $                                        
|                                                  | Adjustments to reconcile net income (loss) to net cash provided by operating activities: |                                                                                                          |                                          
|                                                  |                                                                                          | Depletion, depreciation and amortization                                                                 |                                          
|                                                  |                                                                                          | Accretion of asset retirement obligations                                                                |                                          
|                                                  |                                                                                          | Deferred income taxes (benefit)                                                                          |                                          
|                                                  |                                                                                          | Share-based compensation                                                                                 |                                          
|                                                  |                                                                                          | Amortization of deferred loan costs                                                                      |                                          
|                                                  |                                                                                          | Loss on extinguishment of debt                                                                           |                                          
|                                                  |                                                                                          | Amortization of bond discounts and other non-cash interest                                               |                                          
|                                                  |                                                                                          | Unrealized interest rate swap derivative losses                                                          |                                          
|                                                  |                                                                                          | Unrealized commodity derivative (gains) losses and amortization of premiums and other comprehensive loss |                                          
|                                                  | Changes in operating assets and liabilities:                                             |                                                                                                          |                                          
|                                                  |                                                                                          | Accounts receivable                                                                                      |                                          
|                                                  |                                                                                          | Inventories                                                                                              |                                          
|                                                  |                                                                                          | Prepaid expenses and other current assets                                                                |                                          
|                                                  |                                                                                          | Income tax receivable                                                                                    |                                          
|                                                  |                                                                                          | Other assets                                                                                             |                                          
|                                                  |                                                                                          | Accounts payable and accrued liabilities                                                                 |                                          
|                                                  |                                                                                          | Undistributed revenue payable                                                                            |                                          
|                                                  | Net premiums paid on derivative contracts                                                |                                                                                                          |                                          
|                                                  |                                                                                          |                                                                                                          |                                          
|                                                  |                                                                                          |                                                                                                          | Net cash provided by operating activities
|CASH FLOWS FROM INVESTING ACTIVITIES:             |                                                                                          |                                                                                                          |                                          
|                                                  | Expenditures for oil and natural gas properties                                          |                                                                                                          |                                          
|                                                  | Acquisitions of oil and natural gas properties                                           |                                                                                                          |                                          
|                                                  | Expenditures for drilling equipment                                                      |                                                                                                          |                                          
|                                                  | Expenditures for other property and equipment                                            |                                                                                                          |                                          
|                                                  | Proceeds from sale of oil and natural gas properties                                     |                                                                                                          |                                          
|                                                  | Acquisition of TexCal Energy, net of cash acquired                                       |                                                                                                          |                                          
|                                                  |                                                                                          |                                                                                                          |                                          
|                                                  |                                                                                          | Net cash used in investing activities                                                                    |                                          
|CASH FLOWS FROM FINANCING ACTIVITIES:             |                                                                                          |                                                                                                          |                                          
|                                                  | Proceeds from long-term debt                                                             |                                                                                                          |                                          
|                                                  | Principal payments on long-term debt                                                     |                                                                                                          |                                          
|                                                  | Payments for deferred loan costs                                                         |                                                                                                          |                                          
|                                                  | Premium to retire debt                                                                   |                                                                                                          |                                          
|                                                  | Proceeds from derivative premium financing                                               |                                                                                                          |                                          
|                                                  | Proceeds from issuance of common stock                                                   |                                                                                                          |                                          
|                                                  | Stock issuance costs                                                                     |                                                                                                          |                                          
|                                                  | Proceeds from exercise of stock options                                                  |                                                                                                          |                                          
|                                                  | Excess income tax benefits from share-based compensation                                 |                                                                                                          |                                          
|                                                  | Dividend paid to shareholder                                                             |                                                                                                          |                                          
|                                                  |                                                                                          |                                                                                                          |                                          
|                                                  |                                                                                          | Net cash provided by financing activities                                                                |                                          
|                                                  |                                                                                          |                                                                                                          |                                          
|                                                  | Net (decrease) increase in cash and cash equivalents                                     |                                                                                                          |                                          
|                                                  | Cash and cash equivalents, beginning of period                                           |                                                                                                          |                                          
|                                                  |                                                                                          |                                                                                                          |                                          
|                                                  | Cash and cash equivalents, end of period                                                 |                                                                                                          | $                                        
|                                                  |                                                                                          |                                                                                                          |                                          
|Supplemental Disclosure of Cash Flow Information |                                                                                          |                                                                                                          |                                          
|                                                  | Cash paid for interest                                                                   |                                                                                                          | $                                        
|                                                  | Cash paid for income taxes                                                               |                                                                                                          | $                                        
|Supplemental Disclosure of Noncash Activities    |                                                                                          |                                                                                                          |                                          
|                                                  | Decrease in accrued capital expenditures                                                 |                                                                                                          | $                                        
|                                                  | Distribution of land and building                                                        |                                                                                                          | $                                        
|                                                  | Distribution of building note payable                                                    |                                                                                                          | $                                        

See notes to condensed consolidated financial statements.

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VENOCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. ORGANIZATION AND NATURE OF OPERATIONS

Description of OperationsVenoco, Inc. (the "Company"), a Delaware corporation, is engaged in the acquisition,
exploration, exploitation and development of oil and natural gas properties with a focus on properties offshore and onshore California and the Gulf Coast of Texas.

Condensed Consolidated Financial StatementsThe unaudited condensed consolidated financial statements include the accounts of
Venoco and its subsidiaries, all of which are wholly owned. The financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial
reporting. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all material adjustments considered necessary for a fair
presentation of the Company's interim results have been reflected. Venoco's Annual Report on Form 10-K for the year ended December 31, 2006 includes certain definitions and a
summary of significant accounting policies and should be read in conjunction with this report. The results for interim periods are not necessarily indicative of annual results.

In
the course of preparing the condensed consolidated financial statements, management makes various assumptions, judgments and estimates to determine the reported amount of assets,
liabilities, revenue and expenses, and in the disclosures of commitments and contingencies. Changes in these assumptions, judgments and estimates will occur as a result of the passage of time and the
occurrence of future events and, accordingly, actual results could differ from amounts initially established. The more significant areas requiring the use of assumptions, judgments and estimates
relate to volumes of oil and gas reserves used in calculating depletion, the amount of future net revenues used in computing the ceiling test limitations and the amount of future capital costs and
abandonment obligations used in
such calculations. Assumptions, judgments and estimates are also required in determining impairments of undeveloped properties, valuing deferred tax assets and estimating fair values of derivative
instruments.

Earnings Per ShareStatement of Financial Accounting Standards No. 128,Earnings Per
Share, requires presentation of "basic" and "diluted" earnings per share. Basic earnings per common share of stock is calculated by dividing net income (loss) by the weighted
average number of common shares outstanding during each period. The weighted average number of common shares outstanding used to calculate basic net income (loss) per share excludes the effect of
non-vested restricted shares subject to future vesting. As those restricted shares vest, they will be included in the shares outstanding used to calculate basic earnings per common share
(although all restricted shares are issued and outstanding upon grant). Diluted earnings per common share of stock is calculated by dividing net income by the weighted average number of common shares
outstanding and other dilutive securities. The Company's dilutive securities include non-qualified stock option awards and non-vested restricted shares with only service conditions.

8

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The
treasury stock method is used to measure the dilutive impact of stock options. The following table details the weighted average dilutive and anti-dilutive securities
related to stock options for the periods presented:

|              |  | Three Months Ended
September 30, |  | Nine Months Ended
September 30,
|------------- |  | -------------------------------- |  | -------------------------------
|
|Dilutive      |  | 4,053,661                        |  | 4,106,582                      
|Anti-dilutive |  | 200,000                          |  | 211,875                        

The
following table sets forth the calculation of basic and diluted earnings per share (in thousands except per share amounts):

|                                                                       |                                                       | Three Months Ended
September 30, |        | Nine Months Ended
September 30, |  
|---------------------------------------------------------------------- | ----------------------------------------------------- | -------------------------------- | ------ | ------------------------------- | -
|
|Net income (loss)                                                      |                                                       | $                                | 16,239 |                                 | $
|Adjustments to net income for dilution                                 |                                                       |                                  |       |                                 |  
|                                                                       |                                                       |                                  |        |                                 |  
|                                                                       | Net income (loss) adjusted for the effect of dilution |                                  | $      | 16,239                          |  
|                                                                       |                                                       |                                  |        |                                 |  
|Basic weighted average common shares outstanding                       |                                                       |                                  | 32,693 |                                 |  
|Add: dilutive effect of stock options and non-vested restricted shares |                                                       |                                  | 1,970  |                                 |  
|                                                                       |                                                       |                                  |        |                                 |  
|                                                                       | Diluted weighted average common shares outstanding    |                                  |        | 34,663                          |  
|                                                                       |                                                       |                                  |        |                                 |  
|Basic earnings per common share                                        |                                                       | $                                | 0.50   |                                 | $
|Diluted earnings per common share                                      |                                                       | $                                | 0.47   |                                 | $

ReclassificationsThe Company made certain reclassifications to prior period condensed consolidated balance sheets, statements
of operations and statements of cash flows to be consistent with the current presentation. The condensed consolidated balance sheet was modified to reclassify interest rate derivative liabilities from
accounts payable and accrued liabilities to commodity and interest derivative liabilities and the condensed consolidated statements of operations were modified to combine commodity derivative gains
and losses into one caption. These reclassifications were not material to the Company's financial position or cash flows from operating, investing or financing activities and had no impact on total
revenues or income (loss) before taxes.

Recently Adopted Accounting Pronouncement

In June 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation 48 ("FIN 48"),Accounting for
Uncertainties in Income Taxes, an interpretation of FASB Statement No. 109,Accounting for Income Taxes.This
interpretation addresses how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company may recognize the tax benefit from
an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of

9

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the
position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being
realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes and accounting in interim periods and requires increased
disclosures.

The
Company adopted the provisions of FIN 48 as of January 1, 2007. As a result of the implementation of FIN 48, the Company recognized a $3.8 million reduction in prepaid
income taxes for unrecognized tax benefits which was offset by a corresponding reduction to deferred income tax liabilities. There was no cumulative adjustment made to the opening balance of retained
earnings at January 1, 2007. The Company had a liability for unrecognized tax benefits of $3.8 million at January 1, 2007 and $2.4 million as of September 30, 2007.
The Company's uncertain tax positions relate primarily to timing differences and management does not believe any such uncertain tax positions will materially impact the Company's effective tax rate in
future periods.

The
Company's policy is to recognize interest and penalties related to uncertain tax positions as part of income tax expense. The Company has not incurred any significant interest and
penalties related to income tax filings.

The
Company is subject to taxation at the federal and various state levels. The Company's tax years 2003 and forward are subject to examination by state tax authorities. The Company's
federal income tax returns for the 2003 and 2004 tax years are currently under examination by the Internal Revenue Service ("IRS") and tax years 2005 and 2006 remain open to examination. The Company
has received notices from the IRS relating to 2003 and 2004 in which the IRS has indicated that it is seeking adjustments in an aggregate amount that would exceed the amounts accrued as of
September 30, 2007. The Company does not believe that, when ultimately determined, the adjustments, if any, will materially exceed the accrued amount. The Company anticipates that approximately
$1.3 million of uncertain tax positions will be recognized within the next twelve month period.

New Accounting Standards

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, "Fair Value
Measurements" ("SFAS 157"). This statement clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair
value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company has not determined the effect, if any, the adoption of this statement will have
on its financial position or results of operations.

In
February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities" ("SFAS 159"). This statement permits entities to choose to measure many financial instruments and certain other items at fair value. This statement expands
the use of fair value measurement and applies to entities that elect the fair value option. The fair value option established by this statement permits all entities to choose to measure eligible items
at fair value at specified election dates. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company has not determined the effect, if any, the adoption of
this statement will have on its financial position or results of operations.

10

---



2. ACQUISITIONS

West Montalvo and Manvel acquisitions.The Company acquired the West Montalvo field in Ventura County, California in
May 2007 for approximately $61.3 million. The Company acquired the Manvel field in Brazoria County, Texas, and certain other fields in Texas, in April 2007 for
$46.1 million.

TexCal Energy Acquisition.On March 31, 2006, the Company acquired 100% of the members' interest in TexCal Energy (LP)
LLC (the "TexCal Acquisition"), an independent exploration and production company with properties in Texas and California, for approximately $456.8 million in cash and related financing costs
of $14.4 million. TexCal's operations are located entirely onshore and are concentrated in the Gulf Coast region of Texas and in the Sacramento Basin in California. The Company financed the
acquisition through loans advanced under a second amendment and restatement of its existing revolving credit facility and a new senior secured second lien term loan facility. The purchase price was
allocated to assets and liabilities, adjusted for tax effects, based on their estimated fair values at the date of acquisition. The acquisition was accounted for using the purchase method of
accounting and has been included in the Company's consolidated financial statements as of the date of the acquisition.

The
cash consideration paid for the TexCal Acquisition was allocated as follows (in thousands):

Purchase
Price
AllocationCurrent assets

$
25,834Oil and natural gas properties


461,907Other non-current assets


1,018Current liabilities


(22,411
)Long-term asset retirement obligations


(9,538
)Cash consideration

$
456,810


The
following unaudited pro forma condensed consolidated operating results for the nine months ended September 30, 2006 and 2007 gives effect to the TexCal Acquisition (for the
three months ended March 31, 2006 only) and the West Montalvo and Manvel acquisitions as if they had been completed as of January 1, 2006. The pro forma amounts shown below are not
necessarily indicative of the operating results that would have occurred if the transactions had occurred on such date. The pro forma adjustments made are based on certain assumptions that the Company
believes are reasonable based on currently available information (in thousands except per share amounts) (unaudited).

Nine Months Ended
September 30,2006

2007Pro Forma

Pro FormaTotal revenues

$
255,315

$
234,910Net income (loss)

$
34,101

$
(10,950
)Basic earnings per common share

$
1.04

$
(0.24
)Diluted earnings per common share

$
1.00

$
(0.24
)


11

---



3. LONG-TERM DEBT

As of the dates indicated, the Company's long-term debt consisted of the following (in thousands):

December 31,
2006

September 30, 2007Revolving credit agreement due March 2009

$
30,579

$
10,000Second lien term loan due March 2011


348,882


New second lien term loan due September 2011





500,0008.75% senior notes due December 2011


149,317


149,419Financed derivative premiums due through 2010


4,395


2,912Total long-term debt


533,173


662,331Less: current portion of long-term debt


3,557


2,121Long-term debt, net of current portion

$
529,616

$
660,210


Senior notes.On December 20, 2004, the Company issued $150.0 million in 8.75% senior notes (the "senior
notes") due December 2011. Interest on the senior notes is due each June 15 and December 15. The senior notes are senior obligations and contain covenants that, among other
things, limit the Company's ability to make investments, incur additional debt, issue preferred stock, pay dividends, repurchase its stock, create liens or sell assets. The senior notes were issued as
unsecured obligations, but became secured equally and ratably with the Company's second lien term loan facility on March 30, 2006. Upon the replacement of the Company's second lien term loan
facility with a new second lien term loan facility in May 2007 (see "Second lien term loan facility"), the senior notes became secured equally and ratably with the new facility.

Revolving credit facility.The Company has a $300.0 million revolving credit facility with a syndicate of banks
("revolving credit facility") with a maturity date of March 30, 2009. At September 30, 2007, the revolving credit facility had a borrowing base of $125.0 million, was secured by a
first priority lien on substantially all of the Company's oil and natural gas properties and other assets, including the equity interests in all of the Company's subsidiaries, and was unconditionally
guaranteed by each of the Company's subsidiaries other than Ellwood Pipeline, Inc. The collateral also secured the Company's obligations to hedging counterparties that were also lenders, or
affiliates of lenders, under the revolving credit agreement. Base Rate Loans under the revolving credit facility bear interest at a floating rate equal to (i) the greater of a market base rate
and the overnight federal funds rate plus 0.50% plus (ii) an applicable margin ranging from zero to 0.75%, based upon utilization. LIBO Rate Loans under the revolving credit facility bear
interest at (i) LIBOR plus (ii) an applicable margin ranging from 1.50% to 2.25%, based upon utilization. A commitment fee ranging from 0.375% to 0.5% per annum is payable with respect
to unused borrowing availability under the facility. The agreement governing the facility contains customary representations, warranties, events of default, indemnities and covenants, including
operational covenants that restrict the Company's ability to incur indebtedness and financial covenants that require the Company to maintain specified ratios of EBITDA (as defined in the agreement) to
interest expense, current assets to current liabilities, debt to EBITDA and PV-10 (as defined in the agreement) to total debt. As of September 30, 2007, the Company had available
borrowing capacity of $114.3 million (net of $0.7 million in outstanding letters of credit) under the revolving credit facility.

12

---



Second lien term loan facility.The Company entered into a $350.0 million senior secured second lien term loan
facility in connection with the TexCal Acquisition. Principal on amounts borrowed under the facility was payable on March 30, 2011. Optional prepayments were subject to a prepayment premium. In
May 2007, the Company prepaid and replaced this facility with a new $500.0 million second lien term loan facility. In connection with the settlement of the prior facility, the Company
paid a prepayment premium of $3.5 million and wrote off related deferred loan costs of $8.6 million. Those amounts are reflected as loss on extinguishment of debt in the condensed
consolidated statement of operations.

Of
the total amount borrowed under the new facility, $350.5 million was used to repay all amounts outstanding under the prior facility plus accrued interest, $3.5 million
was used to pay a prepayment premium on those amounts and $4.6 million was used to pay transaction costs associated with the new facility. The remaining borrowings were used to reduce amounts
outstanding under the revolving credit facility.

Loans
made under the new facility are designated, at the Company's option, as either "Base Rate Loans" or "LIBO Rate Loans." Base Rate Loans bear interest at a floating rate equal to
(i) the greater of the overnight federal funds rate plus 0.50% and a market base rate, plus (ii) 3.00%. LIBO Rate Loans bear interest at LIBOR plus 4.00%.

The
new term loan agreement contains customary representations, warranties, events of default and indemnities and certain customary covenants, including covenants that restrict the
Company's ability to incur additional indebtedness. The new facility is secured by second priority liens on substantially all of the Company's oil and natural gas properties and other assets,
including the stock of all of its subsidiaries, and is unconditionally guaranteed by each of the Company's subsidiaries other than Ellwood Pipeline, Inc. Principal on the new facility is
payable on May 8, 2014. However, if the senior notes are not refinanced in full prior to September 20, 2011, principal on the new facility will be payable on that date.

The
Company may from time to time make optional prepayments of amounts borrowed under the new facility if no amounts are outstanding under the revolving credit facility. Optional
prepayments made prior to May 8, 2008 are subject to a prepayment premium of 2%. The premium will be reduced to 1% for prepayments made between May 9, 2008 and May 8, 2009, after
which no premium will be payable with respect to any optional prepayment. Amounts prepaid under the new facility may not be reborrowed.

The
Company was in compliance with all debt covenants at September 30, 2007.

Financed Derivative Premiums.The Company entered into derivative contracts in 2006 and 2007 for options that contain
provisions for the deferral of the payment or receipt of premiums until the period of production for which the derivative contract relates. Both the derivative and the net liability for the payment of
premiums were recorded at their fair values at the inception of the derivative contracts.

13

---





Mortgage.On December 9, 2004, 6267 Carpinteria Avenue, LLC ("6267 Carpinteria"), which was then a wholly-owned
subsidiary of the Company, purchased an office building in Carpinteria, California for $14.2 million. The purchase was financed in part by a secured 5.79% $10 million promissory note due
January 1, 2015. On March 22, 2006, the Company paid a dividend consisting of 100% of the membership interests in 6267 Carpinteria to its sole stockholder, a trust controlled by the
Company's CEO. The obligation for the 5.79% mortgage on the office building owned by 6267 Carpinteria was transferred to the sole stockholder in connection with the dividend.

4. HEDGING AND DERIVATIVE FINANCIAL INSTRUMENTS

The Company utilizes swap and collar agreements and option contracts to hedge the effect of price changes on a portion of its future oil and natural gas
production. The objective of the Company's hedging activities and the use of derivative financial instruments is to achieve more predictable cash flows. While the use of these derivative instruments
limits the downside risk of adverse price movements, they also limit future revenues from favorable price movements. The use of derivatives also involves the risk that the counterparties to such
instruments will be unable to meet the financial terms of such contracts.

The
components of commodity derivative losses in the condensed consolidated statements of operations are as follows (in thousands):

|                                                                           |                                                                              | Three Months Ended
September 30, |        | Nine Months Ended
September 30, |  
|-------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | -------------------------------- | ------ | ------------------------------- | -
|
|Realized commodity derivative gains (losses)                               |                                                                              | $                                | (6,975 | )                               | $
|Amortization of commodity derivative premiums and other comprehensive loss |                                                                              |                                  |       |                                 |  
|Unrealized commodity derivative gains (losses):                            |                                                                              |                                  |        |                                 |  
|                                                                           | Change in fair value of derivatives that do not qualify for hedge accounting |                                  |        | 27,438                          |  
|                                                                           | Ineffective portion of derivatives qualifying for hedge accounting           |                                  |        | 952                             |  
|                                                                           |                                                                              |                                  |        |                                 |  
|                                                                           | Total unrealized commodity derivative gains (losses)                         |                                  |        | 28,390                          |  
|                                                                           |                                                                              |                                  |        |                                 |  
|Commodity derivative gains (losses), net                                   |                                                                              | $                                | 21,415 |                                 | $
|                                                                           |                                                                              |                                  |        |                                 |  

Because
a large portion of the Company's commodity derivatives do not qualify for hedge accounting and to increase clarity in its financial statements, the Company elected to discontinue
hedge accounting prospectively for its commodity derivatives beginning April 1, 2007. Consequently, from that date forward, the Company has recognized mark-to-market
gains and losses in earnings currently, rather than deferring such amounts in accumulated other comprehensive income for those commodity derivatives that qualify as cash flow hedges. The net
mark-to-market loss on outstanding derivatives on the date the Company discontinued hedge accounting included in accumulated other comprehensive loss of $8.3 million
($5.1 million after tax) will be amortized into future earnings as the original hedged transactions occur. This change in reporting will have no impact on the Company's reported cash flows,

14

---



although
future results of operations will be affected by mark-to-market gains and losses which fluctuate with volatile oil and gas prices.

As
of September 30, 2007, an unrealized derivative fair value loss of $6.1 million ($3.7 million after tax), related to derivative contracts previously designated as
cash flow hedges, was recorded in accumulated other comprehensive loss. The Company will amortize net unrealized derivative losses of $3.4 million ($2.1 million after tax) out of
accumulated other comprehensive loss into earnings during the next twelve months.

Crude Oil Agreements.As of September 30, 2007, the Company has entered into option, swap and collar agreements to
receive average minimum and maximum New York Mercantile Exchange (NYMEX) and West Texas Intermediate (WTI) prices as summarized below. Location and quality differentials attributable to the Company's
properties are not included in the following prices. The agreements provide for monthly settlement based on the differential between the agreement price and the actual NYMEX crude oil price.

|                                                            |  | Minimum |  | Maximum
|----------------------------------------------------------- |  | ------- |  | -------
|
|Crude oil derivatives at September 30, 2007 for production: |  |         |  |        
|October 1December 31, 2007                                 |  | 9,880   |  | $      
|January 1December 31, 2008                                 |  | 8,100   |  | $      
|January 1December 31, 2009                                 |  | 6,983   |  | $      
|January 1December 31, 2010                                 |  | 6,150   |  | $      

In
November 2007, we entered into a NYMEX oil put for a total of 2,000 Bbls per day of 2008 production at $80.00 per Bbl.

Natural Gas Agreements.As of September 30, 2007, the Company had entered into option, swap and collar agreements to
receive average minimum and maximum PG&E Citygate prices as follows:

|                                                              |  | Minimum |  | Maximum
|------------------------------------------------------------- |  | ------- |  | -------
|
|Natural gas derivatives at September 30, 2007 for production: |  |         |  |        
|October 1December 31, 2007                                   |  | 34,375  |  | $      
|January 1December 31, 2008                                   |  | 20,650  |  | $      
|January 1December 31, 2009                                   |  | 14,625  |  | $      
|January 1December 31, 2010                                   |  | 11,900  |  | $      

The
Company entered into an interest rate swap transaction during 2006 to lock in its interest cost on $200.0 million of borrowings under its second lien term loan facility
through May 2008. The Company pays a fixed interest rate of 5.4225% and receives a floating interest rate based on the three-month LIBO rate. Settlements are made quarterly. In
June 2007, the Company entered into an additional interest rate swap relating to borrowings under the second lien term loan. The swap fixes the interest rate on $300.0 million of
borrowings through May 2008 and on $500.0 million of borrowings

15

---



from
May 2008 through June 2010. The Company pays a fixed interest rate of 5.32% and receives a floating interest rate based on the three-month LIBO rate, with settlements made
quarterly. As a result of these transactions, amounts borrowed under the second lien term loan facility will effectively bear interest at a fixed rate of approximately 9.3% until June 2010
(including the 4.0% margin payable on borrowed amounts). The Company has not designated either interest rate swap as a hedge. The fair value liability of the interest rate swaps of $0.5 million
at December 31, 2006 and $9.0 million at September 30, 2007 has been recorded in derivative liabilities.

The
components of interest rate derivative losses in the condensed statements of operations are as follows (in thousands):

Three Months Ended
September 30,

Nine Months Ended
September 30,2006

2007

2006

2007Realized interest rate derivative losses

$
134

$
3

$
134

$
58Unrealized interest rate derivative losses


1,247


8,315


1,045


8,497Interest rate derivative losses, net

$
1,381

$
8,318

$
1,179

$
8,555


The
estimated fair values of derivatives included in the condensed consolidated balance sheets at December 31, 2006 and September 30, 2007 are summarized below. The net
fair value of the Company's derivatives decreased by $47.7 million from a net asset of $2.9 million at December 31, 2006 to a net liability of $44.7 million at
September 30, 2007 due to higher futures prices for crude oil and natural gas, which are used in the calculation of the fair value of commodity derivatives, and lower estimated interest rates,
which are used in the calculation of the fair value of interest derivatives (in thousands):

December 31,
2006

September 30,
2007Derivative assets:Oil derivative contracts

$
1,658

$
217Gas derivative contracts


17,281


12,564Derivative liabilities:Oil derivative contracts


(8,905
)

(45,942
)Gas derivative contracts


(6,600
)

(2,568
)Interest rate derivative contracts


(494
)

(8,991
)Net derivative asset (liability)

$
2,940

$
(44,720
)


5. ASSET RETIREMENT OBLIGATIONS

The Company's asset retirement obligations primarily represent the estimated present value of the amounts expected to be incurred to plug, abandon and remediate
producing properties (including removal of certain onshore and offshore facilities) at the end of their productive lives in accordance with applicable state and federal laws. The Company determines
asset retirement obligations by

16

---



calculating
the present value of estimated cash flows related to plugging and abandonment liabilities. The asset retirement liability is accreted to its present value each period and the capitalized
asset retirement cost is depleted as a component of the full cost pool using the units-of-production method.

The
following table summarizes the activities for the Company's asset retirement obligations for the nine months ended September 30, 2006 and 2007 (in thousands):

Nine Months Ended
September 30,2006

2007Asset retirement obligations at beginning of period

$
22,757

$
42,049Revisions of estimated liabilities


2,594


2,596Liabilities incurred


9,896


4,675Liabilities settled


(6
)

(110
)Accretion expense


1,770


2,512Asset retirement obligations at end of period


37,011


51,722Less: current asset retirement obligations (classified with accounts payable and accrued liabilities)


(1,572
)

(7,244
)Long-term asset retirement obligations

$
35,439

$
44,478


6. CAPITAL STOCK AND STOCKHOLDERS' EQUITY

All of the Company's outstanding common stock was controlled by the Company's CEO from December 2004 until August 2006, when the Company's then sole
stockholder, a trust affiliated with the CEO, donated shares of stock to two charitable institutions. The Company issued and sold 10,090,800 shares of its common stock in the fourth quarter of 2006 in
an initial public offering and received net proceeds of $160.4 million. In July 2007, the Company completed an additional public offering of common stock in which it issued and sold
6,565,000 shares of stock and received net proceeds of $116.0 million. The majority of the net proceeds from the offering were used to repay the outstanding balance under the Company's
revolving credit facility.

The
Company has 57.3 million shares of common stock issued or reserved for issuance at September 30, 2007, including 7.5 million shares issued or reserved for
issuance under the Company's stock incentive plans. At September 30, 2007, the Company has 50,261,435 common shares issued and outstanding, of which 371,785 shares are restricted stock granted
under the Company's 2005 stock incentive plan. At September 30, 2007, the Company had approximately 2.3 million shares available to be issued pursuant to awards under its stock incentive
plans.

On
March 22, 2006, the Company paid a dividend consisting of 100% of its membership interest in 6267 Carpinteria to its then sole stockholder, a trust controlled by the Company's
CEO. 6267 Carpinteria owns the office building and related land used by the Company in Carpinteria, California. At the date of the dividend, 6267 Carpinteria had net assets of $4.7 million,
including $0.4 million in cash and land and building with a net book value of $13.4 million, and a note payable of $9.9 million. The Company makes lease payments to 6267
Carpinteria under a lease for the office building entered

17

---



into
prior to the dividend. The lease provides for minimum lease payments of approximately $1.1 million per year through 2019.

Venoco
operates a property located in Carpinteria, California as a transit point for several of the Company's offshore oil and gas producing properties in the Santa Barbara Channel (the
"Bluffs Property"). During the third quarter of 2006, the Company declared and paid a dividend on its common stock of 51 acres of real property at the Bluffs Property and entered into certain
agreements with its then-sole stockholder and an affiliate of the stockholder, including a ground lease and a development agreement relating to the property. Under the ground lease, which
has a 20-year term, the Company will lease the property for use in its oil and gas operations for rent of $1 per year. The stockholder's affiliate has the right to require the Company to
consolidate its operations at a future date from an approximate 14 acre footprint to 2 acres (the "consolidation"). If consolidation is requested, the Company estimates that it will incur
approximately $10 million in capital cost to acquire and install new equipment to effect the consolidation. After the consolidation is completed, the Company has the ability to enter into a new
ground lease for $1 per year for up to 99 years (effectively the remaining productive life of the related offshore oil and gas producing properties). Independent third party appraisals were
obtained which valued the unencumbered value of the land in excess of the Company's historical cost of $10.3 million. In addition, the fair value of the property was appraised at
$5.0 million after taking into account the encumbrance for the ground lease and the time value of money for the consolidation. Therefore, the Company recorded a dividend of $5.0 million
for the appraised value of the interest conveyed and a retained leasehold interest of $5.3 million which will be amortized over the expected life of the ground lease of 20 years.

7. SHARE-BASED PAYMENTS

The Company has granted options to directors, certain employees and officers of the Company other than its CEO. As of September 30, 2007, there are a total
of 4,325,013 options outstanding with a
weighted average exercise price of $9.11 ($6.00 to $20.00). The options vest over a four year period, with 20% vesting on the grant date and 20% vesting on each subsequent anniversary of the grant
date. The options will generally vest upon a change in control of the Company. The agreements with employee option holders generally provide that all of the holder's options will vest if the Company
terminates the holder's employment, unless the termination is for specified types of misconduct. The agreements with director option holders provide that any unvested options will terminate when the
director's service to the Company ceases.

For
the nine months ended September 30, 2007, the Company granted 371,785 shares of restricted stock under the Company's 2005 stock incentive plan, including 205,882 shares
awarded to its CEO. The restricted shares generally vest over a four year service period. The vesting of 225,882 of the shares is also subject to market conditions based on the Company's total
shareholder return in comparison to peer group companies. At the end of the four year service period, the Company may repurchase any unvested restricted shares at $0.00001 per share.

18

---





The
following summarizes the Company's stock option activity for the nine months ended September 30, 2007:

Shares

Weighted
Average
Exercise
PriceOutstanding, beginning of period

4,740,663

$
8.55Granted

265,000


16.93Exercised

(541,350
)

6.83Cancelled

(139,300
)

13.75Outstanding, end of period

4,325,013


9.11Exercisable, end of period

2,375,268

$
8.20


The
weighted average fair value of options granted during the nine months ended September 30, 2007 was $7.54 per option. As of September 30, 2007, there was
$10.7 million of total unrecognized compensation cost related to stock options and restricted stock which is expected to be amortized over a weighted-average period of 3.0 years.

8. LITIGATION

Beverly Hills Litigation

Between June 2003 and April 2005, six lawsuits were filed against the Company and certain other energy companies in Los Angeles County Superior
Court by persons who attended Beverly Hills High School or who were or are citizens of Beverly Hills/Century City or visitors to that area during the time period running from the 1930s to date. There
are approximately 1,000 plaintiffs (including plaintiffs in two related lawsuits in which the Company has not been named) who claim to be suffering from various forms of cancer or other illnesses,
fear they may suffer from such maladies in the future, or are related to persons who have suffered from cancer or other illnesses. Plaintiffs alleged that exposure to substances in the air, soil and
water that originated from either oil-field or other operations in the area were the cause of the cancers and other maladies. The Company has owned an oil and natural gas facility adjacent
to the school since 1995. For the majority of the plaintiffs, their alleged exposures occurred before the Company acquired the facility. All cases were consolidated before one judge. Twelve
"representative" plaintiffs were selected to have their cases tried first, while all of the other plaintiffs' cases were stayed. In November 2006, the judge entered summary judgment in favor of
all defendants in the test cases, including the Company. The judge dismissed all claims by the test case plaintiffs on the ground that they offered no evidence of medical causation between the alleged
emissions and the plaintiffs' alleged injuries. Plaintiffs have appealed the ruling. The Company vigorously defended the actions, and will continue to do so until they are resolved. The Company also
has defense and indemnity obligations to certain other defendants in the actions who have asserted claims for indemnity for events occurring after the Company acquired the property in 1995. In
addition, certain defendants have made claims for indemnity for events occurring prior to 1995, which the Company is disputing. The Company cannot predict the cost of defense and indemnity obligations
at the present time.

19

---



One
of the Company's insurers currently is paying for the defense of these lawsuits under a reservation of its rights. Three other insurers that provided insurance coverage to the
Company (the "Declining
Insurers") have taken the position that they are not required to provide coverage for losses arising out of, or to defend against, the lawsuits because of a pollution exclusion contained in their
policies. The Beverly Hills Unified School District (the "District"), as an additional insured on those policies, brought a declaratory relief action against two of those insurers in Los Angeles
County Superior Court. In November 2005, the court ruled in favor of one of the insurers and in February 2007, an appellate court affirmed the decision of the Superior Court. In
July 2006, the same Los Angeles County Superior Court that ruled in favor of one of the insurers denied a motion for summary judgment brought by another of the insurers against the District on
the issue of the insurer's duty to defend. In February 2006, the Company filed its own declaratory relief action against the Declining Insurers in Santa Barbara County Superior Court seeking a
determination that those insurers have a duty to defend the Company in the lawsuits. The Company has entered into settlement agreements with two of the three Declining Insurers. In November 2007 the
Court granted a motion for summary judgement in favor of the third Declining Insurer. The policy issued by the insurer that currently is providing defense of the lawsuits contains a pollution
exclusion similar to that at issue in the actions brought against the Declining Insurers. However, the Company has no reason to believe that the insurer currently providing defense of these actions
will cease providing such defense. If it does, and the Company is unsuccessful in enforcing its rights in any subsequent litigation, the Company may be required to bear the costs of the defense, and
those costs may be material. If it ultimately is determined that the pollution exclusion or another exclusion contained in one or more of the Company's policies applies, it will not have the
protection of those policies with respect to any damages or settlement costs ultimately incurred in the lawsuits.

In
accordance with SFAS No. 5, Accounting for Contingencies, the Company has not accrued for a loss contingency relating to the Beverly Hills litigation because the Company
believes that, although unfavorable outcomes in the proceedings may be reasonably possible, the Company does not consider them to be probable or reasonably estimable. If one or more of these matters
are resolved in a manner adverse to the Company, and if insurance coverage is determined not to be applicable, their impact on the Company's results of operations, financial position and/or liquidity
could be material.

Other

In addition, the Company is subject from time to time to other claims and legal actions that arise in the ordinary course of business. The Company believes that
the ultimate liability, if any, with respect to these other claims and legal actions will not have a material adverse effect on its consolidated financial position, results of operations or liquidity.

9. GUARANTOR FINANCIAL INFORMATION

Company subsidiaries TexCal Energy (LP) LLC and its four subsidiaries, BMC, Ltd., and Whittier Pipeline Corp. ("Guarantors") have fully and unconditionally
guaranteed, on a joint and several basis, the Company's obligations under the senior notes. The Company has one subsidiary, Ellwood Pipeline, Inc., that is not a Guarantor (the
"Non-Guarantor Subsidiary"). During the quarter ended September 30, 2007, two of the TexCal Energy subsidiaries and BMC, Ltd. were merged with and into

20

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Venoco,
Inc. The condensed consolidating financial information for prior periods has been revised to reflect the guarantor and non-guarantor status of the Company's subsidiaries as of
September 30, 2007. All Guarantors are 100% owned by the Company. Presented below are the Company's condensed consolidating balance sheets, statements of operations and cash flows as required
by Rule 3-10 of Regulation S-X of the Securities Exchange Act of 1934.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2006 (Unaudited)
(in thousands)

|                            |                                                        | Venoco, Inc.                    |        | Guarantor
Subsidiaries |        | Non-Guarantor
Subsidiary |        | Eliminations |       | Consolidated
|--------------------------- | ------------------------------------------------------ | ------------------------------- | ------ | ---------------------- | ------ | ------------------------ | ------ | ------------ | ----- | ------------
|REVENUES:                   |                                                        |                                 |        |                        |        |                          |        |              |       |             
|                            | Oil and natural gas sales                              |                                 | $      | 57,193                 |        | $                        | 18,702 |              | $     |            
|                            | Commodity derivative losses                            |                                 |        | 21,415                 |        |                          |       |              |       |            
|                            | Other                                                  |                                 |        | 1,181                  |        |                          | (80    | )            |       | 1,263       
|                            |                                                        |                                 |        |                        |        |                          |        |              |       |             
|                            |                                                        | Total revenues                  |        |                        | 79,789 |                          |        | 18,622       |       |             
|                            |                                                        |                                 |        |                        |        |                          |        |              |       |             
|EXPENSES:                   |                                                        |                                 |        |                        |        |                          |        |              |       |             
|                            | Oil and natural gas production                         |                                 |        | 15,843                 |        |                          | 10,670 |              |       | 536         
|                            | Transportation expense                                 |                                 |        | 1,477                  |        |                          | 120    |              |       |            
|                            | Depletion, depreciation and amortization               |                                 |        | 13,755                 |        |                          | 4,575  |              |       | 20          
|                            | Accretion of asset retirement obligations              |                                 |        | 509                    |        |                          | 142    |              |       | 6           
|                            | General and administrative, net of amounts capitalized |                                 |        | 6,899                  |        |                          | 545    |              |       | 68          
|                            |                                                        |                                 |        |                        |        |                          |        |              |       |             
|                            |                                                        | Total expenses                  |        |                        | 38,483 |                          |        | 16,052       |       |             
|                            |                                                        |                                 |        |                        |        |                          |        |              |       |             
|Income from operations      |                                                        |                                 | 41,306 |                        |        | 2,570                    |        |              | 633   |             
|                            |                                                        |                                 |        |                        |        |                          |        |              |       |             
|FINANCING COSTS AND OTHER:  |                                                        |                                 |        |                        |        |                          |        |              |       |             
|                            | Interest expense, net                                  |                                 |        | 16,104                 |        |                          | (228   | )            |       | (586        
|                            | Amortization of deferred loan costs                    |                                 |        | 1,099                  |        |                          |       |              |       |            
|                            | Interest rate derivative losses, net                   |                                 |        | 1,381                  |        |                          |       |              |       |            
|                            | Loss on extinguishment of debt                         |                                 |        |                       |        |                          |       |              |       |            
|                            |                                                        |                                 |        |                        |        |                          |        |              |       |             
|                            |                                                        | Total financing costs and other |        |                        | 18,584 |                          |        | (228         | )     |             
|                            |                                                        |                                 |        |                        |        |                          |        |              |       |             
|Equity in subsidiary income |                                                        |                                 | 2,410  |                        |        |                         |        |              |      |             
|                            |                                                        |                                 |        |                        |        |                          |        |              |       |             
|Income before income taxes  |                                                        |                                 | 25,132 |                        |        | 2,798                    |        |              | 1,219 |             
|Income tax provision        |                                                        |                                 | 8,893  |                        |        | 1,120                    |        |              | 487   |             
|                            |                                                        |                                 |        |                        |        |                          |        |              |       |             
|Net income                  |                                                        | $                               | 16,239 |                        | $      | 1,678                    |        | $            | 732   |             
|                            |                                                        |                                 |        |                        |        |                          |        |              |       |             

21

---



CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2007 (Unaudited)
(in thousands)

|                                  |                                                        | Venoco, Inc.                    |         | Guarantor
Subsidiaries |        | Non-Guarantor
Subsidiary |        | Eliminations |       | Consolidated |      
|--------------------------------- | ------------------------------------------------------ | ------------------------------- | ------- | ---------------------- | ------ | ------------------------ | ------ | ------------ | ----- | ------------ | -----
|REVENUES:                         |                                                        |                                 |         |                        |        |                          |        |              |       |              |      
|                                  | Oil and natural gas sales                              |                                 | $       | 64,460                 |        | $                        | 32,814 |              | $     |             |      
|                                  | Commodity derivative losses                            |                                 |         | (11,289                | )      |                          |       |              |       |             |      
|                                  | Other                                                  |                                 |         | 872                    |        |                          | 12     |              |       | 1,425        |      
|                                  |                                                        |                                 |         |                        |        |                          |        |              |       |              |      
|                                  |                                                        | Total revenues                  |         |                        | 54,043 |                          |        | 32,826       |       |              | 1,425
|                                  |                                                        |                                 |         |                        |        |                          |        |              |       |              |      
|EXPENSES:                         |                                                        |                                 |         |                        |        |                          |        |              |       |              |      
|                                  | Oil and natural gas production                         |                                 |         | 18,242                 |        |                          | 9,844  |              |       | 300          |      
|                                  | Transportation expense                                 |                                 |         | 2,362                  |        |                          | 4      |              |       |             |      
|                                  | Depletion, depreciation and amortization               |                                 |         | 18,881                 |        |                          | 6,476  |              |       | 22           |      
|                                  | Accretion of asset retirement obligations              |                                 |         | 740                    |        |                          | 145    |              |       | 10           |      
|                                  | General and administrative, net of amounts capitalized |                                 |         | 7,512                  |        |                          | 113    |              |       | 70           |      
|                                  |                                                        |                                 |         |                        |        |                          |        |              |       |              |      
|                                  |                                                        | Total expenses                  |         |                        | 47,737 |                          |        | 16,582       |       |              | 402  
|                                  |                                                        |                                 |         |                        |        |                          |        |              |       |              |      
|Income from operations            |                                                        |                                 | 6,306   |                        |        | 16,244                   |        |              | 1,023 |              |      
|                                  |                                                        |                                 |         |                        |        |                          |        |              |       |              |      
|FINANCING COSTS AND OTHER:        |                                                        |                                 |         |                        |        |                          |        |              |       |              |      
|                                  | Interest expense, net                                  |                                 |         | 16,153                 |        |                          | 29     |              |       | (689         | )    
|                                  | Amortization of deferred loan costs                    |                                 |         | 981                    |        |                          |       |              |       |             |      
|                                  | Interest rate derivative losses, net                   |                                 |         | 8,318                  |        |                          |       |              |       |             |      
|                                  | Loss on extinguishment of debt                         |                                 |         |                       |        |                          |       |              |       |             |      
|                                  |                                                        |                                 |         |                        |        |                          |        |              |       |              |      
|                                  |                                                        | Total financing costs and other |         |                        | 25,452 |                          |        | 29           |       |              | (689 
|                                  |                                                        |                                 |         |                        |        |                          |        |              |       |              |      
|Equity in subsidiary income       |                                                        |                                 | 9,358   |                        |        |                         |        |              |      |              |      
|                                  |                                                        |                                 |         |                        |        |                          |        |              |       |              |      
|Income (loss) before income taxes |                                                        |                                 | (9,788  | )                      |        | 16,215                   |        |              | 1,712 |              |      
|Income tax provision (benefit)    |                                                        |                                 | (10,269 | )                      |        | 7,670                    |        |              | 899   |              |      
|                                  |                                                        |                                 |         |                        |        |                          |        |              |       |              |      
|Net income (loss)                 |                                                        | $                               | 481     |                        | $      | 8,545                    |        | $            | 813   |              | $    
|                                  |                                                        |                                 |         |                        |        |                          |        |              |       |              |      

22

---





CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2006 (Unaudited)
(in thousands)

|                            |                                                        | Venoco, Inc.                    |        | Guarantor
Subsidiaries |         | Non-Guarantor
Subsidiary |        | Eliminations |       | Consolidated |       
|--------------------------- | ------------------------------------------------------ | ------------------------------- | ------ | ---------------------- | ------- | ------------------------ | ------ | ------------ | ----- | ------------ | ------
|REVENUES:                   |                                                        |                                 |        |                        |         |                          |        |              |       |              |       
|                            | Oil and natural gas sales                              |                                 | $      | 168,385                |         | $                        | 34,884 |              | $     |             |       
|                            | Commodity derivative losses                            |                                 |        | (6,351                 | )       |                          |       |              |       |             |       
|                            | Other                                                  |                                 |        | 4,043                  |         |                          | 48     |              |       | 4,007        |       
|                            |                                                        |                                 |        |                        |         |                          |        |              |       |              |       
|                            |                                                        | Total revenues                  |        |                        | 166,077 |                          |        | 34,932       |       |              | 4,007 
|                            |                                                        |                                 |        |                        |         |                          |        |              |       |              |       
|EXPENSES:                   |                                                        |                                 |        |                        |         |                          |        |              |       |              |       
|                            | Oil and natural gas production                         |                                 |        | 41,981                 |         |                          | 19,157 |              |       | 1,429        |       
|                            | Transportation expense                                 |                                 |        | 4,888                  |         |                          | 180    |              |       |             |       
|                            | Depletion, depreciation and amortization               |                                 |        | 34,547                 |         |                          | 7,185  |              |       | 115          |       
|                            | Accretion of asset retirement obligations              |                                 |        | 1,454                  |         |                          | 297    |              |       | 17           |       
|                            | General and administrative, net of amounts capitalized |                                 |        | 19,069                 |         |                          | 787    |              |       | 270          |       
|                            |                                                        |                                 |        |                        |         |                          |        |              |       |              |       
|                            |                                                        | Total expenses                  |        |                        | 101,939 |                          |        | 27,606       |       |              | 1,831 
|                            |                                                        |                                 |        |                        |         |                          |        |              |       |              |       
|Income from operations      |                                                        |                                 | 64,138 |                        |         | 7,326                    |        |              | 2,176 |              |       
|                            |                                                        |                                 |        |                        |         |                          |        |              |       |              |       
|FINANCING COSTS AND OTHER:  |                                                        |                                 |        |                        |         |                          |        |              |       |              |       
|                            | Interest expense, net                                  |                                 |        | 35,959                 |         |                          | (248   | )            |       | (1,590       | )     
|                            | Amortization of deferred loan costs                    |                                 |        | 2,570                  |         |                          |       |              |       |             |       
|                            | Interest rate derivative losses, net                   |                                 |        | 1,179                  |         |                          |       |              |       |             |       
|                            | Loss on extinguishment of debt                         |                                 |        |                       |         |                          |       |              |       |             |       
|                            |                                                        |                                 |        |                        |         |                          |        |              |       |              |       
|                            |                                                        | Total financing costs and other |        |                        | 39,708  |                          |        | (248         | )     |              | (1,590
|                            |                                                        |                                 |        |                        |         |                          |        |              |       |              |       
|Equity in subsidiary income |                                                        |                                 | 6,804  |                        |         |                         |        |              |      |              |       
|                            |                                                        |                                 |        |                        |         |                          |        |              |       |              |       
|Income before income taxes  |                                                        |                                 | 31,234 |                        |         | 7,574                    |        |              | 3,766 |              |       
|Income tax provision        |                                                        |                                 | 9,564  |                        |         | 3,030                    |        |              | 1,506 |              |       
|                            |                                                        |                                 |        |                        |         |                          |        |              |       |              |       
|Net income                  |                                                        | $                               | 21,670 |                        | $       | 4,544                    |        | $            | 2,260 |              | $     
|                            |                                                        |                                 |        |                        |         |                          |        |              |       |              |       

23

---



CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2007 (Unaudited)
(in thousands)

|                                  |                                                        | Venoco, Inc.                    |         | Guarantor
Subsidiaries |         | Non-Guarantor
Subsidiary |        | Eliminations |       | Consolidated |       
|--------------------------------- | ------------------------------------------------------ | ------------------------------- | ------- | ---------------------- | ------- | ------------------------ | ------ | ------------ | ----- | ------------ | ------
|REVENUES:                         |                                                        |                                 |         |                        |         |                          |        |              |       |              |       
|                                  | Oil and natural gas sales                              |                                 | $       | 193,925                |         | $                        | 67,495 |              | $     |             |       
|                                  | Commodity derivative losses                            |                                 |         | (38,434                | )       |                          |       |              |       |             |       
|                                  | Other                                                  |                                 |         | 2,171                  |         |                          | 49     |              |       | 3,840        |       
|                                  |                                                        |                                 |         |                        |         |                          |        |              |       |              |       
|                                  |                                                        | Total revenues                  |         |                        | 157,662 |                          |        | 67,544       |       |              | 3,840 
|                                  |                                                        |                                 |         |                        |         |                          |        |              |       |              |       
|EXPENSES:                         |                                                        |                                 |         |                        |         |                          |        |              |       |              |       
|                                  | Oil and natural gas production                         |                                 |         | 51,783                 |         |                          | 26,400 |              |       | 1,236        |       
|                                  | Transportation expense                                 |                                 |         | 7,692                  |         |                          | 4      |              |       |             |       
|                                  | Depletion, depreciation and amortization               |                                 |         | 54,822                 |         |                          | 14,655 |              |       | 57           |       
|                                  | Accretion of asset retirement obligations              |                                 |         | 2,097                  |         |                          | 398    |              |       | 17           |       
|                                  | General and administrative, net of amounts capitalized |                                 |         | 22,974                 |         |                          | 1,683  |              |       | 211          |       
|                                  |                                                        |                                 |         |                        |         |                          |        |              |       |              |       
|                                  |                                                        | Total expenses                  |         |                        | 139,368 |                          |        | 43,140       |       |              | 1,521 
|                                  |                                                        |                                 |         |                        |         |                          |        |              |       |              |       
|Income from operations            |                                                        |                                 | 18,294  |                        |         | 24,404                   |        |              | 2,319 |              |       
|                                  |                                                        |                                 |         |                        |         |                          |        |              |       |              |       
|FINANCING COSTS AND OTHER:        |                                                        |                                 |         |                        |         |                          |        |              |       |              |       
|                                  | Interest expense, net                                  |                                 |         | 46,590                 |         |                          | (16    | )            |       | (1,979       | )     
|                                  | Amortization of deferred loan costs                    |                                 |         | 3,211                  |         |                          |       |              |       |             |       
|                                  | Interest rate derivative losses, net                   |                                 |         | 8,555                  |         |                          |       |              |       |             |       
|                                  | Loss on extinguishment of debt                         |                                 |         | 12,063                 |         |                          |       |              |       |             |       
|                                  |                                                        |                                 |         |                        |         |                          |        |              |       |              |       
|                                  |                                                        | Total financing costs and other |         |                        | 70,419  |                          |        | (16          | )     |              | (1,979
|                                  |                                                        |                                 |         |                        |         |                          |        |              |       |              |       
|Equity in subsidiary income       |                                                        |                                 | 15,972  |                        |         |                         |        |              |      |              |       
|                                  |                                                        |                                 |         |                        |         |                          |        |              |       |              |       
|Income (loss) before income taxes |                                                        |                                 | (36,153 | )                      |         | 24,420                   |        |              | 4,298 |              |       
|Income tax provision (benefit)    |                                                        |                                 | (23,146 | )                      |         | 10,838                   |        |              | 1,908 |              |       
|                                  |                                                        |                                 |         |                        |         |                          |        |              |       |              |       
|Net income (loss)                 |                                                        | $                               | (13,007 | )                      | $       | 13,582                   |        | $            | 2,390 |              | $     
|                                  |                                                        |                                 |         |                        |         |                          |        |              |       |              |       

24

---





CONDENSED CONSOLIDATING BALANCE SHEETS
AT DECEMBER 31, 2006
(in thousands)

|                                           |                                           | Venoco, Inc. |           | Guarantor
Subsidiaries |   | Non-Guarantor
Subsidiary |         | Eliminations |         | Consolidated
|------------------------------------------ | ----------------------------------------- | ------------ | --------- | ---------------------- | - | ------------------------ | ------- | ------------ | ------- | ------------
|ASSETS                                     |                                           |              |           |                        |   |                          |         |              |         |             
|CURRENT ASSETS:                            |                                           |              |           |                        |   |                          |         |              |         |             
|                                           | Cash and cash equivalents                 |              | $         | (12                    | ) | $                        | 8,358   |              | $       | 18          
|                                           | Accounts receivable                       |              |           | 26,182                 |   |                          | 21,738  |              |         | 122         
|                                           | Inventories                               |              |           | 3,210                  |   |                          | 1       |              |         |            
|                                           | Prepaid expenses and other current assets |              |           | 5,777                  |   |                          | 1,449   |              |         |            
|                                           | Income taxes receivable                   |              |           | 8,098                  |   |                          |        |              |         |            
|                                           | Deferred income taxes                     |              |           | 879                    |   |                          |        |              |         |            
|                                           | Commodity derivatives                     |              |           | 10,348                 |   |                          |        |              |         |            
|                                           |                                           |              |           |                        |   |                          |         |              |         |             
|TOTAL CURRENT ASSETS                       |                                           |              | 54,482    |                        |   | 31,546                   |         |              | 140     |             
|                                           |                                           |              |           |                        |   |                          |         |              |         |             
|                                           | PROPERTY, PLANT & EQUIPMENT, NET          |              |           | 556,640                |   |                          | 238,505 |              |         | 772         
|                                           | COMMODITY DERIVATIVES                     |              |           | 8,591                  |   |                          |        |              |         |            
|                                           | INVESTMENTS IN AFFILIATES                 |              |           | 375,332                |   |                          |        |              |         |            
|                                           | OTHER                                     |              |           | 18,413                 |   |                          | 5,768   |              |         |            
|                                           |                                           |              |           |                        |   |                          |         |              |         |             
|TOTAL ASSETS                               |                                           | $            | 1,013,458 |                        | $ | 275,819                  |         | $            | 912     |             
|                                           |                                           |              |           |                        |   |                          |         |              |         |             
|LIABILITIES AND STOCKHOLDERS' EQUITY       |                                           |              |           |                        |   |                          |         |              |         |             
|CURRENT LIABILITIES:                       |                                           |              |           |                        |   |                          |         |              |         |             
|                                           | Accounts payable and accrued liabilities  |              | $         | 49,526                 |   | $                        | 3,880   |              | $       |            
|                                           | Undistributed revenue payable             |              |           | 7,831                  |   |                          | 7,765   |              |         |            
|                                           | Interest payable                          |              |           | 5,300                  |   |                          | (5      | )            |         |            
|                                           | Current maturities of long-term debt      |              |           | 3,557                  |   |                          |        |              |         |            
|                                           | Commodity and interest derivatives        |              |           | 8,907                  |   |                          |        |              |         |            
|                                           |                                           |              |           |                        |   |                          |         |              |         |             
|TOTAL CURRENT LIABILITIES:                 |                                           |              | 75,121    |                        |   | 11,640                   |         |              |        |             
|                                           |                                           |              |           |                        |   |                          |         |              |         |             
|LONG-TERM DEBT                             |                                           |              | 529,616   |                        |   |                         |         |              |        |             
|DEFERRED INCOME TAXES                      |                                           |              | 40,424    |                        |   |                         |         |              |        |             
|COMMODITY AND INTEREST DERIVATIVES         |                                           |              | 7,092     |                        |   |                         |         |              |        |             
|ASSET RETIREMENT OBLIGATIONS               |                                           |              | 32,261    |                        |   | 6,443                    |         |              | 280     |             
|INTERCOMPANY PAYABLES (RECEIVABLES)        |                                           |              | 138,628   |                        |   | (107,464                 | )       |              | (31,164 | )           
|OTHER LONG-TERM LIABILITIES                |                                           |              |          |                        |   |                         |         |              |        |             
|                                           |                                           |              |           |                        |   |                          |         |              |         |             
|TOTAL LIABILITIES                          |                                           |              | 823,142   |                        |   | (89,381                  | )       |              | (30,884 | )           
|                                           |                                           |              |           |                        |   |                          |         |              |         |             
|TOTAL STOCKHOLDERS' EQUITY                 |                                           |              | 190,316   |                        |   | 365,200                  |         |              | 31,796  |             
|                                           |                                           |              |           |                        |   |                          |         |              |         |             
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |                                           | $            | 1,013,458 |                        | $ | 275,819                  |         | $            | 912     |             
|                                           |                                           |              |           |                        |   |                          |         |              |         |             

25

---



CONDENSED CONSOLIDATING BALANCE SHEETS
AT SEPTEMBER 30, 2007 (Unaudited)
(in thousands)

|                                           |                                           | Venoco, Inc. |           | Guarantor
Subsidiaries |   | Non-Guarantor
Subsidiary |         | Eliminations |         | Consolidated
|------------------------------------------ | ----------------------------------------- | ------------ | --------- | ---------------------- | - | ------------------------ | ------- | ------------ | ------- | ------------
|ASSETS                                     |                                           |              |           |                        |   |                          |         |              |         |             
|CURRENT ASSETS:                            |                                           |              |           |                        |   |                          |         |              |         |             
|                                           | Cash and cash equivalents                 |              | $         | 124                    |   | $                        | 694     |              | $       |            
|                                           | Accounts receivable                       |              |           | 42,123                 |   |                          | 19,737  |              |         | 57          
|                                           | Inventories                               |              |           | 3,099                  |   |                          |        |              |         |            
|                                           | Prepaid expenses and other current assets |              |           | 5,080                  |   |                          | 1,213   |              |         |            
|                                           | Income taxes receivable                   |              |           | 5,814                  |   |                          |        |              |         |            
|                                           | Deferred income taxes                     |              |           | 4,220                  |   |                          |        |              |         |            
|                                           | Commodity derivatives                     |              |           | 8,182                  |   |                          |        |              |         |            
|                                           |                                           |              |           |                        |   |                          |         |              |         |             
|TOTAL CURRENT ASSETS                       |                                           |              | 68,642    |                        |   | 21,644                   |         |              | 57      |             
|                                           |                                           |              |           |                        |   |                          |         |              |         |             
|                                           | PROPERTY, PLANT & EQUIPMENT, NET          |              |           | 734,819                |   |                          | 362,349 |              |         | 1,279       
|                                           | COMMODITY DERIVATIVES                     |              |           | 4,599                  |   |                          |        |              |         |            
|                                           | INVESTMENTS IN AFFILIATES                 |              |           | 404,050                |   |                          |        |              |         |            
|                                           | OTHER                                     |              |           | 12,650                 |   |                          | 5,829   |              |         |            
|                                           |                                           |              |           |                        |   |                          |         |              |         |             
|TOTAL ASSETS                               |                                           | $            | 1,224,760 |                        | $ | 389,822                  |         | $            | 1,336   |             
|                                           |                                           |              |           |                        |   |                          |         |              |         |             
|LIABILITIES AND STOCKHOLDERS' EQUITY       |                                           |              |           |                        |   |                          |         |              |         |             
|CURRENT LIABILITIES:                       |                                           |              |           |                        |   |                          |         |              |         |             
|                                           | Accounts payable and accrued liabilities  |              | $         | 68,223                 |   | $                        | 2,935   |              | $       |            
|                                           | Undistributed revenue payable             |              |           | 10,010                 |   |                          | 7,675   |              |         |            
|                                           | Interest payable                          |              |           | 6,860                  |   |                          |        |              |         |            
|                                           | Current maturities of long-term debt      |              |           | 2,121                  |   |                          |        |              |         |            
|                                           | Commodity and interest derivatives        |              |           | 26,829                 |   |                          |        |              |         |            
|                                           |                                           |              |           |                        |   |                          |         |              |         |             
|TOTAL CURRENT LIABILITIES:                 |                                           |              | 114,043   |                        |   | 10,610                   |         |              |        |             
|                                           |                                           |              |           |                        |   |                          |         |              |         |             
|LONG-TERM DEBT                             |                                           |              | 660,210   |                        |   |                         |         |              |        |             
|DEFERRED INCOME TAXES                      |                                           |              | 28,437    |                        |   |                         |         |              |        |             
|COMMODITY AND INTEREST DERIVATIVES         |                                           |              | 30,672    |                        |   |                         |         |              |        |             
|ASSET RETIREMENT OBLIGATIONS               |                                           |              | 35,411    |                        |   | 8,234                    |         |              | 833     |             
|INTERCOMPANY PAYABLES (RECEIVABLES)        |                                           |              | 54,233    |                        |   | (18,641                  | )       |              | (35,592 | )           
|OTHER LONG-TERM LIABILITIES                |                                           |              |          |                        |   |                         |         |              |        |             
|                                           |                                           |              |           |                        |   |                          |         |              |         |             
|TOTAL LIABILITIES                          |                                           |              | 923,006   |                        |   | 203                      |         |              | (34,759 | )           
|                                           |                                           |              |           |                        |   |                          |         |              |         |             
|TOTAL STOCKHOLDERS' EQUITY                 |                                           |              | 301,754   |                        |   | 389,619                  |         |              | 36,095  |             
|                                           |                                           |              |           |                        |   |                          |         |              |         |             
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |                                           | $            | 1,224,760 |                        | $ | 389,822                  |         | $            | 1,336   |             
|                                           |                                           |              |           |                        |   |                          |         |              |         |             

26

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER, 2006 (Unaudited)
(in thousands)

|                                      |                                                           | Venoco, Inc.                              |   | Guarantor
Subsidiaries |          | Non-Guarantor
Subsidiary |         | Eliminations |   | Consolidated |      
|------------------------------------- | --------------------------------------------------------- | ----------------------------------------- | - | ---------------------- | -------- | ------------------------ | ------- | ------------ | - | ------------ | -----
|CASH FLOWS FROM OPERATING ACTIVITIES: |                                                           |                                           |   |                        |          |                          |         |              |   |              |      
|                                      | Net cash provided by (used in) operating activities       |                                           | $ | 116,241                |          | $                        | (20,829 | )            | $ | (2,272       | )    
|CASH FLOWS FROM INVESTING ACTIVITIES: |                                                           |                                           |   |                        |          |                          |         |              |   |              |      
|                                      | Expenditures for oil and natrual gas properties           |                                           |   | (121,543               | )        |                          | (13,518 | )            |   |             |      
|                                      | Acqusitions of oil and natural gas properties             |                                           |   |                       |          |                          |        |              |   |             |      
|                                      | Expenditures for property and equipment and other         |                                           |   | (4,679                 | )        |                          | (35     | )            |   |             |      
|                                      | Proceeds from sale of oil and natural gas properties      |                                           |   | 3,031                  |          |                          |        |              |   |             |      
|                                      | Acquisition of Texcal Energy, net of cash acquired        |                                           |   | (456,810               | )        |                          | 9,291   |              |   |             |      
|                                      |                                                           |                                           |   |                        |          |                          |         |              |   |              |      
|                                      |                                                           | Net cash used in investing activities     |   |                        | (580,001 | )                        |         | (4,262       | ) |              |     
|CASH FLOWS FROM FINANCING ACTIVITIES: |                                                           |                                           |   |                        |          |                          |         |              |   |              |      
|                                      | Net proceeds from (repayments of) intercompany borrowings |                                           |   | (34,964                | )        |                          | 32,936  |              |   | 2,028        |      
|                                      | Proceeds from long-term debt                              |                                           |   | 524,529                |          |                          |        |              |   |             |      
|                                      | Principal payments on long-term debt                      |                                           |   | (15,000                | )        |                          |        |              |   | (33          | )    
|                                      | Payments for deferred loan costs                          |                                           |   | (14,180                | )        |                          |        |              |   |             |      
|                                      | Premium to retire debt                                    |                                           |   |                       |          |                          |        |              |   |             |      
|                                      | Proceeds from derivative premium financing                |                                           |   | 3,903                  |          |                          |        |              |   |             |      
|                                      | Proceeds from issuance of common stock                    |                                           |   |                       |          |                          |        |              |   |             |      
|                                      | Stock issuance costs                                      |                                           |   |                       |          |                          |        |              |   |             |      
|                                      | Proceeds from exercise of stock options                   |                                           |   |                       |          |                          |        |              |   |             |      
|                                      | Excess income tax benefits from share-based compensation  |                                           |   |                       |          |                          |        |              |   |             |      
|                                      | Dividend paid to shareholder                              |                                           |   | (426                   | )        |                          |        |              |   |             |      
|                                      |                                                           |                                           |   |                        |          |                          |         |              |   |              |      
|                                      |                                                           | Net cash provided by financing activities |   |                        | 463,862  |                          |         | 32,936       |   |              | 1,995
|                                      |                                                           |                                           |   |                        |          |                          |         |              |   |              |      
|                                      | Net increase (decrease) in cash and cash equivalents      |                                           |   | 102                    |          |                          | 7,845   |              |   | (277         | )    
|                                      | Cash and cash equivalents, beginning of period            |                                           |   | 9,041                  |          |                          |        |              |   | 348          |      
|                                      |                                                           |                                           |   |                        |          |                          |         |              |   |              |      
|                                      | Cash and cash equivalents, end of period                  |                                           | $ | 9,143                  |          | $                        | 7,845   |              | $ | 71           |      
|                                      |                                                           |                                           |   |                        |          |                          |         |              |   |              |      

27

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER, 2007 (Unaudited)
(in thousands)

|                                      |                                                           | Venoco, Inc.                              |   | Guarantor
Subsidiaries |          | Non-Guarantor
Subsidiary |          | Eliminations |   | Consolidated |       
|------------------------------------- | --------------------------------------------------------- | ----------------------------------------- | - | ---------------------- | -------- | ------------------------ | -------- | ------------ | - | ------------ | ------
|CASH FLOWS FROM OPERATING ACTIVITIES: |                                                           |                                           |   |                        |          |                          |          |              |   |              |       
|                                      | Net cash provided by operating activities                 |                                           | $ | 80,301                 |          | $                        | 32,895   |              | $ | 2,865        |       
|CASH FLOWS FROM INVESTING ACTIVITIES: |                                                           |                                           |   |                        |          |                          |          |              |   |              |       
|                                      | Expenditures for oil and natural gas properties           |                                           |   | (102,992               | )        |                          | (137,386 | )            |   | (27          | )     
|                                      | Acqusitions of oil and natural gas properties             |                                           |   | (120,424               | )        |                          |         |              |   |             |       
|                                      | Expenditures for property and equipment and other         |                                           |   | (4,594                 | )        |                          | (281     | )            |   |             |       
|                                      | Proceeds from sale of oil and natural gas properties      |                                           |   |                       |          |                          |         |              |   |             |       
|                                      | Acquisition of Texcal Energy, net of cash acquired        |                                           |   |                       |          |                          |         |              |   |             |       
|                                      |                                                           | Net cash used in investing activities     |   |                        | (228,010 | )                        |          | (137,667     | ) |              | (27   
|CASH FLOWS FROM FINANCING ACTIVITIES: |                                                           |                                           |   |                        |          |                          |          |              |   |              |       
|                                      | Net proceeds from (repayments of) intercompany borrowings |                                           |   | (94,252                | )        |                          | 97,108   |              |   | (2,856       | )     
|                                      | Proceeds from long-term debt                              |                                           |   | 725,421                |          |                          |         |              |   |             |       
|                                      | Principal payments on long-term debt                      |                                           |   | (598,516               | )        |                          |         |              |   |             |       
|                                      | Payments for deferred loan costs                          |                                           |   | (4,838                 | )        |                          |         |              |   |             |       
|                                      | Premium to retire debt                                    |                                           |   | (3,489                 | )        |                          |         |              |   |             |       
|                                      | Proceeds from derivative premium financing                |                                           |   | 1,676                  |          |                          |         |              |   |             |       
|                                      | Proceeds from issuance of common stock                    |                                           |   | 116,595                |          |                          |         |              |   |             |       
|                                      | Stock issuance costs                                      |                                           |   | (561                   | )        |                          |         |              |   |             |       
|                                      | Proceeds from exercise of stock options                   |                                           |   | 3,695                  |          |                          |         |              |   |             |       
|                                      | Excess income tax benefits from share-based compensation  |                                           |   | 2,114                  |          |                          |         |              |   |             |       
|                                      | Dividend paid to shareholder                              |                                           |   |                       |          |                          |         |              |   |             |       
|                                      |                                                           |                                           |   |                        |          |                          |          |              |   |              |       
|                                      |                                                           | Net cash provided by financing activities |   |                        | 147,845  |                          |          | 97,108       |   |              | (2,856
|                                      |                                                           |                                           |   |                        |          |                          |          |              |   |              |       
|                                      | Net increase (decrease) in cash and cash equivalents      |                                           |   | 136                    |          |                          | (7,664   | )            |   | (18          | )     
|                                      | Cash and cash equivalents, beginning of period            |                                           |   | (12                    | )        |                          | 8,358    |              |   | 18           |       
|                                      |                                                           |                                           |   |                        |          |                          |          |              |   |              |       
|                                      | Cash and cash equivalents, end of period                  |                                           | $ | 124                    |          | $                        | 694      |              | $ |             |       
|                                      |                                                           |                                           |   |                        |          |                          |          |              |   |              |       

28

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Item 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion and analysis should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations"
contained in our Annual Report on Form 10-K for the year ended December 31, 2006 as well as with the financial statements and related notes and the other information
appearing elsewhere in this report. As used in this report, unless the context otherwise indicates, references to "we," "our," "ours," and "us" refer to Venoco, Inc. and its subsidiaries
collectively.

Overview

We are an independent energy company primarily engaged in the acquisition, exploration, exploitation and development of oil and natural gas properties. Our
strategy is to grow through exploration, exploitation and development projects we believe to be relatively low risk and through selective acquisitions of underdeveloped properties. Our average net
production was 20,701 BOE/d in the third quarter of 2007, compared to 19,628 BOE/d in the second quarter of 2007 and 16,962 BOE/d in the third quarter of 2006. We expect further increases in our
production through the remainder of 2007 and in 2008. See "Trends Affecting Our Results of Operations."

Capital Expenditures

We have developed an active capital expenditure program to systematically exploit our extensive inventory of drilling prospects and other projects. We expect that
our exploration, exploitation and development capital expenditures, which were $240 million in the first nine months of 2007, will be approximately $320.0 million for the year. We increased our
previous estimate of 2007 capital expenditures due primarily to higher than expected capital expenditures associated with increases in fluid processing capacity in the Hastings complex, an increase in
the number of wells expected to be drilled in the Sacramento Basin and increased activity in the West Montalvo field. For 2007 as a whole, we anticipate drilling or spudding approximately 150 gross
wells, compared to 70 gross wells drilled in
2006. We currently estimate our inventory of drilling locations to be approximately 650. The following summarizes certain significant aspects of our capital spending program to date in 2007:

Coastal CaliforniaExploitation and Development

In the Coastal California area, we are focusing on development activities in the West Montalvo field, where we have drilled one well and initiated an aggressive
workover, recompletion and return to production program on existing wells since acquiring the field in May 2007. On platform Grace in the Santa Clara field, facilities construction is complete and we
have completed our first well. We expect to see production from the platform in the fourth quarter. In the Sockeye field, we are continuing to implement our waterflood program from platform Gail and
are working on the evaluation and design of a possible expansion of the program. We are also continuing to evaluate a possible expansion of our horizontal-well drilling activities to the
Monterey formation in the Sockeye field. In the South Ellwood field, the permitting process for a full-field development project, including a lease extension, is continuing. We expect to
receive the draft environmental impact report for the project early in 2008 and to commence work on the project in 2009.

Sacramento BasinExploitation and Development

In the Sacramento Basin, we continue to pursue our infill drilling program in the greater Grimes and Willows fields. We spudded 101 wells in the basin in the
first nine months of 2007 and expect to drill approximately 130 wells for the year. In addition, we expect to achieve our target of 100 well workovers and/or recompletions in the basin
during the year. We continue to test and evaluate

29

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potential
downspacing opportunities, as well as new methods of improving productivity and reducing drilling costs. In particular, we have initiated a hydraulic fracturing program targeting the Forbes
and deeper formations, a program that could potentially enhance production and reserves from these fields. We fracture stimulated the initial wells in the basin in November 2007, and plan to
fracture a number of additional wells there during 2008. The strategy of using hydraulic refracturing to enhance oil and natural gas production and recovery is a well established and proven process,
although it is not currently employed in the Sacramento Basin. As of September 30, 2007, our acreage position in the basin had grown to approximately 187,000 net acres (235,000 gross).

TexasExploitation and Development

In Texas, we have continued our workover and recompletion program in the Hastings complex, focusing primarily on increasing lift capacity through electrical
submersible pump conversions and improving fluid handling capacity. Our objective is to reach 500,000 Bbls/d of total fluid handling capacity by year end (up more than 200% from approximately 150,000
Bbls/d at the time of acquisition). In addition, we drilled five infill replacement wells in the Hastings complex in the first nine months of 2007. Although we are still evaluating this program, we
are not planning any additional replacement wells at this time. Also, we initiated a workover and recompletion program in the Manvel field, which produces from the same reservoir and exhibits similar
operating characteristics to the Hastings complex.

Higher Impact Exploration Activities

We expect to drill up to seven higher impact exploration wells in 2007, including six in the Sacramento Basin and one in Coastal California. We drilled one higher
impact exploration well in the first nine months of the year, a successful well in the Sacramento Basin. We spudded the Coastal California well in September and are currently running logs. We are in
the process of drilling a second higher impact exploration well in the Sacramento Basin, and expect to spud up to four additional wells in the basin in the fourth quarter.

The
aggregate levels of capital expenditures for 2007 and 2008, and the allocation of those expenditures, are dependent on a variety of factors, including the availability of capital
resources to fund the expenditures, the availability of service contractors and equipment, permitting issues, weather, costs of equipment and third-party services, limits on the number of activities
that can be conducted at any one time on our offshore platforms and changes in our business assessments as to where our capital can be most profitably employed. Accordingly, the actual levels of
capital expenditures and the allocation of those expenditures may vary materially from the estimates described above.

Acquisitions

TexCal Transaction.We acquired TexCal Energy on March 31, 2006 for $456.8 million in cash. The acquisition is
consistent with our strategy of acquiring large, mature fields with established reserves and significant exploitation and development potential, and provided us with substantial additions to our
multi-year drilling inventory.

West Montalvo and Manvel Acquisitions.We acquired the West Montalvo field in Ventura County, California in May 2007
for approximately $61.3 million. The field includes an offshore portion that is reachable from onshore locations. We acquired the Manvel field in Brazoria County, Texas, and certain related
fields, in April 2007 for $46.1 million. We believe that the Manvel field provides us with exploitation and development opportunities that are similar to those in the Hastings complex.
We believe that both the West Montalvo and Manvel fields may be suitable for CO2 flooding.

30

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Other.We have an active acreage acquisition program and we regularly engage in acquisitions (and, to a lesser extent,
dispositions) of oil and natural gas properties in and around our existing core areas of operations.

Trends Affecting Our Results of Operations

Expected Production.We expect that the execution of our capital expenditure program in the remainder of 2007 and in 2008
will result in significant increases in our average net production. We are pursuing a multi-year drilling program in the Sacramento Basin and are on pace to drill approximately
130 wells there in 2007. In 2008, we plan to drill approximately 110 new wells and perform over 100 workovers in the basin. In the Hastings complex, we are continuing our active workover
and recompletion program and expect to do so for the remainder of 2007 and throughout 2008. We have also implemented development and workover programs in the West Montalvo and Manvel fields, and these
programs are expected to continue throughout 2008. Finally, we expect production increases in 2008 from platform Grace in the Santa Clara field, where we commenced drilling operations in the third
quarter of 2007. Our expectations with respect to future production rates are subject to a number of uncertainties, including those associated with the availability and cost of rigs and third party
services, oil and natural gas prices, the potential for mechanical problems or other events resulting in unexpected downtime, permitting issues, drilling success rates, pipeline capacity, the accuracy
of our assumptions regarding the sustainability of historical growth rates and the performance of existing wells, weather and other factors, including those referenced in "Risk Factors."

Production Expenses.Production expenses averaged $14.90 per BOE in the third quarter of 2007 compared to $14.53 per BOE in
the second quarter of 2007. Third quarter 2007 production expenses reflect a full quarter of West Montalvo and Manvel operations, where expenses increased as remedial efforts accelerated in both
fields. These efforts, coupled with a production curtailment at West Montalvo for facility vessel inspections and repairs, resulted in an increase in production expenses per BOE. We expect our
production expenses to decrease on a BOE basis in 2008 due to reduced remedial activities in the Hastings complex and production volume increases from the Sacramento Basin,
platform Grace and the West Montalvo and Manvel fields and the Hastings complex. Our expectations with respect to future per-unit expenses are based in part on the projected increases in
our production and are subject to numerous risks and uncertainties, including those described and referenced in the preceding paragraph.

General and Administrative Expenses.General and administrative expenses were $3.97 per BOE in the first nine months of 2007,
excluding per BOE charges under SFAS 123R of $0.70. This represented a decrease from per BOE G&A costs of $4.29 (excluding SFAS 123R charges of $0.45) in the first nine months of 2006.
The change resulted from an overall increase in G&A costs in the 2007 period being more than offset by production growth. Excluding SFAS 123R charges, we expect our 2008 G&A costs to be similar
to our full year 2007 costs on a per BOE basis. As with production expenses, our expectations in this regard are based in part on our projected increases in production, which are subject to numerous
risks and uncertainties.

Unrealized Derivative Gains and Losses.Rising oil prices created substantial unrealized commodity derivative losses in the
first nine months of 2007, while fluctuating oil prices and lower natural gas prices led to unrealized commodity derivative gains in 2006. These unrealized gains and losses resulted from
mark-to-market valuations of derivative positions that are not accounted for as cash flow hedges and are reflected as unrealized commodity derivative gains or losses in our
income statement. Payments actually due to or from counterparties in the future on these derivatives will typically be offset by corresponding changes in prices ultimately received from the sale of
our production. We may incur significant gains or losses of this type for the remainder of 2007 and in subsequent years. As described in note 4 to the condensed consolidated financial
statements included in this report, we discontinued

31

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hedge
accounting as of April 1, 2007. This may increase volatility in gains and losses of this type in subsequent periods. We may also have significant unrealized interest rate derivative gains
and losses in subsequent periods due to changes in market interest rates.

Internal Control Over Financial Reporting

In November 2005, we restated the financial statements included in our Quarterly Reports on Form 10-Q for the first two quarters of
2005. In addition, historically we operated with a relatively small number of employees in the accounting and financial reporting area. If we had previously conducted an assessment of our internal
controls under the standards set forth in Section 404 of the Sarbanes-Oxley Act and related rules, either or both of these factors likely would have led us to conclude that we had one or more
material weaknesses in our internal controls. In addition, our independent registered public accounting firm, in the performance of their 2005 and 2006 audits, concluded that material weaknesses in
our internal controls existed in 2005 and 2006. We have taken a variety of actions to address these issues, including the adoption of more extensive accounting controls and financial review procedures
and the hiring of additional accounting staff. A substantial part of our efforts in this regard in 2006 focused on the design of a more comprehensive system of internal controls. We are focusing on
the implementation and testing of this system in 2007.

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Results of Operations

The following table reflects the components of our oil and natural gas production and sales prices and sets forth our operating revenues, costs and expenses on a
BOE basis for the three and nine months ended September 30, 2006 and 2007.

|                                          |  | Three Months Ended
September 30, |        | Nine Months Ended
September 30, |  
|----------------------------------------- |  | -------------------------------- | ------ | ------------------------------- | -
|
|Production Volume:                        |  |                                  |        |                                 |  
|Oil (MBbls)                               |  |                                  | 872    |                                 |  
|Natural gas (MMcf)                        |  |                                  | 4,131  |                                 |  
|MBOE                                      |  |                                  | 1,561  |                                 |  
|Daily Average Production Volume:          |  |                                  |        |                                 |  
|Oil (Bbls/d)                              |  |                                  | 9,478  |                                 |  
|Natural gas (Mcf/d)                       |  |                                  | 44,902 |                                 |  
|BOE/d                                     |  |                                  | 16,962 |                                 |  
|Oil Price per Bbl Produced (in dollars):  |  |                                  |        |                                 |  
|Realized price before hedging gain (loss) |  | $                                | 61.17  |                                 | $
|Realized hedging gain (loss)              |  |                                  | (10.05 | )                               |  
|                                          |  |                                  |        |                                 |  
|Net realized                              |  | $                                | 51.12  |                                 | $
|                                          |  |                                  |        |                                 |  
|Natural Gas Price per Mcf (in dollars):   |  |                                  |        |                                 |  
|Realized price before hedging gain        |  | $                                | 5.83   |                                 | $
|Realized hedging gain                     |  |                                  | 0.43   |                                 |  
|                                          |  |                                  |        |                                 |  
|Net realized                              |  | $                                | 6.26   |                                 | $
|                                          |  |                                  |        |                                 |  
|Average Sale Price per BOE(1)             |  | $                                | 46.61  |                                 | $
|Expense per BOE:                          |  |                                  |        |                                 |  
|Production expenses(2)                    |  | $                                | 17.33  |                                 | $
|Transportation expenses                   |  |                                  | 0.40   |                                 |  
|Depreciation, depletion and amortization  |  |                                  | 11.76  |                                 |  
|General and administrative expense(3)     |  |                                  | 4.77   |                                 |  
|Interest expense, net                     |  |                                  | 9.80   |                                 |  

---

33

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Comparison of Quarter Ended September 30, 2006 to Quarter Ended September 30, 2007

Oil and Natural Gas Revenues.Oil and natural gas revenues increased $21.4 million (28%) to $97.3 million for
the quarter ended September 30, 2007 from $75.9 million for the same period in 2006. The increase was primarily due to a 22% increase in production and a 9% increase in our average sale
price per BOE.

Oil
revenues increased by $16.9 million (33%) in the third quarter of 2007 to $68.7 million, compared to $51.8 million in the third quarter of 2006. Oil production
rose 23%, with production of 1,071 MBbl in the third quarter of 2007 compared to 872 MBbl in the third quarter of 2006. The increase was attributable to our successful workover program in the Hastings
complex, production from the West Montalvo and Manvel fields and production increases from the waterflood program at platform Gail. Our average realized price for oil increased $5.56 (9%) to $66.73
per Bbl for the period.

Natural
gas revenues increased $4.4 million in the third quarter of 2007 (18%) to $28.5 million compared to $24.1 million in the third quarter of 2006. Natural gas
production increased 21%, with production of 5,001 MMcf compared to 4,131 MMcf in the third quarter of 2006. The majority of the increase was due to our drilling program in the Sacramento Basin. Our
average realized price for natural gas decreased $0.12 (2%) to $5.71 per Mcf for the period.

Commodity Derivatives and Other Revenues.The following table sets forth the components of commodity derivative losses, net
in our condensed consolidated statements of operations for the periods indicated (in thousands):

Three Months Ended
September 30,2006

2007Realized commodity derivative gains (losses)

$
(6,975
)
$
530Unrealized commodity derivative gains (losses)


28,390


(8,576
)Amortization of derivative premiums and other comprehensive loss





(3,243
)Total

$
21,415

$
(11,289
)


Realized
commodity derivative gains or losses represent the difference between the strike price in the contracts settled during the period and the ultimate settlement prices. The
realized commodity derivative gains in the 2007 period reflect the settlement of contracts at prices below the strike price, whereas the realized commodity derivative losses in the 2006 period reflect
the settlement of contracts at prices above the strike price. Unrealized commodity derivative gains (losses) represent the change in the fair value of our open derivative contracts from period to
period. The change in unrealized commodity derivative gains (losses) reflects an increase in the number of derivative contracts outstanding in the 2007 period as well as an increase in the futures
prices used to estimate the fair value of those contracts at the end of the period. Derivative premiums are amortized over the term of the underlying derivative contracts. The increase in amortization
of derivative premiums and other comprehensive losses in the 2007 period reflects additional premiums paid in connection with the additional contracts outstanding in the 2007 period and amortization
of other comprehensive loss in the 2007 period.

Other
revenue decreased 24%, from $1.3 million in the third quarter of 2006 to $1.0 million in the third quarter of 2007. The decrease was primarily due to lower
transportation income received from purchasers of oil production from the South Ellwood field.

As
a result of the foregoing factors, total revenues decreased $11.6 million (12%) to $87.0 million in the third quarter of 2007, compared to $98.6 million in the
third quarter of 2006.

34

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Production Expenses.Production expenses increased $1.4 million (5%) to $28.4 million in the third quarter of
2007 from $27.0 million in the third quarter of 2006. The increase was primarily due to costs associated with new wells drilled in the Sacramento Basin during the quarter, workovers in the
Hastings complex and operating expenses from properties acquired in the first half of 2007. On a per unit basis, production expenses declined to $14.90 per BOE in the third quarter of 2007 from $17.33
per BOE in the same period in 2006. This decrease was primarily attributable to increased production from lower cost wells in the Sacramento Basin, additional production resulting from our workover
programs and a reduction in Hastings remedial work compared to the prior year period. In addition, production expenses on a per BOE basis were relatively high in the third quarter of 2006 because
production from the South Ellwood field was shut in for part of the period due to barge maintenance and our acceleration of scheduled maintenance to coincide with the barge maintenance.

Transportation Expenses.Transportation expenses increased 81%, from $0.6 million in the third quarter of 2006 to
$1.1 million in the third quarter of 2007. This was primarily attributable to increased transportation costs for barge deliveries. On a per BOE basis, transportation expenses increased
$0.20 per BOE, from $0.40 per BOE in the third quarter of 2006 to $0.60 per BOE in the third quarter of 2007.

Depletion, Depreciation and Amortization (DD&A).DD&A expense increased $7.0 million (38%) to $25.4 million in
the third quarter of 2007 from $18.4 million in the third quarter of 2006. DD&A expense rose $1.56 per BOE, from $11.76 per BOE in the third quarter of 2006 to $13.32 per BOE in the third
quarter of 2007. The increase was primarily due to the increase in oil and natural gas property costs during the quarter resulting from our capital expenditure program and properties acquired in the
2007 period.

Accretion of Asset Retirement Obligations.Accretion expense was $0.9 million in the third quarter of 2007 compared to
$0.7 million in the third quarter of 2006. The increase was due to accretion from new liabilities incurred in connection with the Sacramento Basin drilling program and the addition of new
properties acquired in the first half of the year.

General and Administrative (G&A).G&A expense, net of amounts capitalized, increased $0.2 million to
$7.6 million in the third quarter of 2007 from $7.4 million in the third quarter of 2006. The increase resulted primarily from increases in our professional staff and related
infrastructure costs, a non-recurring charge of $0.6 million for the settlement of an employment contract, and an increase in non-cash SFAS 123R share based compensation expense from
$0.5 million in the third quarter of 2006 to $1.2 million in the third quarter of 2007. These increases were partially offset by an increase in the
G&A costs that were capitalized for payroll and related overhead for activities that are directly involved in our development, exploitation, exploration and acquisition efforts. On a per BOE basis,
G&A expenses decreased $1.07, from $4.43 in the third quarter of 2006 to $3.36 in the third quarter of 2007, excluding per BOE charges under SFAS 123R of $0.34 and $0.64, respectively.

Financing Costs and Other.Interest expense, net of interest income, increased from $15.3 million in the third quarter
of 2006 to $15.5 million in the third quarter of 2007. The increase was due to an increase in average debt outstanding in the 2007 period, partially offset by a reduction in average interest rates.
Amortization of deferred loan costs decreased slightly from $1.1 million in the third quarter of 2006 to $1.0 million in the third quarter of 2007. Changes in the fair value of our
interest rate swap derivative instruments resulted in unrealized losses of $1.2 million in the 2006 period and $8.3 million in the 2007 period as a result of a decrease in estimated
interest rates used to determine the fair value of the derivative instruments.

Income tax expense.The net loss in the third quarter of 2007 resulted in an income tax benefit of $1.7 million
compared to income tax expense of $10.5 million for the third quarter of 2006. The effective tax rate for the third quarter of 2007 reflects the impact of applying our estimated effective tax
rate for the full year 2007 under the provisions of FIN 18.

35

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Net Income (Loss).Net income for the third quarter of 2007 was $0.5 million compared to net income of
$16.2 million for the same period in 2006. The change between periods is the result of the items discussed above.

Comparison of Nine Months Ended September 30, 2006 to Nine Months Ended September 30, 2007

Oil and Natural Gas Revenues.Oil and natural gas revenues increased $58.1 million (29%) to $261.4 million for
the nine months ended September 30, 2007 from $203.3 million for the same period in 2006. The increase was primarily due to a 28% increase in production, as further described below.

Oil
revenues increased by $27.6 million (19%) in the first nine months of 2007 to $170.1 million from $142.5 million in the first nine months of 2006. Oil production
rose 19%, with production of 2,960 MBbl in the first nine months of 2007 compared to 2,478 MBbl in the first nine months of 2006. The production increase was attributable primarily to the
acquisition of the TexCal properties in March 2006, the Manvel field in April 2007 and the West Montalvo field in May 2007, our successful workover program in the Hastings field and, to a
lesser extent, increases from other Venoco properties. Our average realized price for oil decreased $0.66 (1%) to $58.00 per Bbl for the period.

Natural
gas revenues increased $30.6 million (50%) in the first nine months of 2007 to $91.3 million compared to $60.7 million in the first nine months of 2006.
Natural gas production increased 41%, with production of 13,926 MMcf compared to 9,895 MMcf in the first nine months of 2006. The increase was due primarily to production attributable to the TexCal
acquisition and increased production resulting from drilling and recompletion activities in the Sacramento Basin. Our average realized price for natural gas increased $0.42 (7%) to $6.56 per Mcf for
the period.

Commodity Derivatives and Other Revenues.The following table sets forth the components of commodity derivative losses, net
in our condensed consolidated statements of operations for the periods indicated (in thousands):

Nine Months Ended
September 30,2006

2007Realized commodity derivative gains (losses)

$
(15,124
)
$
554Unrealized commodity derivative gains (losses)


13,413


(31,428
)Amortization of derivative premiums and other comprehensive loss


(4,640
)

(7,560
)Total

$
(6,351
)
$
(38,434
)


Realized
commodity derivative gains or losses represent the difference between the strike price in the contracts settled during the period and the ultimate settlement prices. The
realized commodity derivative gains in the 2007 period reflect the settlement of contracts at prices below the strike price, whereas the realized commodity derivative losses in the 2006 period reflect
the settlement of contracts at prices above the strike price. Unrealized commodity derivative gains (losses) represent the change in the fair value of our open derivative contracts from period to
period. The change in unrealized commodity derivative gains (losses) reflects an increase in the number of derivative contracts outstanding in the 2007 period as well as an increase in the futures
prices used to estimate the fair value of those contracts at the end of the period. Derivative premiums are amortized over the term of the underlying derivative contracts. The increase in amortization
of derivative premiums and other comprehensive losses in the 2007 period reflects additional premiums paid in connection with the additional contracts outstanding in the 2007 period and amortization
of other comprehensive losses beginning in the second quarter of 2007.

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Other
revenue decreased 45%, from $4.7 million in the first nine months of 2006 to $2.6 million in the first nine months of 2007. The decrease was primarily due to lower
transportation income received from purchasers of oil production from the South Ellwood field.

As
a result of the foregoing factors, total revenues increased $23.9 million (12%) to $225.6 million in the first nine months of 2007, compared to $201.6 million in
the first nine months of 2006.

Production Expenses.Production expenses increased $16.9 million (27%) to $79.4 million in the first nine
months of 2007 from $62.6 million in the first nine months of 2006. The increase was primarily due to production expenses attributable to the March 2006 TexCal acquisition, acquisitions
made in the first half of 2007 and a 17% increase in production expenses related to other Venoco properties. The increase in production expenses for other Venoco properties relates to an increase in
the number of producing wells, normal variances of timing of production expenses, including expenses relating to periodic maintenance projects which continued into the third quarter of 2007, and
increased costs of third party services. On a per unit basis, production expenses declined to $15.04 per BOE in the first nine months of 2007 compared to $15.16 per BOE in the same period in
2006.

Transportation Expenses.Transportation expenses increased 98%, from $2.2 million in the first nine months of 2006 to
$4.4 million in the first nine months of 2007. This was primarily attributable to increased transportation costs for barge deliveries. On a per BOE basis, transportation expenses increased
$0.30 per BOE, from $0.54 per BOE in the first nine months of 2006 to $0.84 per BOE in the first nine months of 2007.

Depletion, Depreciation and Amortization (DD&A).DD&A expense increased $27.7 million (66%) to $69.5 million in
the first nine months of 2007 from $41.8 million in the first nine months of 2006. DD&A expense per BOE rose $3.03, from $10.14 per BOE in the first nine months of 2006 to $13.17 per BOE
in the first nine months of 2007. The increase was primarily due to a higher depletion expense resulting from the increase in the oil and natural gas properties obtained in the TexCal, Manvel and West
Montalvo acquisitions and the increase in oil and natural gas property costs during the period resulting from our capital expenditure program.

Accretion of Asset Retirement Obligations.Accretion expense was $2.5 million in the first nine months of 2007
compared to $1.8 million in the first nine months of 2006. The increase was primarily due to accretion from the properties obtained in the TexCal, Manvel and West Montalvo acquisitions and from
new wells drilled and completed in the second half of 2006 and the first nine months of 2007.

General and Administrative (G&A).G&A expense, net of amounts capitalized, increased $5.1 million (26%) to
$24.7 million in the first nine months of 2007 from $19.6 million in the first nine months of 2006. The increase resulted primarily from increases in our professional staff and related
infrastructure costs, non-recurring charges of $1.3 million for the settlement of employment contracts, and an increase in non-cash SFAS 123R share based compensation expense from $1.8 million
in the first nine months of 2006 to $3.7 million in the first nine months of 2007. These increases were partially offset by an increase in the G&A costs that were capitalized for payroll and related
overhead for activities that are directly involved in our development, exploitation, exploration and acquisition efforts. On a per BOE basis, G&A expenses decreased $0.32, from $4.29 in the first nine
months of 2006 to $3.97 per BOE in the first nine months of 2007, excluding per BOE charges under SFAS 123R of $0.45 and $0.70, respectively.

Financing Costs and Other.Interest expense, net of interest income, increased $10.5 million (31%) from $34.1 million
in the first nine months of 2006 to $44.6 million in the first nine months of 2007. The increase was primarily due to an increase in average debt outstanding during the 2007 period.
Amortization of deferred loan costs increased $0.6 million (25%) from $2.6 million in the first nine months of 2006 to $3.2 million in the first nine months of 2007 because the
2007 period includes

37

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nine months
of amortization of loan costs related to the second lien term loan compared to six months in 2006 (the debt was initially incurred on March 31, 2006). Changes in the
fair value of our interest rate swap derivative instruments resulted in unrealized losses of $1.0 million in the first nine months of 2006 and $8.5 million in the first nine months of
2007 as a result of a decrease in estimated interest rates used to determine the fair value of the derivative instruments. We incurred a loss on extinguishment of debt of $12.1 million in the
second quarter of 2007 when we prepaid the prior second lien term loan facility and replaced it with the new term loan facility. We paid a premium of $3.5 million and wrote off related deferred
loan costs of $8.6 million in connection with the prepayment of the prior term loan facility.

Income tax expense.The loss before taxes in the first nine months of 2007 resulted in an income tax benefit of
$10.4 million compared to income tax expense of $14.1 million for the first nine months of 2006. The effective tax rate for the first nine months of 2007 reflects the impact of applying
our estimated effective tax rate for the full year 2007 under the provisions of FIN 18.

Net Income (Loss).The net loss for the first nine months of 2007 was $13.0 million compared to net income of
$21.7 million for the same period in 2006. The change between periods is the result of the items discussed above.

Liquidity and Capital Resources

Our primary sources of liquidity are cash generated from our operations and amounts available under our revolving credit facility.

Cash Flows

Nine Months Ended
September 30,2006

2007(in thousands)Cash provided by operating activities

$
93,140

$
116,061Cash used in investing activities


(584,263
)

(365,704
)Cash provided by financing activities


498,793


242,097


Net
cash provided by operating activities was $116.1 million in the first nine months of 2007 compared with $93.1 million in the first nine months of 2006. Cash flows from
operating activities in the first nine months of 2007 were favorably impacted by production increases in the 2007 period.

Net
cash used in investing activities was $365.7 million in the first nine months of 2007 compared with $584.3 million in the first nine months of 2006. The primary
investing activities in the first nine months of 2007 include $240.4 million in expenditures for oil and gas properties and $120.4 million paid to acquire the West Montalvo and Manvel
fields and other properties. The primary investing activities in the first nine months of 2006 include $447.5 million paid in cash to acquire TexCal (net of TexCal cash) and
$135.1 million in expenditures for oil and gas properties.

Net
cash provided by financing activities was $242.1 million in the first nine months of 2007 compared to $498.8 million in the first nine months of 2006. The primary
financing activities in the first nine months of 2007 were $151.1 million in net borrowings under the second lien term loan facility to fund capital expenditures and working capital needs and
$20.6 million in net payments under the revolving credit facility. Net proceeds from an additional offering of common stock completed in July 2007 were $116.0 million, of which
$95.0 million was used to pay down amounts outstanding under our revolving credit facility; the remainder was used to fund our 2007 capital expenditure program. Proceeds from
long-term debt in the first nine months of 2006 included $350.0 million borrowed under the prior term loan facility and $159.5 million in net borrowings under the revolving
credit facility.

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Capital Resources and Requirements

We plan to make substantial capital expenditures in the future for the acquisition, exploration, exploitation and development of oil and natural gas properties.
We expect that our exploration, exploitation and development capital expenditures, which were $240 million in the first nine months of 2007, will be approximately $320.0 million for the year.
In addition, we completed two acquisitions in the second quarter of 2007 for an aggregate purchase price of approximately $107.4 million and will continue to pursue acquisitions on an
opportunistic basis. We currently expect that our exploration, exploitation and development capital expenditures in 2008 will be approximately $235.0 million. We intend to finance capital
expenditures in the remainder of 2007 and in 2008 primarily with cash flow from operations, supplemented with additional borrowings under our revolving credit facility. As of November 16, 2007,
$37.0 million was outstanding under the revolving credit facility, which had a borrowing base of $125.0 million as of that date.

Master Limited Partnership.We expect to form a master limited partnership, or MLP, and offer common units
representing limited partnership interests to the public. We expect to capitalize the MLP through the contribution of our interests in certain onshore fields in Southern California and a portion of
our interests in the South Ellwood field and in the Hastings complex. We anticipate receiving a portion of the proceeds of the offering of MLP interests as a distribution to us, but the amount of the
distribution, if any, has not been determined. Our plans with respect to the MLP may change, and we cannot assure you that we will form the MLP or that any MLP offering will be completed.

Second Lien Term Loan.In May 2007, we entered into a new second lien term loan agreement to refinance and replace our
prior second lien term loan facility. We entered into the new term loan agreement to facilitate the financing of our acquisitions of the West Montalvo and Manvel fields and to amend certain covenants
included in the agreement governing the prior second lien term loan facility. We borrowed $500.0 million pursuant to the new term loan agreement on May 8, 2007. Of the total amount
borrowed, $350.5 million was used to repay all amounts outstanding under the prior second lien term loan facility plus accrued interest, $3.5 million was used to pay a prepayment premium
on those
amounts and $4.6 million was used to pay transaction costs associated with the new facility. The remaining borrowings were used to reduce amounts then outstanding under our revolving credit
facility.

The
new term loan agreement contains customary representations, warranties, events of default and indemnities and certain customary covenants, including covenants that restrict our
ability to incur additional indebtedness. The covenants and other terms of the agreement contain exceptions that are intended to permit us to form an MLP and certain related entities, to contribute
assets to the MLP, to sell securities of the MLP and to cause the MLP to incur indebtedness and issue securities, subject in each case to the satisfaction of certain requirements. The agreement
requires us to maintain derivative contracts covering at least 70% of our projected oil and natural gas production attributable to proved developed producing reserves through May 8, 2010, and
at least 50% of such production on an annual basis thereafter. We cannot, however, enter into derivative contracts (other than certain put contracts) covering more than 80% of such oil and gas
production in any month. The agreement also prohibits us from paying dividends on our common stock. The agreement will require us to make offers to prepay amounts outstanding under the second lien
term loan facility with the proceeds of certain transactions or events, including sales of assets, in certain circumstances. Amounts prepaid under the facility may not be reborrowed. The new term loan
facility is secured by a second priority lien on substantially all of our assets.

Loans
made under the new term loan agreement are designated, at our option, as either "Base Rate Loans" or "LIBO Rate Loans." Base Rate Loans bear interest at a floating rate equal to
(i) the greater of the overnight federal funds rate plus 0.50% and the administrative agent's announced base rate, plus (ii) 3.00%. LIBO Rate Loans bear interest at LIBOR plus 4.00%. We
have entered into interest rate swaps pursuant to which amounts borrowed under the new term loan agreement will

39

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effectively
bear interest at a fixed rate of approximately 9.3% until June 2010. See "Quantitative and Qualitative Disclosures About Market RiskInterest Rate
Derivative Transactions."

Amended Revolving Credit Facility.Also in May 2007, we entered into a fifth amendment to the second amended and
restated credit agreement governing our revolving credit facility. The principal effects of the amendment were (i) to permit us to enter into the new term loan agreement, (ii) to reduce
the borrowing base under the revolving credit facility to $125.0 million and (iii) to change the rate at which amounts outstanding under the revolving credit agreement accrue interest.
Pursuant to the amendment, Base Rate Loans under the revolving credit facility bear interest at a floating rate equal to (i) the greater of Bank of Montreal's announced base rate and the
overnight federal funds rate plus 0.50% plus (ii) an applicable margin ranging from zero to 0.75%, based upon utilization. LIBO Rate Loans under the revolving credit facility bear interest at
(i) LIBOR plus (ii) an applicable margin ranging from 1.50% to 2.25%, based upon utilization. A commitment fee ranging from 0.375% to 0.5% per annum is payable with respect to unused
borrowing availability under the facility.

Principal
on the revolving credit facility is payable on March 30, 2009. The agreement governing the facility contains customary representations, warranties, events of default,
indemnities and covenants, including operational covenants that restrict our ability to incur indebtedness and financial covenants that require us to maintain specified ratios of EBITDA (as defined in
the agreement) to interest expense, current assets to current liabilities, debt to EBITDA and PV-10 to total debt. The ratios required to be met in order to remain in compliance with our
financial covenants change at specified times over the duration of the loans. On September 30, 2007, the required ratio of EBITDA to interest expense changed from 3:1 to 3.5:1 and the maximum
permitted ratio of debt to EBITDA changed from 4:1 to 3.5:1. The agreement governing the revolving credit facility will require us to reduce amounts outstanding under the facility with the proceeds of
certain transactions or events, including sales of assets, in certain circumstances. The revolving credit facility is secured by a first priority lien on substantially all of our assets.

Senior Notes.We issued $150.0 million of our senior notes in December 2004. The notes bear interest at 8.75%
per year and will mature on December 15, 2011. We may redeem the notes after December 15, 2008, initially at a redemption price equal to 104.375% of the principal amount. In addition,
before December 15, 2008, we may redeem all or part of the notes at a specified "make-whole" price, and before December 15, 2007, we may redeem up to 35% of the notes with
the net proceeds of certain public or private equity offerings at a redemption price of 108.75% of the principal amount of the notes. Upon the occurrence of a change of control of our company, each
holder of notes may require us to repurchase all or a portion of its notes for cash at a price equal to 101% of the aggregate principal amount of those notes, plus any accrued and unpaid interest. The
indenture governing the notes also contains operational covenants that, among other things, limit our ability to make investments, incur additional indebtedness or create liens on our assets. The
notes are guaranteed by all of our subsidiaries other than Ellwood Pipeline, Inc. and are secured with the new second lien term loan on an equal and ratable basis.

Because
we must dedicate a substantial portion of our cash flow from operations to the payment of interest on our debt, that portion of our cash flow is not available for other purposes.
Our ability to make scheduled interest payments on our indebtedness and pursue our capital expenditure plan will depend to a significant extent on our financial and operating performance, which is
subject to prevailing economic conditions, commodity prices and a variety of other factors. If our cash flow and other capital resources are insufficient to fund our debt service obligations and our
capital expenditure budget, we may be forced to reduce or delay scheduled capital projects, sell material assets or operations and/or seek additional capital. Needed capital may not be available on
acceptable terms or at all. Our ability to raise funds through the incurrence of additional indebtedness and certain other means is limited by covenants in our debt agreements. In addition, pursuant
to mandatory prepayment provisions in our credit facilities, our ability to respond to a shortfall in our expected liquidity by selling

40

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assets
or incurring additional indebtedness would be limited by provisions in the facilities that require us to use some or all of the proceeds of such transactions to reduce amounts outstanding under
one or both of the facilities in some circumstances. If we are unable to obtain funds when needed and on acceptable terms, we may not be able to complete acquisitions that may be favorable to us, meet
our debt obligations or finance the capital expenditures necessary to replace our reserves.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

This section provides information about derivative financial instruments we use to manage commodity price volatility. Due to the historical volatility of crude
oil and natural gas prices, we have implemented a hedging strategy aimed at reducing the variability of the prices we receive for our production and providing a minimum revenue stream. Currently, we
purchase puts and enter into other derivative transactions such as collars and fixed price swaps in order to hedge our exposure to changes in commodity prices. All contracts are settled with cash and
do not require the delivery of a physical quantity to satisfy settlement. While this hedging strategy may result in us having lower revenues than we would have if we were unhedged in times of higher
oil and natural gas prices, management believes that the stabilization of prices and protection afforded us by providing a revenue floor on a portion of our production is beneficial.

This
section also provides information about derivative financial instruments we use to manage interest rate risk. See "Interest Rate Derivative Transactions."

Commodity Derivative Transactions

Oil.As of September 30, 2007, we had entered into option (including collar) agreements to receive average minimum and
maximum NYMEX West Texas Intermediate prices as summarized below. Location and quality differentials attributable to our properties are not reflected in those prices. The agreements provide for
monthly settlement based on the differential between the agreement price and the actual NYMEX crude oil price.

|                                                            |  | Minimum |  | Maximum
|----------------------------------------------------------- |  | ------- |  | -------
|
|Crude oil derivatives at September 30, 2007 for production: |  |         |  |        
|October 1December 31, 2007                                 |  | 9,880   |  | $      
|January 1December 31, 2008                                 |  | 8,100   |  | $      
|January 1December 31, 2009                                 |  | 6,983   |  | $      
|January 1December 31, 2010                                 |  | 6,150   |  | $      

Natural Gas.As of September 30, 2007, we had entered into option, swap and collar agreements to receive average
minimum and maximum PG&E Citygate prices as follows:

|                                                              |  | Minimum |  | Maximum
|------------------------------------------------------------- |  | ------- |  | -------
|
|Natural gas derivatives at September 30, 2007 for production: |  |         |  |        
|October 1December 31, 2007                                   |  | 34,375  |  | $      
|January 1December 31, 2008                                   |  | 20,650  |  | $      
|January 1December 31, 2009                                   |  | 14,625  |  | $      
|January 1December 31, 2010                                   |  | 11,900  |  | $      

41

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Portfolio of Commodity Derivative Transactions

Our portfolio of commodity derivative transactions as of September 30, 2007 is summarized below:

Oil

|Type of Contract |  | Basis |  | Quantity (Bbl/d) |   | Strike Price ($/Bbl) |              | Term
|---------------- |  | ----- |  | ---------------- | - | -------------------- | ------------ | ----
|Collar           |  | NYMEX |  | 2,000            |   | $                    | 40.00/$65.80 |     
|Collar           |  | NYMEX |  | 1,000            |   | $                    | 40.00/$67.50 |     
|Collar           |  | NYMEX |  | 1,000            |   | $                    | 58.00/$76.25 |     
|Collar           |  | NYMEX |  | 1,030            |   | $                    | 53.00/$75.00 |     
|Put              |  | NYMEX |  | 2,000            |   | $                    | 58.00 Floor  |     
|Collar           |  | NYMEX |  | 2,000            |   | $                    | 57.00/$73.55 |     
|Call             |  | NYMEX |  | 1,035            |   | $                    | 81.00 Cap    |     
|Collar           |  | NYMEX |  | 850              |   | $                    | 60.00/$80.00 |     
|Collar           |  | NYMEX |  | 3,450            |   | $                    | 52.00/$75.00 |     
|Collar           |  | NYMEX |  | 2,450            |   | $                    | 52.00/$75.00 |     
|Collar           |  | NYMEX |  | 1,000            |   | $                    | 58.00/$78.00 |     
|Collar           |  | NYMEX |  | 1,500            |   | $                    | 58.00/$75.25 |     
|Swap             |  | NYMEX |  | 2,500            |   | $                    | 67.25        |     
|Collar           |  | NYMEX |  | 800              |   | $                    | 60.00/$82.75 |     
|Collar           |  | NYMEX |  | (150             | ) | $                    | 60.00/$82.75 |     
|Collar           |  | NYMEX |  | 2,170            |   | $                    | 50.00/$75.00 |     
|Collar           |  | NYMEX |  | 1,000            |   | $                    | 56.00/$79.25 |     
|Collar           |  | NYMEX |  | 3,000            |   | $                    | 55.00/$77.00 |     
|Swap             |  | NYMEX |  | 2,000            |   | $                    | 67.22        |     
|Collar           |  | NYMEX |  | 750              |   | $                    | 60.00/$82.75 |     
|Collar           |  | NYMEX |  | (700             | ) | $                    | 60.00/$82.75 |     
|Collar           |  | NYMEX |  | 1,000            |   | $                    | 60.00/$72.80 |     
|Collar           |  | NYMEX |  | 3,500            |   | $                    | 60.00/$73.00 |     
|Swap             |  | NYMEX |  | 1,000            |   | $                    | 66.75        |     
|Collar           |  | NYMEX |  | 650              |   | $                    | 60.00/$81.75 |     

In
November 2007, we entered into a NYMEX oil put for a total of 2,000 Bbls per day of 2008 production at $80.00 per Bbl.

42

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Natural Gas

|Type of Contract |  | Basis         |  | Quantity (MMBtu/d) |  | Strike Price ($/MMBtu) |             | Term
|---------------- |  | ------------- |  | ------------------ |  | ---------------------- | ----------- | ----
|Collar           |  | PG&E Citygate |  | 6,000              |  | $                      | 6.00/$8.40  |     
|Collar           |  | NYMEX         |  | 5,000              |  | $                      | 8.00/$14.60 |     
|Put              |  | NYMEX         |  | 10,000             |  | $                      | 7.985 Floor |     
|Call             |  | NYMEX         |  | 4,310              |  | $                      | 11.95 Cap   |     
|Basis Swap       |  | PG&E Citygate |  | 10,000             |  | $                      | (0.58       | )   
|Basis Swap       |  | PG&E Citygate |  | 10,000             |  | $                      | (0.46       | )   
|Collar           |  | NYMEX         |  | 11,500             |  | $                      | 7.50/$10.35 |     
|Collar           |  | NYMEX         |  | 1,875              |  | $                      | 7.50/$14.10 |     
|Put              |  | NYMEX         |  | 6,000              |  | $                      | 8.00 Floor  |     
|Call             |  | NYMEX         |  | 4,513              |  | $                      | 12.15 Cap   |     
|Call             |  | NYMEX         |  | 4,382              |  | $                      | 10.60 Cap   |     
|Collar           |  | NYMEX         |  | 7,500              |  | $                      | 8.00/$12.75 |     
|Collar           |  | NYMEX         |  | 5,700              |  | $                      | 7.75/$10.05 |     
|Basis Swap       |  | PG&E Citygate |  | 10,000             |  | $                      | (0.32       | )   
|Basis Swap       |  | PG&E Citygate |  | 10,000             |  | $                      | (0.38       | )   
|Collar           |  | NYMEX         |  | 1,450              |  | $                      | 8.00/$12.95 |     
|Swap             |  | NYMEX         |  | 1,250              |  | $                      | 8.72 Fixed  |     
|Collar           |  | NYMEX         |  | 1,250              |  | $                      | 7.75/$13.05 |     
|Swap             |  | NYMEX         |  | 1,250              |  | $                      | 8.00 Fixed  |     
|Collar           |  | NYMEX         |  | 1,250              |  | $                      | 7.25/$11.30 |     
|Collar           |  | NYMEX         |  | 7,000              |  | $                      | 7.50/$12.75 |     
|Basis Swap       |  | PG&E Citygate |  | 6,000              |  | $                      | 0.10        |     
|Basis Swap       |  | PG&E Citygate |  | 7,500              |  | $                      | 0.11        |     
|Collar           |  | NYMEX         |  | 4,000              |  | $                      | 7.30/$9.85  |     
|Collar           |  | NYMEX         |  | 1,125              |  | $                      | 8.00/$12.00 |     
|Collar           |  | NYMEX         |  | 10,000             |  | $                      | 7.00/$10.35 |     
|Basis Swap       |  | PG&E Citygate |  | 10,000             |  | $                      | 0.22        |     
|Collar           |  | NYMEX         |  | 1,000              |  | $                      | 7.00/$9.10  |     
|Collar           |  | NYMEX         |  | 900                |  | $                      | 7.50/$12.20 |     

Because
a large portion of our commodity derivatives do not qualify for hedge accounting and to increase clarity in our financial statements, effective April 1, 2007 we elected to
discontinue hedge accounting. Consequently, from that date forward, we have recognized mark-to-market gains and losses in earnings currently, rather than deferring such amounts
in accumulated other comprehensive income for those commodity derivatives that qualify as cash flow hedges.

All
derivative instruments are recorded on the balance sheet at fair value. Fair value is generally determined based on the difference between the fixed contract price and the underlying
market price at the determination date, and/or confirmed by the counterparty. Changes in the fair value of derivatives are recorded in commodity derivative income (loss) on the statement of
operations.

Interest Rate Derivative Transactions

We are subject to interest rate risk with respect to amounts borrowed under our credit facilities because those amounts bear interest at variable rates. As of
November 16, 2007, there was approximately $537 million outstanding under those facilities. We have entered into two interest rate swap transactions to limit our exposure to changes in
interest rates with respect to our second lien term loan facility. In May 2006, we entered into a swap to lock in our interest cost on $200.0 million of borrowings through
May 2008. In June 2007, we entered into a second swap to lock in our interest cost

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on
$300.0 million of borrowings through May 2008 and on $500.0 million of borrowings from May 2008 through June 2010. As a result of these transactions, amounts
borrowed under the second lien term loan facility will effectively bear interest at a fixed rate of approximately 9.3% until June 2010. Accordingly, we expect to be subject to interest rate
risk until that time only with respect to amounts borrowed under the revolving credit facility. A 1.0% increase in interest rates on unhedged variable rate borrowings of $10 million at
September 30, 2007 would result in additional annualized interest expense of $0.1 million. As of September 30, 2007, the fair value of our interest rate derivatives was a
liability of $9.0 million.

See
note 3 to our condensed consolidated financial statements for a discussion of our long-term debt as of September 30, 2007.

Item 4.    Controls and Procedures

Disclosure Controls and Procedures

Timothy Marquez, our Chief Executive Officer, and Timothy Ficker, our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures as of September 30, 2007. Based on the evaluation, they believe that:



We
are currently taking steps intended to enhance our internal control over financial reporting. See "Management's Discussion and Analysis of Financial Condition and Results of
OperationOverviewInternal Control Over Financial Reporting."

Internal Control Over Financial Reporting

Other than in connection with the steps we are taking to enhance our internal control over financial reporting as described in "Management's Discussion and
Analysis of Financial Condition and Results of OperationOverviewInternal Control Over Financial Reporting," there has not been any change in our internal control over
financial reporting that occurred during the quarterly period ended September 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.

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PART IIOTHER INFORMATION

Item 1.    Legal Proceedings

Not Applicable

Item 1A.    Risk Factors

In addition to the other information set forth in this report, you should carefully consider the matters discussed in "Risk Factors" in our Annual Report on
Form 10-K for the year ended December 31, 2006, and in our Quarterly Reports on Form 10-Q for the quarters ended March 31 and June 30, 2007,
any of which could materially affect our business, financial condition and/or future results. The risks described in those reports are not the only risks facing us. 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. The following sets forth
additional and/or updated information with respect to certain of the risks described in our Annual Report on Form 10-K and our other reports:

Our plans with respect to the proposed MLP are subject to a wide variety of risks and uncertainties.

We
expect to form an MLP and to offer common units representing limited partnership interests in the MLP to the public. Our plans with respect to the MLP may change and are subject to
market conditions and numerous other risks beyond our control. It is possible that the MLP will not be formed, will not complete an offering of securities, will not raise the expected amount of
capital even if an offering of securities is completed and/or will not be able to complete its proposed activities on the
currently contemplated schedule. In addition, the structure, nature, purpose and proposed assets and liabilities of the MLP may change materially from those currently anticipated. The MLP, and our
retained investment in it, will be subject to a wide variety of risks, including those risks normally associated with operations in the oil and natural gas industry.

This
report on Form 10-Q shall not constitute an offer to sell or the solicitation of an offer to buy any securities. Any offers, solicitations of offers to buy, or
any sales of securities will only be made in accordance with the registration requirements of the Securities Act of 1933 or an exemption therefrom.

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

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

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Item 6.    Exhibits.

|Exhibit
Number |  | Exhibit                                                                                                                                
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|31.1           |  | Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                
|31.2           |  | Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                
|32             |  | Certification of the Chief Executive Officer and the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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.

|November 19, 2007 |  | VENOCO, INC.
|----------------- |  | ------------
|                  |  | By:         
|                  |  |             
|                  |  |             
|                  |  | By:         
|                  |  |             
|                  |  |             

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