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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 March 31, 2008
|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, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act).

|Large Accelerated Filer o                                            |  | Accelerated Filer ý        
|-------------------------------------------------------------------- |  | ---------------------------
|Non-accelerated filer o(Do not check if a smaller reporting company) |  | Smaller Reporting Company o

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 March 31, 2008, there were 50,867,872 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 in 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, 2007. 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, 2007 and such things as:



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VENOCO, INC.
Form 10-Q for the Quarterly Period Ended March 31, 2008

TABLE OF CONTENTS



|PART I.    |  | FINANCIAL INFORMATION                                                                                                                         |  |   
|---------- |  | --------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|Item 1.    |  | Financial Statements (Unaudited)                                                                                                              |  | 2 
|           |  | Condensed Consolidated Balance Sheets at December 31, 2007 and March 31, 2008                                                                 |  | 2 
|           |  | Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2007 and the Three Months Ended March 31, 2008           |  | 3 
|           |  | Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2007 and the Three Months Ended March 31, 2008 |  | 4 
|           |  | Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and the Three Months Ended March 31, 2008           |  | 5 
|           |  | Notes to Condensed Consolidated Financial Statements                                                                                          |  | 6 
|Item 2.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                                         |  | 26
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                                                                                    |  | 34
|Item 4.    |  | Controls and Procedures                                                                                                                       |  | 38
|PART II.   |  | OTHER INFORMATION                                                                                                                             |  |   
|Item 1.    |  | Legal Proceedings                                                                                                                             |  | 39
|Item 1A.   |  | Risk Factors                                                                                                                                  |  | 39
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                   |  | 39
|Item 3.    |  | Defaults upon Senior Securities                                                                                                               |  | 39
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                                                           |  | 39
|Item 5.    |  | Other Information                                                                                                                             |  | 39
|Item 6.    |  | Exhibits                                                                                                                                      |  | 39
|Signatures |  | 40                                                                                                                                           

1

---





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

|                                           |                                                                                                                                                                                               | December 31,
2007          |                                   | March 31,
2008 |          
|------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | --------------------------------- | -------------- | ---------
|ASSETS                                     |                                                                                                                                                                                               |                            |                                   |                |          
|CURRENT ASSETS:                            |                                                                                                                                                                                               |                            |                                   |                |          
|                                           | Cash and cash equivalents                                                                                                                                                                     |                            | $                                 | 9,735          |          
|                                           | Accounts receivable, net of allowance for doubtful accounts of $850 at December 31, 2007 and March 31, 2008                                                                                   |                            |                                   | 55,597         |          
|                                           | Inventories                                                                                                                                                                                   |                            |                                   | 10,377         |          
|                                           | Prepaid expenses and other current assets                                                                                                                                                     |                            |                                   | 4,391          |          
|                                           | Income tax receivable                                                                                                                                                                         |                            |                                   | 6,725          |          
|                                           | Deferred income taxes                                                                                                                                                                         |                            |                                   | 21,967         |          
|                                           | Commodity derivatives                                                                                                                                                                         |                            |                                   | 7,780          |          
|                                           |                                                                                                                                                                                               |                            |                                   |                |          
|                                           |                                                                                                                                                                                               | Total current assets       |                                   |                | 116,572  
|                                           |                                                                                                                                                                                               |                            |                                   |                |          
|PROPERTY, PLANT AND EQUIPMENT, AT COST:    |                                                                                                                                                                                               |                            |                                   |                |          
|                                           | Oil and natural gas properties (full cost method, of which $12,034 and $13,594 for unproved properties were excluded from amortization at December 31, 2007 and March 31, 2008, respectively) |                            |                                   | 1,331,531      |          
|                                           | Drilling equipment                                                                                                                                                                            |                            |                                   | 14,460         |          
|                                           | Other property and equipment                                                                                                                                                                  |                            |                                   | 17,208         |          
|                                           |                                                                                                                                                                                               |                            |                                   |                |          
|                                           | Total property, plant and equipment                                                                                                                                                           |                            |                                   | 1,363,199      |          
|                                           | Accumulated depletion, depreciation and amortization                                                                                                                                          |                            |                                   | (232,167       | )        
|                                           |                                                                                                                                                                                               |                            |                                   |                |          
|                                           |                                                                                                                                                                                               |                            | Net property, plant and equipment |                |          
|                                           |                                                                                                                                                                                               |                            |                                   |                |          
|OTHER ASSETS:                              |                                                                                                                                                                                               |                            |                                   |                |          
|                                           | Commodity derivatives                                                                                                                                                                         |                            |                                   | 3,768          |          
|                                           | Deferred loan costs                                                                                                                                                                           |                            |                                   | 9,699          |          
|                                           | Other                                                                                                                                                                                         |                            |                                   | 4,414          |          
|                                           |                                                                                                                                                                                               |                            |                                   |                |          
|                                           |                                                                                                                                                                                               | Total other assets         |                                   |                | 17,881   
|                                           |                                                                                                                                                                                               |                            |                                   |                |          
|TOTAL ASSETS                               |                                                                                                                                                                                               | $                          | 1,265,485                         |                | $        
|                                           |                                                                                                                                                                                               |                            |                                   |                |          
|LIABILITIES AND STOCKHOLDERS' EQUITY       |                                                                                                                                                                                               |                            |                                   |                |          
|CURRENT LIABILITIES:                       |                                                                                                                                                                                               |                            |                                   |                |          
|                                           | Accounts payable and accrued liabilities                                                                                                                                                      |                            | $                                 | 82,094         |          
|                                           | Undistributed revenue payable                                                                                                                                                                 |                            |                                   | 11,298         |          
|                                           | Interest payable                                                                                                                                                                              |                            |                                   | 6,839          |          
|                                           | Current maturities of long-term debt                                                                                                                                                          |                            |                                   | 3,449          |          
|                                           | Commodity and interest derivatives                                                                                                                                                            |                            |                                   | 68,756         |          
|                                           |                                                                                                                                                                                               |                            |                                   |                |          
|                                           |                                                                                                                                                                                               | Total current liabilities  |                                   |                | 172,436  
|LONG-TERM DEBT                             |                                                                                                                                                                                               |                            | 691,896                           |                |          
|DEFERRED INCOME TAXES                      |                                                                                                                                                                                               |                            | 16,607                            |                |          
|COMMODITY AND INTEREST DERIVATIVES         |                                                                                                                                                                                               |                            | 87,224                            |                |          
|ASSET RETIREMENT OBLIGATIONS               |                                                                                                                                                                                               |                            | 51,720                            |                |          
|                                           |                                                                                                                                                                                               |                            |                                   |                |          
|                                           |                                                                                                                                                                                               | Total liabilities          |                                   |                | 1,019,883
|COMMITMENTS AND CONTINGENCIES              |                                                                                                                                                                                               |                            |                                   |                |          
|STOCKHOLDERS' EQUITY:                      |                                                                                                                                                                                               |                            |                                   |                |          
|                                           | Common stock, $.01 par value (200,000,000 shares authorized; 50,593,403 and 50,867,872 shares issued and outstanding at December 31, 2007 and March 31, 2008, respectively)                   |                            |                                   | 506            |          
|                                           | Additional paid-in capital                                                                                                                                                                    |                            |                                   | 309,887        |          
|                                           | Retained earnings (accumulated deficit)                                                                                                                                                       |                            |                                   | (62,462        | )        
|                                           | Accumulated other comprehensive loss                                                                                                                                                          |                            |                                   | (2,329         | )        
|                                           |                                                                                                                                                                                               |                            |                                   |                |          
|                                           |                                                                                                                                                                                               | Total stockholders' equity |                                   |                | 245,602  
|                                           |                                                                                                                                                                                               |                            |                                   |                |          
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |                                                                                                                                                                                               | $                          | 1,265,485                         |                | $        
|                                           |                                                                                                                                                                                               |                            |                                   |                |          

See notes to condensed consolidated financial statements.

2

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

|                                            |                                                        | Three Months Ended
March 31,    |        
|------------------------------------------- | ------------------------------------------------------ | ------------------------------- | -------
|
|REVENUES:                                   |                                                        |                                 |        
|                                            | Oil and natural gas sales                              |                                 | $      
|                                            | Commodity derivative losses, net                       |                                 |        
|                                            | Other                                                  |                                 |        
|                                            |                                                        |                                 |        
|                                            |                                                        | Total revenues                  |        
|EXPENSES:                                   |                                                        |                                 |        
|                                            | Oil and natural gas production                         |                                 |        
|                                            | Transportation expense                                 |                                 |        
|                                            | Depletion, depreciation and amortization               |                                 |        
|                                            | Accretion of asset retirement obligations              |                                 |        
|                                            | General and administrative, net of amounts capitalized |                                 |        
|                                            |                                                        |                                 |        
|                                            |                                                        | Total expenses                  |        
|                                            |                                                        |                                 |        
|Income (loss) from operations               |                                                        |                                 | (2,393 
|FINANCING COSTS AND OTHER:                  |                                                        |                                 |        
|                                            | Interest expense, net                                  |                                 |        
|                                            | Amortization of deferred loan costs                    |                                 |        
|                                            | Interest rate derivative losses, net                   |                                 |        
|                                            |                                                        |                                 |        
|                                            |                                                        | Total financing costs and other |        
|                                            |                                                        |                                 |        
|Income (loss) before income taxes           |                                                        |                                 | (16,965
|Income tax benefit                          |                                                        |                                 | (6,600 
|                                            |                                                        |                                 |        
|Net loss                                    |                                                        | $                               | (10,365
|                                            |                                                        |                                 |        
|Earnings per common share:                  |                                                        |                                 |        
|                                            | Basic                                                  |                                 | $      
|                                            | Diluted                                                |                                 | $      
|Weighted average common shares outstanding: |                                                        |                                 |        
|                                            | Basic                                                  |                                 |        
|                                            | Diluted                                                |                                 |        

See
notes to condensed consolidated financial statements.

3

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

|                                                      |                                                                             | Three Months Ended
March 31, |        
|----------------------------------------------------- | --------------------------------------------------------------------------- | ---------------------------- | -------
|
|Net loss                                              |                                                                             | $                            | (10,365
|OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAX: |                                                                             |                              |        
|Hedging activities:                                   |                                                                             |                              |        
|                                                      | Reclassification adjustments for settled contracts                          |                              |        
|                                                      | Changes in fair value of effective portion of outstanding hedging positions |                              |        
|                                                      |                                                                             |                              |        
|Other comprehensive income (loss)                     |                                                                             |                              | (2,610 
|                                                      |                                                                             |                              |        
|Comprehensive loss                                    |                                                                             | $                            | (12,975
|                                                      |                                                                             |                              |        

See
notes to condensed consolidated financial statements.

4

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

|                                                  |                                                                                 | Three Months Ended March 31,                                                                     |  
|------------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | -
|
|CASH FLOWS FROM OPERATING ACTIVITIES:             |                                                                                 |                                                                                                  |  
|                                                  | Net loss                                                                        |                                                                                                  | $
|                                                  | Adjustments to reconcile net loss to net cash provided by operating activities: |                                                                                                  |  
|                                                  |                                                                                 | Depletion, depreciation and amortization                                                         |  
|                                                  |                                                                                 | Accretion of asset retirement obligations                                                        |  
|                                                  |                                                                                 | Deferred income tax benefit                                                                      |  
|                                                  |                                                                                 | Share-based compensation                                                                         |  
|                                                  |                                                                                 | Amortization of deferred loan costs                                                              |  
|                                                  |                                                                                 | Amortization of bond discounts and other non-cash interest                                       |  
|                                                  |                                                                                 | Unrealized interest rate swap derivative losses                                                  |  
|                                                  |                                                                                 | Unrealized commodity derivative 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                                   |                                                                                                  |  
|                                                  |                                                                                 |                                                                                                  |  
|                                                  |                                                                                 | 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                                                |                                                                                                  |  
|                                                  | Proceeds from derivative premium financing                                      |                                                                                                  |  
|                                                  | Proceeds from exercise of stock options                                         |                                                                                                  |  
|                                                  | Stock issuance costs                                                            |                                                                                                  |  
|                                                  |                                                                                 |                                                                                                  |  
|                                                  |                                                                                 | 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 received for income taxes                                                  |                                                                                                  | $
|Supplemental Disclosure of Noncash Activities    |                                                                                 |                                                                                                  |  
|                                                  | Accrued capital expenditures at period end                                      |                                                                                                  | $
|                                                  | Decrease (increase) in accrued capital expenditures                             |                                                                                                  | $

See notes to condensed consolidated financial statements.

5

---





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

1. SIGNIFICANT ACCOUNTING POLICIES

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.

Basis of Presentation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, 2007 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. Significant areas requiring the use of assumptions, judgments and estimates include
(1) oil and gas reserves; (2) cash flow estimates used in impairment tests of long-lived assets; (3) depreciation, depletion and amortization; (4) asset
retirement obligations; (5) assigning fair value and allocating purchase price in connection with business combinations; (6) accrued revenue and related receivables; (7) valuation
of commodity and interest derivative instruments; (8) accrued liabilities; (9) valuation of share-based payments and (10) income taxes. Although management believes these
estimates are reasonable, actual results could differ from these estimates.

Income TaxesThe Company computes its quarterly taxes under the effective tax rate method based on applying an anticipated
annual effective rate to its year-to-date income or loss, except for discrete items. Income taxes for discrete items are computed and recorded in the period that the specific transaction occurs. For
the three months ended March 31, 2008, the Company's overall effective tax rate for continuing operations was different than the statutory rate of 35% primarily due to state income taxes. The
Company expects its effective tax rate to be approximately 38% for the remainder of 2008.

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

6

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VENOCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

1. SIGNIFICANT ACCOUNTING POLICIES (Continued)

service
conditions. Non-vested restricted shares with service and market conditions are excluded from basic earnings per common share calculations until they vest.

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
March 31,2007

2008Dilutive



Anti-dilutive

4,730,184

4,151,501


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

Three months ended
March 31,2007

2008Net income (loss)

$
(10,365
)
$
(25,456
)Adjustments to net income for dilution





Net income (loss) adjusted for the effect of dilution

$
(10,365
)
$
(25,456
)Basic weighted average common shares outstanding


42,790


50,227Add: dilutive effect of stock options and non-vested restricted shares





Diluted weighted average common shares outstanding


42,790


50,227Basic earnings per common share

$
(0.24
)
$
(0.51
)Diluted earnings per common share

$
(0.24
)
$
(0.51
)


ReclassificationsThe Company made certain reclassifications to prior period condensed consolidated statements of operations
to be consistent with the current presentation. The condensed consolidated statements of operations were modified to separately disclose interest rate derivative losses.



In April 2007, the FASB issued FSP No. FIN 39-1,Amendment of FASB Interpretation
No. 39, ("FIN 39-1") to amend FIN 39,Offsetting of Amounts Related to Certain Contracts("FIN 39"). The terms "conditional contracts" and "exchange contracts" used in FIN 39 have been replaced with the more general term "derivative contracts." In addition,
FIN 39-1 permits the offsetting of recognized fair values for the right to reclaim cash collateral or the obligation to return cash collateral against fair values of derivatives
under certain circumstances, such as under master netting arrangements. Additional disclosure is also required regarding a company's accounting policy with respect to offsetting fair value amounts.
The guidance in FIN 39-1 is effective for fiscal years beginning after November 15, 2007, with early application allowed. The effects of initial adoption should be recognized
as a change in

7

---



VENOCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

1. SIGNIFICANT ACCOUNTING POLICIES (Continued)

accounting
principle through retrospective application for all periods presented. The Company adopted FIN 39-1 and no change in accounting principle was necessary. There was no
impact on the Company's operating results, financial position or cash flows.

In
February 2007, the FASB issued Statement No. 159,The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115("SFAS 159"), which permits entities to choose to measure many financial instruments and certain other items at fair value (the Fair Value
Option). Election of the Fair Value Option is made on an instrument-by-instrument basis and is irrevocable. At the adoption date, unrealized gains and losses on financial
assets and liabilities for which the Fair Value Option has been elected would be reported as a cumulative adjustment to beginning retained earnings. If the Company elects the Fair Value Option for
certain financial assets and liabilities, the Company will report unrealized gains and losses due to changes in fair value in earnings at each subsequent reporting date. The provisions of
SFAS 159 are effective January 1, 2008. The Company adopted SFAS 159 as of January 1, 2008, and the adoption did not have a material impact on the Company's operating
results, financial position or cash flows as the Company did not elect the Fair Value Option for any of its financial assets or liabilities.

In
March 2008, the FASB issued Statement No. 161,Disclosure about Derivative Instruments and Hedging Activitiesan amendment to FASB Statement
No. 133("SFAS 161"). The adoption of SFAS 161 is not expected to have an impact on the Company's consolidated financial statements, other than additional
disclosures. SFAS 161 expands interim and annual disclosures about derivative and hedging activities that are intended to better convey the purpose of derivative use and the risks managed.
SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008.

In
December 2007, the FASB issued Statement No. 141R,Business Combinations("SFAS 141R"). SFAS 141R may have an
impact on the Company's consolidated financial statements when effective, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the
acquisitions the Company consummates after the effective date. SFAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill
acquired in business combinations and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The
statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15,
2008.

In
September 2006, the FASB issued SFAS No. 157,Fair Value Measurements("SFAS 157"), which defines fair value, establishes
a framework for measuring fair value, and expands disclosures about fair value measurements. This pronouncement applies to other standards that require or permit fair value measurements. Accordingly,
this statement does not require any new fair value measurements. The Company adopted the provisions of SFAS 157 on January 1, 2008. See "Fair Value Measurements" below for more details.

Fair Value MeasurementsIn September 2006, the FASB issued SFAS 157 which defines fair value, establishes a framework
for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective January 1, 2008. The FASB has also issued

8

---



VENOCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

1. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Staff
Position FAS 157-2 (FSP No. 157-2), which delays the effective date of SFAS 157 for nonfinancial assets and liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008. The Company adopted
SFAS 157 as of January 1, 2008 for all financial and non-financial assets and liabilities recognized or disclosed at fair value on a recurring basis. The Company elected to
defer the application thereof to nonfinancial assets and liabilities in accordance with FSP No. 157-2. Non-recurring nonfinancial assets and nonfinancial liabilities for
which the Company has not applied the provisions of SFAS 157 include those measured at fair value in impairment testing for unproved properties, asset retirement obligations initially measured
at fair value, and those initially measured at fair value in a business combination.

As
defined in SFAS 157, fair value is the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about
risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances
based on the observability of those inputs. SFAS 157 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).

The
three levels of the fair value hierarchy defined by SFAS 157 are as follows:

Level 1Quoted
prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for
the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded
derivatives and listed equities.

Level 2Pricing
inputs are other than quoted prices in active markets included in level 1, but are either directly or indirectly observable as of the reported
date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various
assumptions, including quoted forward prices for interest rates and commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as
other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are
supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity
swaps, interest rate swaps, options and collars.

Level 3Pricing
inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed
methodologies that result in management's best estimate of fair value. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, options and
collars that are valued similar to the industry-standard models described above, however, these derivatives are classified in Level 3 because volatility factors are generally less observable
from objective sources.

9

---



VENOCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

1. SIGNIFICANT ACCOUNTING POLICIES (Continued)

As
required by SFAS 157, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The Company's assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their
placement within the fair value hierarchy levels. The following table sets forth by level within the fair value hierarchy the Company's financial assets and liabilities that were accounted for at fair
value as of March 31, 2008 (in thousands).

|                      |                       | Level 1 |   | Level 2 |  | Level 3 |         | Fair Value
as of March 31, 2008 |  
|--------------------- | --------------------- | ------- | - | ------- |  | ------- | ------- | ------------------------------- | -
|Assets (Liabilities): |                       |         |   |         |  |         |         |                                 |  
|                      | Commodity derivatives |         | $ |        |  | $       |        |                                 | $
|                      | Commodity derivatives |         |   |        |  |         |        |                                 | $
|                      | Interest rate swaps   |         |   |        |  |         | (31,361 | )                               |  

Derivatives
listed above include interest rate swaps that are carried at fair value. All of the fair value amounts included in current period earnings resulted from Level 2 fair
value methodologies; that is, the Company is able to value the assets and liabilities based on observable market data for similar instruments. This observable data includes the forward curve for
interest rates based on quoted market prices.

The
table below presents a reconciliation for the liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the first quarter
of 2008. The fair values of Level 3 commodity derivative instruments are estimated using valuation models that utilize both market observable and unobservable parameters. Level 3
instruments presented in the table consist of net commodity derivatives valued using pricing models incorporating assumptions that, in management's judgment, reflect the assumptions a marketplace
participant would have used at March 31, 2008 (in thousands).

DerivativesBalance as of January 1, 2008

$
(126,625
)Total realized and unrealized gains (losses) included in earnings in commodity derivative losses, net


(56,373
)Purchases, issuances and settlements


8,511Transfers in and out of level 3


Balance as of March 31, 2008

$
(174,488
)Change in unrealized gains (losses) included in earnings relating to derivatives still held as of March 31, 2008

$
(54,609
)


2. ACQUISITIONS AND SALES OF PROPERTIES

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 $44.5 million.

10

---



VENOCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

2. ACQUISITIONS AND SALES OF PROPERTIES (Continued)

The
following unaudited pro forma condensed consolidated operating results for the quarter ended March 31, 2007 gives effect to the West Montalvo and Manvel acquisitions as if
they had been completed as of January 1, 2007. The pro forma amounts shown below are not necessarily indicative of the operating results that would have occurred if the transaction had occurred
on such date. The pro forma adjustments made are based on certain assumptions that the Company believes are reasonable based on information available at the time they were prepared (in thousands,
except per share amounts) (unaudited).

Quarter Ended, March 31, 2007Pro FormaTotal revenues

$
62,883Net loss

$
(8,867
)Basic earnings per common share

$
(0.21
)Dilutive earnings per common share

$
(0.21
)


Willows-Beehive.The Company acquired additional working interests in the Arbuckle, Beehive Bend, and Bounde Creek fields in
March 2008 for approximately $4.5 million. All fields are located in the Sacramento Basin in California.

3. LONG-TERM DEBT

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

December 31,
2007

March 31,
2008Revolving credit agreement due March 2011

$
42,000

$
92,000New second lien term loan due September 2011


500,000


500,0008.75% senior notes due December 2011


149,453


149,487Financed derivative premiums due through 2010


3,892


5,565Total long-term debt


695,345


747,052Less: current portion of long-term debt


3,449


2,583Long-term debt, net of current portion

$
691,896

$
744,469


Revolving credit facility.The Company has a $300.0 million revolving credit facility with a syndicate of banks
("revolving credit facility"). In May 2008, the revolving credit facility was amended to, among other things, extend the maturity date to March 30, 2011 and increase the borrowing base
from $140.0 million to $200.0 million. The revolving credit facility is 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 operating subsidiaries other than Ellwood Pipeline, Inc.
The collateral also secures the Company's obligations to hedging counterparties that are or 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

11

---



VENOCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

3. LONG-TERM DEBT (Continued)

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 current assets to current liabilities and debt to EBITDA. As of May 9,
2008, the Company had available borrowing capacity of $117.3 million (net of $0.7 million in outstanding letters of credit) under the revolving credit facility.

Second lien term loan facility.The Company entered into its $500.0 million senior secured second lien term loan
facility in May 2007. Loans made under the 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
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 facility is secured by second priority liens on substantially all of the Company's oil and natural gas properties and other assets, including the equity
interests in all of its subsidiaries, and is unconditionally guaranteed by each of the Company's subsidiaries other than Ellwood Pipeline, Inc. Principal on the facility is payable on
May 8, 2014. However, if the senior notes (see below) 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 facility if no amounts are outstanding under the revolving credit facility. Optional prepayments
made prior to May 7, 2009 are subject to a prepayment premium of 1%. After that date, no premium will be payable with respect to any optional prepayment. Amounts prepaid under the facility may
not be reborrowed.

Senior notes.In December 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 are currently secured equally and ratably with the Company's second lien term loan facility.

The
Company was in compliance with all debt covenants at March 31, 2008.

Financed Derivative Premiums.The Company has entered into derivative contracts 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.

12

---



VENOCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

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 consolidated statements of operations are as follows (in thousands):

Quarter Ended March 31,2007

2008Realized commodity derivative gains (losses)

$
174

$
(18,263
)Amortization of commodity derivative premiums and other comprehensive loss


(1,898
)

(2,057
)Unrealized commodity derivative gains (losses):Change in fair value of derivatives that do not qualify for hedge accounting


(17,103
)

(54,609
)Ineffective portion of derivatives qualifying for hedge accounting


113


Total unrealized commodity derivative losses


(16,990
)

(54,609
)Commodity derivative losses, net

$
(18,714
)
$
(74,929
)


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 (loss) 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) is being amortized into future earnings as the original hedged transactions affect earnings. This change in reporting has no impact on the Company's reported cash
flows, although future results of operations are affected by mark-to-market gains and losses which fluctuate with volatile oil and gas prices.

As
of March 31, 2008, the remaining unrealized derivative fair value loss of $3.5 million ($2.1 million after tax) for derivative contracts previously designated as
cash flow hedges is recorded in accumulated other comprehensive loss. The Company will amortize net unrealized derivative losses of $1.8 million ($1.1 million after tax) out of
accumulated other comprehensive loss into earnings during the next twelve months.

Crude Oil Agreements.As of March 31, 2008, the Company had entered into option, swap and collar agreements to receive
average minimum and maximum New York Mercantile Exchange

13

---



VENOCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

4. HEDGING AND DERIVATIVE FINANCIAL INSTRUMENTS (Continued)

(NYMEX)
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 March 31, 2008 for production: |                             |         |        |        
|                                                        | April 1December 31, 2008   |         | 11,100 |        
|                                                        | January 1December 31, 2009 |         | 7,983  |        
|                                                        | January 1December 31, 2010 |         | 7,150  |        
|                                                        | January 1December 31, 2011 |         | 7,000  |        

Natural Gas Agreements.As of March 31, 2008, 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 March 31, 2008 for production: |                             |         |        |        
|                                                          | April 1December 31, 2008   |         | 32,650 |        
|                                                          | January 1December 31, 2009 |         | 23,125 |        
|                                                          | January 1December 31, 2010 |         | 17,900 |        
|                                                          | January 1December 31, 2011 |         | 12,000 |        

In
May 2008, the Company entered into two NYMEX natural gas put contracts for 2009 production to establish a minimum price of $8.50 on a total of 20,000 MMbtu per day.

Interest Rate Swap.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 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.

14

---



VENOCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

4. HEDGING AND DERIVATIVE FINANCIAL INSTRUMENTS (Continued)

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

Quarter ended
March 31,2007

2008Realized interest rate derivative losses

$
(24
)
$
(417
)Unrealized interest rate derivative losses


(24
)

(13,554
)Interest rate derivative losses, net

$
(48
)
$
(13,971
)


The
estimated fair values of derivatives included in the consolidated balance sheets at December 31, 2007 and March 31, 2008 are summarized below. The net fair value of the
Company's derivatives increased by $61.4 million from a net liability of $144.4 million at December 31, 2007 to a net liability of $205.8 million at March 31, 2008
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 futures interest rates, which are used in
the calculation of the fair value of interest derivatives. As of the dates indicated, the Company's derivative assets and liabilities consisted of the following (in thousands):

December 31,
2007

March 31,
2008Derivative assets:Oil derivative contracts

$
3,341

$
4,958Gas derivative contracts


8,207


2,488Derivative liabilities:Oil derivative contracts


(134,505
)

(171,213
)Gas derivative contracts


(3,668
)

(10,721
)Interest rate derivative contracts


(17,807
)

(31,361
)Net derivative liability

$
(144,432
)
$
(205,849
)


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 and shut-in 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 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.

15

---



VENOCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

5. ASSET RETIREMENT OBLIGATIONS (Continued)

The
following table summarizes the activities for the Company's asset retirement obligations for the quarters ended March 31, 2007 and 2008 (in thousands):

Quarter Ended
March 31,2007

2008Asset retirement obligations at beginning of period

$
42,049

$
52,220Revisions of estimated liabilities


639


515Liabilities incurred


916


953Liabilities settled





(51
)Accretion expense


773


993Asset retirement obligations at end of period


44,377


54,630Less: current asset retirement obligations (classified with accounts payable and accrued liabilities)


(4,529
)

(500
)Long-term asset retirement obligations

$
39,848

$
54,130


6. CAPITAL STOCK

The Company has 57.3 million shares of common stock issued or reserved for issuance at March 31, 2008, including 7.5 million shares issued or
reserved for issuance under the Company's stock incentive plans. At March 31, 2008, the Company has 50,867,872 common shares issued and outstanding, of which
640,254 shares are restricted stock granted under the Company's 2005 stock incentive plan. At March 31, 2008, the Company had approximately 2.0 million shares available to be issued
pursuant to awards under its stock incentive plans.

7. SHARE-BASED PAYMENTS

The Company has granted options to directors, certain employees and officers of the Company other than its CEO. As of March 31, 2008, there are a total of
4,147,443 options outstanding with a weighted average exercise price of $9.18 ($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.

As
of March 31, 2008, there are a total of 640,254 shares of restricted shares outstanding under the Company's 2005 stock incentive plan, including 365,773 granted to its CEO. The
restricted shares generally vest over a four year service period. The vesting of 485,851 of the shares is also subject to market conditions based on the Company's total shareholder return in
comparison to peer group companies for each calendar year. The estimated grant date fair values of restricted share awards are recognized as expense over the requisite service periods. As of
March 31, 2008, none of the shares subject to market conditions have vested.

16

---



VENOCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

7. SHARE-BASED PAYMENTS (Continued)

The
Company recognized total share-based compensation expense of $1.1 million and $1.3 million during the quarters ended March 31, 2007 and 2008, respectively. As of
March 31, 2008, there was $4.1 million of total unrecognized compensation cost related to stock options which is expected to be amortized over a weighted-average period of
2.2 years and $6.3 million of total unrecognized compensation cost related to restricted stock which is expected to be amortized over a weighted-average period of 3.4 years.

The
following summarizes the Company's stock option activity for the quarter ended March 31, 2008:

Shares

Weighted
Average
Exercise
PriceOutstanding, beginning of period

4,159,463

$
9.19Granted




Exercised

(5,000
)

7.20Cancelled

(7,020
)

13.85Outstanding, end of period

4,147,443

$
9.18Exercisable, end of period

2,934,640

$
8.28


8. 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 claimed 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 appealed the ruling. A decision on the appeal is expected in late 2008. 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

17

---



VENOCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

8. LITIGATION (Continued)

occurring
prior to 1995, which the Company is disputing. The Company cannot predict the cost of defense and indemnity obligations at the present time.

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") took the position that they were 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. In February 2006, the Company filed a 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. Two of the three Declining Insurers settled with the Company. The third Declining Insurer disputed the Company's position and in November
2007 the Santa Barbara Court granted that insurer's motion for summary judgement, in part on the basis that the pollution exclusion provision in the policy did not require that insurer to provide a
defense for the Company. The Company has appealed the Santa Barbara Court's ruling. 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.



The Company pays royalties to the state of California pursuant to certain oil and natural gas leases relating to the South Ellwood field. The Company has been
informed by the California State Lands Commission (the "SLC") that the SLC is in the process of auditing the Company's royalty payment calculations on those leases. The SLC has not completed its
audit, nor has it presented the Company with any audit conclusions. The Company does not currently expect that the audit adjustments, if any, will be material.

18

---



VENOCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

8. LITIGATION (Continued)



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 two subsidiaries, Catco Energy LLC and Whittier Pipeline Corp. (the "Guarantor Subsidiaries")
have fully and unconditionally guaranteed, on a joint and several basis, the Company's obligations under the senior notes. In addition to two subsidiaries formed in connection with the Company's
proposed master limited partnership, each of which has nominal assets, the Company has one subsidiary, Ellwood Pipeline, Inc., that is not a Guarantor (the "Non-Guarantor
Subsidiary"). 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
March 31, 2008. All Guarantors are 100% owned by the Company. Presented below are the Company's condensed consolidating balance sheets, statements of operations and statements of cash flows as
required by Rule 3-10 of Regulation S-X of the Securities Exchange Act of 1934.

19

---





CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS        THREE MONTHS ENDED MARCH 31, 2007        (in thousands)

|                            |                                                        | Venoco, Inc.          |         | Guarantor Subsidiaries |        | Non-Guarantor Subsidiaries |        | Eliminations |       | Consolidated |     
|--------------------------- | ------------------------------------------------------ | --------------------- | ------- | ---------------------- | ------ | -------------------------- | ------ | ------------ | ----- | ------------ | ----
|REVENUES:                   |                                                        |                       |         |                        |        |                            |        |              |       |              |     
|                            | Oil and natural gas sales                              |                       | $       | 60,443                 |        | $                          | 13,196 |              | $     |             |     
|                            | Commodity derivative losses, net                       |                       |         | (18,714                | )      |                            |       |              |       |             |     
|                            | Other                                                  |                       |         | 682                    |        |                            | 2      |              |       | 1,183        |     
|                            |                                                        |                       |         |                        |        |                            |        |              |       |              |     
|                            | Total revenues                                         |                       |         | 42,411                 |        |                            | 13,198 |              |       | 1,183        |     
|                            |                                                        |                       |         |                        |        |                            |        |              |       |              |     
|EXPENSES:                   |                                                        |                       |         |                        |        |                            |        |              |       |              |     
|                            | Oil and natural gas production                         |                       |         | 16,380                 |        |                            | 8,183  |              |       | 524          |     
|                            | Transportation expense                                 |                       |         | 2,770                  |        |                            | 91     |              |       |             |     
|                            | Depletion, depreciation and amortization               |                       |         | 17,140                 |        |                            | 3,445  |              |       | 14           |     
|                            | Accretion of abandonment liability                     |                       |         | 650                    |        |                            | 119    |              |       | 4            |     
|                            | General and administrative, net of amounts capitalized |                       |         | 8,748                  |        |                            | 1,046  |              |       | 71           |     
|                            |                                                        |                       |         |                        |        |                            |        |              |       |              |     
|                            |                                                        | Total expenses        |         |                        | 45,688 |                            |        | 12,884       |       |              | 613 
|                            |                                                        |                       |         |                        |        |                            |        |              |       |              |     
|Income from operations      |                                                        |                       | (3,277  | )                      |        | 314                        |        |              | 570   |              |     
|                            |                                                        |                       |         |                        |        |                            |        |              |       |              |     
|FINANCING COSTS AND OTHER:  |                                                        |                       |         |                        |        |                            |        |              |       |              |     
|                            | Interest, net                                          |                       |         | 13,927                 |        |                            | (19    | )            |       | (629         | )   
|                            | Amortization of deferred loan costs                    |                       |         | 1,245                  |        |                            |       |              |       |             |     
|                            | Interest rate derivative losses, net                   |                       |         | 48                     |        |                            |        |              |       |              |     
|                            |                                                        |                       |         |                        |        |                            |        |              |       |              |     
|                            |                                                        | Total financing costs |         |                        | 15,220 |                            |        | (19          | )     |              | (629
|                            |                                                        |                       |         |                        |        |                            |        |              |       |              |     
|Equity in subsidiary income |                                                        |                       | 935     |                        |        |                           |        |              |      |              |     
|                            |                                                        |                       |         |                        |        |                            |        |              |       |              |     
|Income before income taxes  |                                                        |                       | (17,562 | )                      |        | 333                        |        |              | 1,199 |              |     
|Income tax provision        |                                                        |                       | (7,197  | )                      |        | 130                        |        |              | 467   |              |     
|                            |                                                        |                       |         |                        |        |                            |        |              |       |              |     
|Net income                  |                                                        | $                     | (10,365 | )                      | $      | 203                        |        | $            | 732   |              | $   
|                            |                                                        |                       |         |                        |        |                            |        |              |       |              |     

20

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CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS        THREE MONTHS ENDED MARCH 31, 2008 (Unaudited)        (in thousands)

|                                  |                                                        | Venoco, Inc.          |         | Guarantor Subsidiaries |        | Non-Guarantor Subsidiary |        | Eliminations |       | Consolidated |      
|--------------------------------- | ------------------------------------------------------ | --------------------- | ------- | ---------------------- | ------ | ------------------------ | ------ | ------------ | ----- | ------------ | -----
|REVENUES:                         |                                                        |                       |         |                        |        |                          |        |              |       |              |      
|                                  | Oil and natural gas sales                              |                       | $       | 102,296                |        | $                        | 34,662 |              | $     |             |      
|                                  | Commodity derivative losses, net                       |                       |         | (74,929                | )      |                          |       |              |       |             |      
|                                  | Other                                                  |                       |         | 683                    |        |                          | 9      |              |       | 1,211        |      
|                                  |                                                        |                       |         |                        |        |                          |        |              |       |              |      
|                                  |                                                        | Total revenues        |         |                        | 28,050 |                          |        | 34,671       |       |              | 1,211
|                                  |                                                        |                       |         |                        |        |                          |        |              |       |              |      
|EXPENSES:                         |                                                        |                       |         |                        |        |                          |        |              |       |              |      
|                                  | Oil and natural gas production                         |                       |         | 20,911                 |        |                          | 10,749 |              |       | 349          |      
|                                  | Transportation expense                                 |                       |         | 2,341                  |        |                          |       |              |       |             |      
|                                  | Depletion, depreciation and amortization               |                       |         | 25,249                 |        |                          | 5,974  |              |       | 23           |      
|                                  | Accretion of abandonment liability                     |                       |         | 784                    |        |                          | 193    |              |       | 16           |      
|                                  | General and administrative, net of amounts capitalized |                       |         | 8,468                  |        |                          | 598    |              |       | 74           |      
|                                  |                                                        |                       |         |                        |        |                          |        |              |       |              |      
|                                  |                                                        | Total expenses        |         |                        | 57,753 |                          |        | 17,514       |       |              | 462  
|                                  |                                                        |                       |         |                        |        |                          |        |              |       |              |      
|Income from operations            |                                                        |                       | (29,703 | )                      |        | 17,157                   |        |              | 749   |              |      
|                                  |                                                        |                       |         |                        |        |                          |        |              |       |              |      
|FINANCING COSTS AND OTHER:        |                                                        |                       |         |                        |        |                          |        |              |       |              |      
|                                  | Interest expense, net                                  |                       |         | 15,347                 |        |                          | (8     | )            |       | (750         | )    
|                                  | Amortization of deferred loan costs                    |                       |         | 999                    |        |                          |       |              |       |             |      
|                                  | Interest rate derivative losses, net                   |                       |         | 13,971                 |        |                          |       |              |       |             |      
|                                  |                                                        |                       |         |                        |        |                          |        |              |       |              |      
|                                  |                                                        | Total financing costs |         |                        | 30,317 |                          |        | (8           | )     |              | (750 
|                                  |                                                        |                       |         |                        |        |                          |        |              |       |              |      
|Equity in subsidiary income       |                                                        |                       | 11,488  |                        |        |                         |        |              |      |              |      
|                                  |                                                        |                       |         |                        |        |                          |        |              |       |              |      
|Income (loss) before income taxes |                                                        |                       | (48,532 | )                      |        | 17,165                   |        |              | 1,499 |              |      
|Income tax provision (benefit)    |                                                        |                       | (23,076 | )                      |        | 6,600                    |        |              | 576   |              |      
|                                  |                                                        |                       |         |                        |        |                          |        |              |       |              |      
|Net income (loss)                 |                                                        | $                     | (25,456 | )                      | $      | 10,565                   |        | $            | 923   |              | $    
|                                  |                                                        |                       |         |                        |        |                          |        |              |       |              |      

21

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CONDENSED CONSOLIDATING BALANCE SHEETS        AT DECEMBER 31, 2007        (in thousands)

|                                           |                                           | Venoco, Inc. |           | Guarantor Subsidiaries |   | Non- Guarantor Subsidiary |         | Eliminations |         | Consolidated
|------------------------------------------ | ----------------------------------------- | ------------ | --------- | ---------------------- | - | ------------------------- | ------- | ------------ | ------- | ------------
|ASSETS                                     |                                           |              |           |                        |   |                           |         |              |         |             
|CURRENT ASSETS:                            |                                           |              |           |                        |   |                           |         |              |         |             
|                                           | Cash and cash equivalents                 |              | $         | 8,762                  |   | $                         | 973     |              | $       |            
|                                           | Accounts receivable                       |              |           | 38,020                 |   |                           | 17,512  |              |         | 65          
|                                           | Inventories                               |              |           | 5,217                  |   |                           | 5,160   |              |         |            
|                                           | Prepaid expenses and other current assets |              |           | 4,391                  |   |                           |        |              |         |            
|                                           | Income taxes receivable                   |              |           | 6,725                  |   |                           |        |              |         |            
|                                           | Deferred income taxes                     |              |           | 21,967                 |   |                           |        |              |         |            
|                                           | Commodity derivatives                     |              |           | 7,780                  |   |                           |        |              |         |            
|                                           |                                           |              |           |                        |   |                           |         |              |         |             
|TOTAL CURRENT ASSETS                       |                                           |              | 92,862    |                        |   | 23,645                    |         |              | 65      |             
|                                           |                                           |              |           |                        |   |                           |         |              |         |             
|                                           | PROPERTY, PLANT & EQUIPMENT, NET          |              |           | 755,487                |   |                           | 374,246 |              |         | 1,299       
|                                           | COMMODITY DERIVATIVES                     |              |           | 3,768                  |   |                           |        |              |         |            
|                                           | INVESTMENTS IN AFFILIATES                 |              |           | 431,083                |   |                           |        |              |         |            
|                                           | OTHER                                     |              |           | 13,296                 |   |                           | 817     |              |         |            
|                                           |                                           |              |           |                        |   |                           |         |              |         |             
|TOTAL ASSETS                               |                                           | $            | 1,296,496 |                        | $ | 398,708                   |         | $            | 1,364   |             
|                                           |                                           |              |           |                        |   |                           |         |              |         |             
|LIABILITIES AND STOCKHOLDERS' EQUITY       |                                           |              |           |                        |   |                           |         |              |         |             
|CURRENT LIABILITIES:                       |                                           |              |           |                        |   |                           |         |              |         |             
|                                           | Accounts payable and accrued liabilities  |              | $         | 75,524                 |   | $                         | 6,570   |              | $       |            
|                                           | Undistributed revenue payable             |              |           | 11,298                 |   |                           |        |              |         |            
|                                           | Interest payable                          |              |           | 6,839                  |   |                           |        |              |         |            
|                                           | Current maturities of long-term debt      |              |           | 3,449                  |   |                           |        |              |         |            
|                                           | Commodity and interest derivatives        |              |           | 68,756                 |   |                           |        |              |         |            
|                                           |                                           |              |           |                        |   |                           |         |              |         |             
|TOTAL CURRENT LIABILITIES:                 |                                           |              | 165,866   |                        |   | 6,570                     |         |              |        |             
|                                           |                                           |              |           |                        |   |                           |         |              |         |             
|LONG-TERM DEBT                             |                                           |              | 691,896   |                        |   |                          |         |              |        |             
|DEFERRED INCOME TAXES                      |                                           |              | 16,607    |                        |   |                          |         |              |        |             
|COMMODITY AND INTEREST DERIVATIVES         |                                           |              | 87,224    |                        |   |                          |         |              |        |             
|ASSET RETIREMENT OBLIGATIONS               |                                           |              | 40,587    |                        |   | 10,317                    |         |              | 816     |             
|INTERCOMPANY PAYABLES (RECEIVABLES)        |                                           |              | 48,714    |                        |   | (11,705                   | )       |              | (37,009 | )           
|                                           |                                           |              |           |                        |   |                           |         |              |         |             
|TOTAL LIABILITIES                          |                                           |              | 1,050,894 |                        |   | 5,182                     |         |              | (36,193 | )           
|                                           |                                           |              |           |                        |   |                           |         |              |         |             
|TOTAL STOCKHOLDERS' EQUITY                 |                                           |              | 245,602   |                        |   | 393,526                   |         |              | 37,557  |             
|                                           |                                           |              |           |                        |   |                           |         |              |         |             
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |                                           | $            | 1,296,496 |                        | $ | 398,708                   |         | $            | 1,364   |             
|                                           |                                           |              |           |                        |   |                           |         |              |         |             

22

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CONDENSED CONSOLIDATING BALANCE SHEETS        AT MARCH 31, 2008 (Unaudited)        (in thousands)

|                                           |                                           | Venoco, Inc. |           | Guarantor Subsidiaries |   | Non-Guarantor Subsidiary |         | Eliminations |         | Consolidated
|------------------------------------------ | ----------------------------------------- | ------------ | --------- | ---------------------- | - | ------------------------ | ------- | ------------ | ------- | ------------
|ASSETS                                     |                                           |              |           |                        |   |                          |         |              |         |             
|CURRENT ASSETS:                            |                                           |              |           |                        |   |                          |         |              |         |             
|                                           | Cash and cash equivalents                 |              | $         | 14,397                 |   | $                        |        |              | $       |            
|                                           | Accounts receivable                       |              |           | 47,772                 |   |                          | 19,417  |              |         | 52          
|                                           | Inventories                               |              |           | 3,784                  |   |                          | 4,466   |              |         |            
|                                           | Prepaid expenses and other current assets |              |           | 4,815                  |   |                          |        |              |         |            
|                                           | Income taxes receivable                   |              |           | 6,625                  |   |                          |        |              |         |            
|                                           | Deferred income taxes                     |              |           | 35,167                 |   |                          |        |              |         |            
|                                           | Commodity derivatives                     |              |           | 2,986                  |   |                          |        |              |         |            
|                                           |                                           |              |           |                        |   |                          |         |              |         |             
|TOTAL CURRENT ASSETS                       |                                           |              | 115,546   |                        |   | 23,883                   |         |              | 52      |             
|                                           |                                           |              |           |                        |   |                          |         |              |         |             
|                                           | PROPERTY, PLANT & EQUIPMENT, NET          |              |           | 785,948                |   |                          | 383,593 |              |         | 1,263       
|                                           | COMMODITY DERIVATIVES                     |              |           | 4,460                  |   |                          |        |              |         |            
|                                           | INVESTMENTS IN AFFILIATES                 |              |           | 449,746                |   |                          |        |              |         |            
|                                           | OTHER                                     |              |           | 11,675                 |   |                          | 800     |              |         |            
|                                           |                                           |              |           |                        |   |                          |         |              |         |             
|TOTAL ASSETS                               |                                           | $            | 1,367,375 |                        | $ | 408,276                  |         | $            | 1,315   |             
|                                           |                                           |              |           |                        |   |                          |         |              |         |             
|LIABILITIES AND STOCKHOLDERS' EQUITY       |                                           |              |           |                        |   |                          |         |              |         |             
|CURRENT LIABILITIES:                       |                                           |              |           |                        |   |                          |         |              |         |             
|                                           | Accounts payable and accrued liabilities  |              | $         | 49,237                 |   | $                        | 9,681   |              | $       |            
|                                           | Undistributed revenue payable             |              |           | 9,237                  |   |                          |        |              |         |            
|                                           | Interest payable                          |              |           | 8,978                  |   |                          |        |              |         |            
|                                           | Current maturities of long-term debt      |              |           | 2,583                  |   |                          |        |              |         |            
|                                           | Commodity and interest derivatives        |              |           | 98,587                 |   |                          |        |              |         |            
|                                           |                                           |              |           |                        |   |                          |         |              |         |             
|TOTAL CURRENT LIABILITIES:                 |                                           |              | 168,622   |                        |   | 9,681                    |         |              |        |             
|                                           |                                           |              |           |                        |   |                          |         |              |         |             
|LONG-TERM DEBT                             |                                           |              | 744,469   |                        |   |                         |         |              |        |             
|DEFERRED INCOME TAXES                      |                                           |              | 13,920    |                        |   |                         |         |              |        |             
|COMMODITY AND INTEREST DERIVATIVES         |                                           |              | 114,708   |                        |   |                         |         |              |        |             
|ASSET RETIREMENT OBLIGATIONS               |                                           |              | 42,973    |                        |   | 10,325                   |         |              | 832     |             
|INTERCOMPANY PAYABLES (RECEIVABLES)        |                                           |              | 60,993    |                        |   | (22,418                  | )       |              | (38,575 | )           
|                                           |                                           |              |           |                        |   |                          |         |              |         |             
|TOTAL LIABILITIES                          |                                           |              | 1,145,685 |                        |   | (2,412                   | )       |              | (37,743 | )           
|                                           |                                           |              |           |                        |   |                          |         |              |         |             
|TOTAL STOCKHOLDERS' EQUITY                 |                                           |              | 221,690   |                        |   | 410,688                  |         |              | 39,058  |             
|                                           |                                           |              |           |                        |   |                          |         |              |         |             
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |                                           | $            | 1,367,375 |                        | $ | 408,276                  |         | $            | 1,315   |             
|                                           |                                           |              |           |                        |   |                          |         |              |         |             

23

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS        THREE MONTHS ENDED MARCH 31, 2007        (in thousands)

|                                      |                                                           | Venoco, Inc.                              |   | Guarantor Subsidiaries |         | Non-Guarantor Subsidiaries |         | Eliminations |   | Consolidated |     
|------------------------------------- | --------------------------------------------------------- | ----------------------------------------- | - | ---------------------- | ------- | -------------------------- | ------- | ------------ | - | ------------ | ----
|CASH FLOWS FROM OPERATING ACTIVITIES: |                                                           |                                           |   |                        |         |                            |         |              |   |              |     
|                                      | Net cash provided by (used in) operating activities       |                                           | $ | 27,846                 |         | $                          | 5,375   |              | $ | 470          |     
|CASH FLOWS FROM INVESTING ACTIVITIES: |                                                           |                                           |   |                        |         |                            |         |              |   |              |     
|                                      | Expenditures for oil and natural gas properties           |                                           |   | (47,826                | )       |                            | (13,723 | )            |   |             |     
|                                      | Acqusitions of oil and natural gas properties             |                                           |   | (12,801                | )       |                            | (1,504  | )            |   |             |     
|                                      | Expenditures for property and equipment and other         |                                           |   | (1,838                 | )       |                            | (96     | )            |   |             |     
|                                      |                                                           |                                           |   |                        |         |                            |         |              |   |              |     
|                                      |                                                           | Net cash used in investing activities     |   |                        | (62,465 | )                          |         | (15,323      | ) |              |    
|CASH FLOWS FROM FINANCING ACTIVITIES: |                                                           |                                           |   |                        |         |                            |         |              |   |              |     
|                                      | Net proceeds from (repayments of) intercompany borrowings |                                           |   | (6,094                 | )       |                            | 6,582   |              |   | (488         | )   
|                                      | Proceeds from long-term debt                              |                                           |   | 41,421                 |         |                            |        |              |   |             |     
|                                      | Principal payments on long-term debt                      |                                           |   | (1,138                 | )       |                            |        |              |   |             |     
|                                      | Proceeds from derivative premium financing                |                                           |   | 1,676                  |         |                            |        |              |   |             |     
|                                      | Deferred loan costs                                       |                                           |   | (78                    | )       |                            |        |              |   |             |     
|                                      | Proceeds from exercise of stock options                   |                                           |   | 72                     |         |                            |        |              |   |             |     
|                                      |                                                           |                                           |   |                        |         |                            |         |              |   |              |     
|                                      |                                                           | Net cash provided by financing activities |   |                        | 35,859  |                            |         | 6,582        |   |              | (488
|                                      |                                                           |                                           |   |                        |         |                            |         |              |   |              |     
|                                      | Net increase (decrease) in cash and cash equivalents      |                                           |   | 1,240                  |         |                            | (3,366  | )            |   | (18          | )   
|                                      | Cash and cash equivalents, beginning of period            |                                           |   | (12                    | )       |                            | 8,358   |              |   | 18           |     
|                                      |                                                           |                                           |   |                        |         |                            |         |              |   |              |     
|                                      | Cash and cash equivalents, end of period                  |                                           | $ | 1,228                  |         | $                          | 4,992   |              | $ |             |     
|                                      |                                                           |                                           |   |                        |         |                            |         |              |   |              |     

24

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS        THREE MONTHS ENDED MARCH 31, 2008 (Unaudited)        (in thousands)

|                                      |                                                           | Venoco, Inc.                              |   | Guarantor Subsidiaries |         | Non-Guarantor Subsidiary |         | Eliminations |   | Consolidated |     
|------------------------------------- | --------------------------------------------------------- | ----------------------------------------- | - | ---------------------- | ------- | ------------------------ | ------- | ------------ | - | ------------ | ----
|CASH FLOWS FROM OPERATING ACTIVITIES: |                                                           |                                           |   |                        |         |                          |         |              |   |              |     
|                                      | Net cash provided by operating activities                 |                                           | $ | 20,953                 |         | $                        | 18,586  |              | $ | 969          |     
|CASH FLOWS FROM INVESTING ACTIVITIES: |                                                           |                                           |   |                        |         |                          |         |              |   |              |     
|                                      | Expenditures for oil and natural gas properties           |                                           |   | (67,628                | )       |                          | (13,417 | )            |   | (3           | )   
|                                      | Acqusitions of oil and natural gas properties             |                                           |   | (3,300                 | )       |                          | (2,028  | )            |   |             |     
|                                      | Expenditures for property and equipment and other         |                                           |   | (968                   | )       |                          | (53     | )            |   |             |     
|                                      |                                                           |                                           |   |                        |         |                          |         |              |   |              |     
|                                      |                                                           | Net cash used in investing activities     |   |                        | (71,896 | )                        |         | (15,498      | ) |              | (3  
|CASH FLOWS FROM FINANCING ACTIVITIES: |                                                           |                                           |   |                        |         |                          |         |              |   |              |     
|                                      | Net proceeds from (repayments of) intercompany borrowings |                                           |   | 5,027                  |         |                          | (4,061  | )            |   | (966         | )   
|                                      | Proceeds from long-term debt                              |                                           |   | 60,000                 |         |                          |        |              |   |             |     
|                                      | Principal payments on long-term debt                      |                                           |   | (10,893                | )       |                          |        |              |   |             |     
|                                      | Payments for deferred loan costs                          |                                           |   | (68                    | )       |                          |        |              |   |             |     
|                                      | Proceeds from derivative premium financing                |                                           |   | 2,488                  |         |                          |        |              |   |             |     
|                                      | Stock issuance costs                                      |                                           |   | (5                     | )       |                          |        |              |   |             |     
|                                      | Proceeds from exercise of stock options                   |                                           |   | 29                     |         |                          |        |              |   |             |     
|                                      |                                                           |                                           |   |                        |         |                          |         |              |   |              |     
|                                      |                                                           | Net cash provided by financing activities |   |                        | 56,578  |                          |         | (4,061       | ) |              | (966
|                                      |                                                           |                                           |   |                        |         |                          |         |              |   |              |     
|                                      | Net increase (decrease) in cash and cash equivalents      |                                           |   | 5,635                  |         |                          | (973    | )            |   |             |     
|                                      | Cash and cash equivalents, beginning of period            |                                           |   | 8,762                  |         |                          | 973     |              |   |             |     
|                                      |                                                           |                                           |   |                        |         |                          |         |              |   |              |     
|                                      | Cash and cash equivalents, end of period                  |                                           | $ | 14,397                 |         | $                        |        |              | $ |             |     
|                                      |                                                           |                                           |   |                        |         |                          |         |              |   |              |     

25

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

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, 2007 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 21,026 BOE/d in the first quarter of 2008, compared to 17,670 BOE/d in the first quarter of 2007 and 20,100 BOE/d in the fourth quarter of 2007.

In
the execution of our strategy, our management is principally focused on increasing our reserves of oil and natural gas and on increasing annual production through exploration,
exploitation and development activities and acquisitions. Our management is also focused on the risks and opportunities associated with current oil and natural gas prices, which remain high compared
to longer-term historical averages, and on the goal of maximizing production rates while operating in a safe manner.

Capital Expenditures

We have developed an active capital expenditure program to take advantage of our extensive inventory of drilling prospects and other projects. In 2008, we expect
that our exploration, exploitation and development capital expenditures will be approximately $235.0 million, of which approximately $63.7 million (excluding changes in accrued capital
expenditures) was expended in the first quarter of the year. We expect to spend approximately 60% of the budgeted amount on projects in the Sacramento Basin, 25% in Southern California and 15% in
Texas. Included in the budget is $25.0 million for exploration projects. The aggregate levels of capital expenditures for 2008, and the allocation of those expenditures, are dependent on a
variety of factors, including the availability of capital resources to fund the expenditures 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 our estimates. The following summarizes certain significant aspects of our
capital spending program in 2008:

Southern CaliforniaExploitation and Development

Our primary focus in Southern California in 2008 is on development activities in the West Montalvo field, where we are continuing an aggressive workover,
recompletion and return to production program that we began when we acquired the field in May 2007. In the first quarter of 2008, we returned three wells to production and worked over two wells in the
field. We plan to drill two new development wells in the field later in 2008. We also plan to commission a seismic survey to assist us in designing and optimizing an infill development program.

In
the Sockeye field, we continue 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 and multi-lateral well drilling activities to the Monterey formation in the field.

26

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In
the South Ellwood field, the permitting process continues for our full-field development project. Key components of the project include an extension of our current field
area (which would effectively double the size of the existing field) and the installation of an onshore oil transport pipeline to replace the existing barge. Development of the extended lease area can
be accomplished from our existing platform, platform Holly. We anticipate receiving the environmental impact report for this project in 2008 with project approval and startup expected 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 currently have five drilling rigs and five
workover/completion rigs working in the basin and expect to drill over 110 new wells and perform more than 125 workovers and recompletions there during 2008. In the first quarter of 2008, we spudded
29 wells, completed 31 wells, and performed 29 workovers and recompletions in the basin.

We
also continue to pursue our hydraulic fracturing program in the basin, a program that could potentially enhance production and reserves significantly. We initiated the program in
November 2007 and we fractured 16 wells during the first quarter of 2008. We are encouraged by the success of these early wells and currently plan to fracture more than 50 wells in the basin during
the year.

TexasExploitation and Development

In Texas, our focus in 2008 is on the continuation of our workover and recompletion programs in the Hastings complex and the Manvel field. In the first quarter,
we performed 29 workovers and recompletions in Hastings and three in Manvel. We are also focused on lowering operating expenses in the Hastings complex as we reduce our remediation and redevelopment
activities there.

Higher Impact Exploration Activities

In 2008, we expect to drill as many as fifteen higher impact exploration wells, including ten in the Sacramento Basin, three in Southern California and two in
Texas. We spudded one higher impact exploration well in Texas during the first quarter.

Acquisitions and Divestitures

West Montalvo and Manvel Acquisitions.We acquired the West Montalvo field in Ventura County, California in May 2007 for
$61.3 million. We acquired the Manvel field in Brazoria County, Texas, and certain other fields in Texas, in April 2007 for $44.5 million.

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, primarily in and around our existing core areas of operations.

Certain Trends Affecting our Results of Operations

Expected Production.We expect that the continued execution of our capital expenditure program will result in increases in
our average net production from each of our operating areas over the remainder of 2008. In Southern California, we expect to achieve production increases from the drilling and workover/recompletion
programs we began in the West Montalvo field in 2007. In the Sacramento Basin, we are continuing our multi-year drilling program and our hydraulic fracturing program and anticipate
production increases from both. We also expect production to increase in the Hastings complex as a result of the enhancement of our water processing and injection capabilities and the continuation of
our workover and recompletion program. At the Manvel field, we are implementing a similar redevelopment program to increase production by upgrading our fluid handling and injection

27

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capacity
and performing workovers and recompletions. We expect production in the second quarter of the year to be similar to the level achieved in the first quarter due primarily to scheduled downtime
affecting operations in the South Ellwood and Sockeye fields, and for production to increase in the second half of the year. Our expectations with respect to future production rates are subject to a
number of uncertainties, including those associated with third party services, oil and natural gas prices, events resulting in unexpected downtime, permitting issues, drilling success rates, pipeline
capacity, and other factors, including those referenced in "Risk Factors."

Commodity Prices.Rising oil and natural gas prices have contributed to significant increases in our oil and natural gas
sales in recent periods, including the first quarter of 2008. Rising commodity prices have also caused us to incur substantial unrealized commodity derivative losses. These unrealized 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 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. Oil and natural gas prices have continued to rise in the second quarter of 2008. If this trend persists, it is likely that we will continue to experience increases in our oil and natural
gas sales and significant unrealized commodity derivative losses, at least in the near term. Oil and natural
gas prices are affected by many factors outside of our control, including changes in worldwide supply and demand, and we cannot predict future changes in those prices.

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 quarters ended March 31, 2007 and 2008.

|                                                                                     |  | Three Months Ended
March 31, |       
|------------------------------------------------------------------------------------ |  | ---------------------------- | ------
|
|Production Volume:                                                                   |  |                              |       
|Oil (MBbls)                                                                          |  |                              | 883   
|Natural gas (MMcf)                                                                   |  |                              | 4,244 
|MBOE                                                                                 |  |                              | 1,590 
|Daily Average Production Volume:                                                     |  |                              |       
|Oil (Bbls/d)                                                                         |  |                              | 9,811 
|Natural gas (Mcf/d)                                                                  |  |                              | 47,156
|BOE/d                                                                                |  |                              | 17,670
|Oil Price per Bbl Produced (in dollars):                                             |  |                              |       
|Realized price                                                                       |  | $                            | 49.26 
|Realized commodity derivative loss and amortization of commodity derivative premiums |  |                              | 0.35  
|                                                                                     |  |                              |       
|Net realized price                                                                   |  | $                            | 49.61 
|                                                                                     |  |                              |       
|Natural Gas Price per Mcf (in dollars):                                              |  |                              |       
|Realized price                                                                       |  | $                            | 7.12  
|Realized commodity derivative loss and amortization of commodity derivative premiums |  |                              | (0.03 
|                                                                                     |  |                              |       
|Net realized price                                                                   |  | $                            | 7.09  
|                                                                                     |  |                              |       
|Average Sale Price per BOE(1)                                                        |  | $                            | 45.54 

28

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|Expense per BOE:                         |  |   |       |  |   |       | 
|---------------------------------------- |  | - | ----- |  | - | ----- | 
|Production expenses(2)                   |  | $ | 15.78 |  | $ | 16.73 | 
|Transportation expenses                  |  |   | 1.18  |  |   | 0.68  | 
|Depreciation, depletion and amortization |  |   | 12.96 |  |   | 16.33 | 
|General and administrative expense(3)    |  |   | 6.16  |  |   | 4.74  | 
|Interest expense                         |  |   | 8.38  |  |   | 7.63  | 

---

Comparison of Quarter Ended March 31, 2008 to Quarter Ended March 31, 2007

Oil and Natural Gas Revenues.Oil and natural gas revenues increased $63.4 million (86%) to $137.0 million for
the quarter ended March 31, 2008 from $73.6 million for the same period in 2007. The increase was primarily due to a 20% increase in production and a 30% increase in average sales prices
as described below.

Oil
revenues increased by $49.6 million (114%) in the first quarter of 2008 to $93.0 million compared to $43.4 million in the first quarter of 2007. Oil production
rose 11%, with production of 984 MBbl in the first quarter of 2008 compared to 883 MBbl in the first quarter of 2007. The production increase was attributable primarily to the acquisition of
the Manvel field in April 2007 and the West Montalvo field in May 2007 and to our workover program in the Hastings complex. Our average realized price for oil increased $41.58 (84%) to $90.84 per Bbl
for the period.

Natural
gas revenues increased $13.7 million (45%) in the first quarter of 2008 to $44.0 million compared to $30.2 million in the first quarter of 2007. Natural gas
production increased 31%, with production of 5,576 MMcf in the first quarter of 2008 compared to 4,244 MMcf in the first quarter of 2007. The increase was due primarily to drilling, recompletion and
hydraulic fracturing activities in the Sacramento Basin. These factors were partially offset by decreases in natural gas production at the South Ellwood field and the Santa Clara Federal Unit. Our
average realized price for natural gas increased $0.76 (11%) to $7.88 per Mcf for the period.

29

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

Three Months Ended
March 31,2007

2008Realized commodity derivative gains (losses)

$
174

$
(18,263
)Unrealized commodity derivative gains (losses)


(16,990
)

(54,609
)Amortization of derivative premiums and other comprehensive loss


(1,898
)

(2,057
)Total

$
(18,714
)
$
(74,929
)


Realized
commodity derivative gains or losses represent the difference between the strike prices in the contracts settled during the period and the ultimate settlement prices. The
realized commodity derivative losses in the first quarter of 2008 reflect the settlement of contracts at prices above the relevant strike prices. Unrealized commodity derivative losses represent the
change in the fair value of our open derivative contracts from period to period. The change in unrealized commodity derivative losses reflects an increase in the notional volumes under derivative
contracts outstanding in the 2008 period and 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 2008 period reflect additional premiums paid in connection with
the additional contracts outstanding in 2008.

Other
revenue of $0.8 million in the first quarter of 2008 was unchanged relative to the same period in 2007.

As
a result of the foregoing factors, total revenues increased $7.1 million (13%) to $62.8 million in the first quarter of 2008, compared to $55.7 million in the
first quarter of 2007.

Production Expenses.Production expenses, which consist of lease operating expenses ("LOE") and production/property taxes,
increased $6.9 million (28%) to $32.0 million in the first quarter of 2008 from $25.1 million in the first quarter of 2007. The increase was primarily due to production expenses
attributable to the Manvel and West Montalvo acquisitions, the workover program at the Hastings
complex and an increase in the number of producing wells at other Venoco properties. On a per unit basis, LOE declined to $14.68 per BOE in the first quarter of 2008 from $15.09 per BOE in the same
period in 2007, but this was more than offset by the effect of an increase of approximately 1% in production/property taxes as a percentage of oil and natural gas revenue. The tax increase was due to
higher property tax assessments on mineral rights.

Transportation Expenses.Transportation expenses decreased 31%, from $1.9 million in the first quarter of 2007 to
$1.3 million in the first quarter of 2008. Barge deliveries were made to a refinery closer to our Ellwood Marine Terminal in the 2008 period, resulting in decreased costs for those deliveries.
On a per BOE basis, transportation expenses decreased $0.50 per BOE, from $1.18 per BOE in the first quarter of 2007 to $0.68 per BOE in the first quarter of 2008.

Depletion, Depreciation and Amortization (DD&A).DD&A expense increased $10.6 million (52%) to $31.2 million in
the first quarter of 2008 from $20.6 million in the first quarter of 2007. DD&A expense rose $3.37 per BOE, from $12.96 per BOE in the first quarter of 2007 to $16.33 per BOE in the first
quarter of 2008. The increase was primarily due to a higher depletion expense resulting from the increase in our oil and natural gas property cost as a result of the Manvel and West Montalvo

30

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acquisitions
in the second quarter of 2007 and the increase in oil and natural gas property costs during the period resulting from our capital expenditure program.

Accretion of Abandonment Liability.Accretion expense was $1.0 million in the first quarter of 2008 compared to
$0.8 million in the first quarter of 2007. The increase was due to accretion from the properties acquired in the Manvel and West Montalvo acquisitions and from new wells drilled and completed
in 2007 and the first quarter of 2008.

General and Administrative (G&A).G&A expense decreased $0.7 million (7%) to $9.1 million in the first quarter
of 2008 from $9.8 million in the first quarter of 2007. The decrease resulted primarily from a decrease of $0.8 million in charges for the settlement of employment contracts and an
increase in the G&A costs that were capitalized for payroll and related overhead for activities that are directly related to our development, exploitation, exploration and acquisition efforts. These
factors more than offset costs arising from increases in our professional staff and related infrastructure. Non-cash SFAS 123R compensation expense charged to G&A increased
$0.2 million (15%) from $1.1 million in 2007 to $1.3 million in 2008 as a result of equity compensation awards made in 2007 and the first quarter of 2008.

Financing Costs and Other.Financing costs and other increased $15.0 million (103%) to $29.6 million in the
first quarter of 2008 from $14.6 million in the first quarter of 2007. Interest expense, net of interest income, increased $1.3 million (10%) from $13.3 million in the first
quarter of 2007 to $14.6 million in the first quarter of 2008. The increase was primarily due to an increase in average debt outstanding in the period partially offset by lower interest rates.
Amortization of deferred loan costs decreased
$0.2 million, from $1.2 million in the first quarter of 2007 to $1.0 million in the 2008 period, primarily as a result of the write-off of deferred loan costs in
connection with the refinancing of our term loan facility in the second quarter of 2007. Changes in the fair value of our interest rate swap derivative instruments resulted in unrealized losses of
$13.6 million in the first quarter of 2008 and $24,000 in the 2007 period. The change between periods is the result of an increase in the notional amount of debt covered by the interest rate
swap and a decrease in estimated interest rates used to determine the fair value of the derivative instruments.

Income tax expense.The net loss in the first quarter of 2008 resulted in an income tax benefit of $15.9 million
compared to the income tax benefit of $6.6 million for the first quarter of 2007.

Net Income.The net loss for the first quarter of 2008 was $25.5 million compared to a net loss of
$10.4 million for the same period in 2007. 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

Three Months Ended
March 31,2007

2008(in thousands)Cash provided by operating activities

$
33,691

$
40,508Cash used in investing activities


(77,788
)

(87,397
)Cash provided by (used in) financing activities


41,953


51,551


31

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Net cash provided by operating activities was $40.5 million in the first quarter of 2008 compared with $33.7 million in the first quarter of 2007. Cash flows from operating
activities in the first quarter of 2008 were favorably impacted by increases in commodity prices and production from properties acquired and our development program. Cash flows from operating
activities were unfavorably impacted in the first quarter of 2008 by increases in receivables and decreases in accounts payable and accrued liabilities. Cash flows from operating activities in the
2007 period were favorably impacted by increases in accounts payable and accrued expenses.

Net
cash used in investing activities was $87.4 million in the first quarter of 2008 compared with $77.8 million in the first quarter of 2007. The primary investing
activities in the first quarter of 2008 include $86.4 million in capital expenditures on oil and natural gas properties related to our 2008 capital expenditure program. The primary investing
activities in the first quarter of 2007 include $75.9 million in capital expenditures on oil and gas properties.

Net
cash provided by financing activities was $51.6 million in the first quarter of 2008 compared to $42.0 million in the first quarter of 2007. The primary financing
activities in the first quarter of 2008 were $49.1 million in net borrowings under our revolving credit facility to fund capital expenditures and working capital needs. The primary financing
activities in the first quarter of 2007 were $40.3 million in net borrowings under our revolving credit facility to fund capital expenditures and working capital needs.

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.
In 2008, we expect that our exploration, exploitation and development capital expenditures will be approximately $235.0 million, although we may increase this amount modestly if oil and natural
gas prices remain at high levels. We expect to be able to finance our capital expenditures for the remainder of the year primarily with cash flow from operations before working capital adjustments. We
expect to supplement our capital budget with additional amounts borrowed under our revolving credit facility, in particular to satisfy short-term working capital needs, but do not
currently expect our total indebtedness to increase significantly by the end of 2008 relative to total current indebtedness. As of May 9, 2008, we had $117.3 million in unused borrowing
capacity under the revolving credit facility. Uncertainties relating to our capital resources and requirements in 2008 include a possible expansion of our exploration, exploitation and development
capital expenditure budget, uncertainties associated with the
planned master limited partnership offering discussed below and the possibility that we will pursue one or more significant acquisitions that would require additional debt or equity financing. In
addition, we have entered into an agreement pursuant to which Denbury Resources Inc. has an option to acquire our interest in part of the Hastings complex for cash or by entering into a
volumetric production payment or similar arrangement with us. If the option is exercised, the consideration we would receive would be a significant additional source of liquidity, subject to potential
mandatory repayment requirements under our credit facilities. However, we would not expect to receive any such consideration until the first quarter of 2009 at the earliest.

Master Limited Partnership.A recently-formed subsidiary of ours, Venoco Acquisition Company, L.P., which we refer to
as the master limited partnership or the MLP, has filed a preliminary registration statement on Form S-1 in connection with a proposed offering of common units representing limited
partnership interests in the MLP. We expect to capitalize the MLP through the contribution of our interests in certain onshore fields in California and a portion of our interests in the South Ellwood
field. We anticipate receiving an initial cash distribution in connection with the offering of MLP interests, but the amount of the distribution, if any, has not been determined. We currently expect
to use any such distribution, net of any required tax payments, to reduce indebtedness under one or both of our credit facilities or to repurchase or redeem some or all of our senior notes. The

32

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nature,
amount and timing of such a reduction in indebtedness will depend on a variety of factors, including the amount of the distribution and the amount then outstanding under our revolving credit
facility. In some circumstances, we would be required to use some or all of the distribution to reduce the amount outstanding under the revolving credit facility. Our plans with respect to the MLP,
the MLP offering and any related distribution to us may change, and we cannot assure you that any MLP offering will be completed. We expect the MLP offering to be completed only if capital market
conditions are favorable. 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.

Amended Revolving Credit Facility.We entered into a second amended and restated agreement governing our revolving credit
facility in March 2006, and have entered into several subsequent amendments to the agreement. In May 2008 we amended the facility to, among other things, extend its maturity to March 2011. The
borrowing base under the facility is currently $200.0 million. The agreement 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 current assets to current liabilities and debt to EBITDA (as defined
in the agreement). The agreement requires us to reduce amounts outstanding under the facility with the proceeds of certain transactions or events, including sales of assets, in certain circumstances.
The completion of the MLP offering could result in a reduction of the borrowing base under the facility, and thus require us to prepay some of the borrowings then outstanding under the facility. The
revolving credit facility is secured by a first priority lien on substantially all of our assets.

Loans
under the revolving credit facility designated as "Base Rate Loans" 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. Loans designated as "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.

Second Lien Term Loan.We entered into a $500.0 million senior secured second lien term loan agreement in May 2007.
The 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 term loan facility is secured by a second
priority lien on substantially all of our assets.

Loans
under the term loan facility designated as "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%. Loans designated as "LIBO Rate Loans" bear interest at LIBOR plus 4.00%. We have entered into interest rate swaps pursuant to which
amounts borrowed under the

33

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new
term loan agreement will 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."

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. 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 secured with
the 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 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.

Off-Balance Sheet Arrangements

At March 31, 2008, we had no existing off-balance sheet arrangements, as defined under SEC rules, that have or are reasonably likely to have a material
current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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.

34

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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 March 31, 2008, 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 March 31, 2008 for production: |                             |         |        |        
|                                                        | April 1December 31, 2008   |         | 11,100 |        
|                                                        | January 1December 31, 2009 |         | 7,983  |        
|                                                        | January 1December 31, 2010 |         | 7,150  |        
|                                                        | January 1December 31, 2011 |         | 7,000  |        

Natural Gas.As of March 31, 2008, we had entered into option, swap and collar agreements to receive average minimum
and maximum NYMEX or PG&E Citygate prices as follows:

|                                                          |                             | Minimum |        | Maximum
|--------------------------------------------------------- | --------------------------- | ------- | ------ | -------
|
|Natural gas derivatives at March 31, 2008 for production: |                             |         |        |        
|                                                          | April 1December 31, 2008   |         | 32,650 |        
|                                                          | January 1December 31, 2009 |         | 23,125 |        
|                                                          | January 1December 31, 2010 |         | 17,900 |        
|                                                          | January 1December 31, 2011 |         | 12,000 |        

35

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Portfolio of Derivative Transactions

Our portfolio of commodity derivative transactions as of March 31, 2008 is summarized below:

Oil

|Type of Contract |  | Basis |  | Quantity
(Bbl/d) |   | Strike Price
($/Bbl) |  | Term            
|---------------- |  | ----- |  | ---------------- | - | -------------------- |  | ----------------
|Collar           |  | NYMEX |  | 3,450            |   | $52.00/$75.00        |  | Jan 1Jun 30, 08
|Collar           |  | NYMEX |  | 2,450            |   | $52.00/$75.00        |  | Jul 1Dec 31, 08
|Collar           |  | NYMEX |  | 1,000            |   | $58.00/$78.00        |  | Jul 1Dec 31, 08
|Collar           |  | NYMEX |  | 1,500            |   | $58.00/$75.25        |  | Jan 1Dec 31, 08
|Swap             |  | NYMEX |  | 2,500            |   | $67.25               |  | Jan 1Dec 31, 08
|Collar           |  | NYMEX |  | 800              |   | $60.00/$82.75        |  | Jan 1Dec 31, 08
|Collar           |  | NYMEX |  | (150             | ) | $60.00/$82.75        |  | Jan 1Dec 31, 08
|Collar           |  | NYMEX |  | 1,000            |   | $70.00/$130.75       |  | Mar 1Dec 31, 08
|Put              |  | NYMEX |  | 2,000            |   | $80.00               |  | Jan 1Dec 31, 08
|Collar           |  | NYMEX |  | 2,170            |   | $50.00/$75.00        |  | Jan 1Jun 30, 09
|Collar           |  | NYMEX |  | 1,000            |   | $56.00/$79.25        |  | Jul 1Dec 31, 09
|Collar           |  | NYMEX |  | 3,000            |   | $55.00/$77.00        |  | Jan 1Dec 31, 09
|Swap             |  | NYMEX |  | 2,000            |   | $67.22               |  | Jan 1Dec 31, 09
|Collar           |  | NYMEX |  | 750              |   | $60.00/$82.75        |  | Jan 1Dec 31, 09
|Collar           |  | NYMEX |  | (700             | ) | $60.00/$82.75        |  | Jan 1Jun 30, 09
|Collar           |  | NYMEX |  | 1,000            |   | $70.00/$140.00       |  | Jan 1Dec 31, 09
|Collar           |  | NYMEX |  | 1,000            |   | $60.00/$72.80        |  | Jan 1Dec 31, 10
|Collar           |  | NYMEX |  | 3,500            |   | $60.00/$73.00        |  | Jan 1Dec 31, 10
|Swap             |  | NYMEX |  | 1,000            |   | $66.75               |  | Jan 1Dec 31, 10
|Collar           |  | NYMEX |  | 650              |   | $60.00/$81.75        |  | Jan 1Dec 31, 10
|Collar           |  | NYMEX |  | 1,000            |   | $70.00/$150.00       |  | Jan 1Dec 31, 10
|Collar           |  | NYMEX |  | 2,000            |   | $70.00/$144.75       |  | Jan 1Dec 31, 11
|Collar           |  | NYMEX |  | 2,000            |   | $70.00/$141.00       |  | Jan 1Dec 31, 11
|Collar           |  | NYMEX |  | 3,000            |   | $70.00/$140.00       |  | Jan 1Dec 31, 11

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Natural Gas

|Type of Contract |  | Basis         |  | Quantity
(MMBtu/d) |  | Strike Price
($/MMBtu) |  | Term            
|---------------- |  | ------------- |  | ------------------ |  | ---------------------- |  | ----------------
|Put              |  | NYMEX         |  | 6,000              |  | $8.00 Floor            |  | Jan 1Dec 31, 08
|Call             |  | NYMEX         |  | 4,513              |  | $12.15 Cap             |  | Jan 1Jun 30, 08
|Call             |  | NYMEX         |  | 4,382              |  | $10.60 Cap             |  | Jul 1Dec 31, 08
|Collar           |  | NYMEX         |  | 7,500              |  | $8.00/$12.75           |  | Jan 1Dec 31, 08
|Collar           |  | NYMEX         |  | 5,700              |  | $7.75/$10.05           |  | Jan 1Dec 31, 08
|Basis Swap       |  | PG&E Citygate |  | 10,000             |  | $(0.32)                |  | Jan 1Dec 31, 08
|Basis Swap       |  | PG&E Citygate |  | 10,000             |  | $(0.38)                |  | Jan 1Dec 31, 08
|Collar           |  | NYMEX         |  | 1,450              |  | $8.00/$12.95           |  | Jan 1Dec 31, 08
|Collar           |  | NYMEX         |  | 12,000             |  | $7.50/$11.75           |  | Mar 1Dec 31, 08
|Swap             |  | NYMEX         |  | 1,250              |  | $8.72 Fixed            |  | Jan 1Jun 30, 09
|Collar           |  | NYMEX         |  | 1,250              |  | $7.75/$13.05           |  | Jan 1Jun 30, 09
|Swap             |  | NYMEX         |  | 1,250              |  | $8.00 Fixed            |  | Jul 1Dec 31, 09
|Collar           |  | NYMEX         |  | 1,250              |  | $7.25/$11.30           |  | Jul 1Dec 31, 09
|Collar           |  | NYMEX         |  | 7,000              |  | $7.50/$12.75           |  | Jan 1Dec 31, 09
|Basis Swap       |  | PG&E Citygate |  | 6,000              |  | $0.10                  |  | Jan 1Dec 31, 09
|Basis Swap       |  | PG&E Citygate |  | 7,500              |  | $0.11                  |  | Jan 1Dec 31, 09
|Collar           |  | NYMEX         |  | 4,000              |  | $7.30/$9.85            |  | Jan 1Dec 31, 09
|Collar           |  | NYMEX         |  | 1,125              |  | $8.00/$12.00           |  | Jan 1Dec 31, 09
|Collar           |  | NYMEX         |  | 8,500              |  | $7.50/$11.15           |  | Jan 1Dec 31, 09
|Collar           |  | NYMEX         |  | 10,000             |  | $7.00/$10.35           |  | Jan 1Dec 31, 10
|Basis Swap       |  | PG&E Citygate |  | 10,000             |  | $0.22                  |  | Jan 1Dec 31, 10
|Collar           |  | NYMEX         |  | 1,000              |  | $7.00/$9.10            |  | Jan 1Dec 31, 10
|Collar           |  | NYMEX         |  | 900                |  | $7.50/$12.20           |  | Jan 1Dec 31, 10
|Collar           |  | NYMEX         |  | 6,000              |  | $7.50/$11.95           |  | Jan 1Dec 31, 10
|Collar           |  | NYMEX         |  | 12,000             |  | $7.50/$13.50           |  | Jan 1Dec 31, 11

In
May 2008, the Company entered into two NYMEX natural gas put contracts for 2009 production to establish a minimum price of $8.50 on a total of 20,000 MMbtu per day.

We
enter into derivative contracts, primarily collars, swaps and option contracts, to hedge future crude oil and natural gas production in an effort to mitigate the risk of market price
fluctuations. The objective of our hedging activities and the use of derivative financial instruments is to achieve more predictable cash flows. Our hedging activities attempt to mitigate our exposure
to price declines and allow us more flexibility to continue to execute our capital expenditure plan even if prices decline. Our collar and swap contracts, however, prevent us from receiving the full
advantage of increases in oil or natural gas prices above the maximum fixed amount specified in the hedge agreement. Also, if production is less than the amount we have hedged and the price of oil or
natural gas exceeds a fixed price in a hedge contract, we will be required to make payments against which there are no offsetting sales of production. This could impact our ability to fund future
capital expenditures. In addition, we have incurred, and may incur in the future, substantial unrealized commodity derivative losses in connection with our hedging activities, although we do not
expect such losses to have a material effect on our ability to fund expected capital expenditures. Finally, the use of derivatives involves the risk that the counterparties to such instruments will be
unable to meet the financial terms of such contracts.

Because
a large portion of our commodity derivatives do not qualify for hedge accounting and to increase clarity in our financial statements, we elected to discontinue hedge accounting
effective April 1, 2007. 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.

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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. Changes in the fair value of derivatives are recorded in commodity derivative gains (losses) on the consolidated 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
May 9, 2008, there was approximately $582.0 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 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
$92.0 million at March 31, 2008 would result in additional annualized interest expense of $0.9 million. As of March 31, 2008, the fair value of our interest rate
derivatives was a liability of $31.4 million.

See
notes to our consolidated financial statements for a discussion of our long-term debt as of March 31, 2008.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Our management, with the participation of Timothy Marquez, our Chief Executive Officer, and Timothy Ficker, our Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures as of March 31, 2008. Based on the evaluation, those officers believe that:



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 March 31, 2008 that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

38

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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 factors discussed in "Risk Factors" in our Annual Report on
Form 10-K for the year ended December 31, 2007, which could materially affect our business, financial condition and/or future results. The risks described in our Annual
Report on Form 10-K 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.

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

Item 6. Exhibits

|Exhibit Number |  | Exhibit                                                                                                                                
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|10.1           |  | Venoco, Inc. 2007 Senior Executive Bonus Plan, as amended.                                                                             
|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.

May 9,
2008

| |  |              |  |                       |  |                                     
| |  | ------------ |  | --------------------- |  | ------------------------------------
| |  | VENOCO, INC.
| |  |              |  |                       |  |                                     
| |  |              |  |                       |  |                                     
| |  | By:          |  | /s/TIMOTHY M. MARQUEZ
| |  |              |  |                      
| |  |              |  | Name:                 |  | Timothy M. Marquez                  
| |  |              |  | Title:                |  | Chairman and Chief Executive Officer
| |  |              |  |                       |  |                                     
| |  |              |  |                       |  |                                     
| |  | By:          |  | /s/TIMOTHY A. FICKER 
| |  |              |  |                      
| |  |              |  | Name:                 |  | Timothy A. Ficker                   
| |  |              |  | Title:                |  | Chief Financial Officer             

40

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