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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 1934For the quarterly period ended June 30, 2008oro

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

80202-1370(Address of principal executive offices)

(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 June 30, 2008, there were 51,457,224 shares of the issuer's common stock, par value $0.01 per share, issued and outstanding.



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Table of Contents

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, expected production and expenses in 2008, the nature, timing and results of capital
expenditure projects, amounts of future capital expenditures, our future debt levels, our receipt of approvals relating to the South Ellwood full-field development project and the possible exercise by
Denbury Resources of its option to purchase an interest in the Hastings complex. 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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Table of Contents

VENOCO, INC.
Form 10-Q for the Quarterly Period Ended June 30, 2008

TABLE OF CONTENTS



PART I.

FINANCIAL INFORMATIONItem 1.

Financial Statements (Unaudited)


2Condensed Consolidated Balance Sheets at December 31, 2007 and June 30, 2008


2Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2007 and the Three and Six Months
Ended June 30, 2008


3Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2007 and the Three and Six
Months Ended June 30, 2008


4Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and the Six Months Ended June 30,
2008


5Notes to Condensed Consolidated Financial Statements


6Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations


27Item 3.

Quantitative and Qualitative Disclosures about Market Risk


37Item 4.

Controls and Procedures


41PART II.

OTHER INFORMATIONItem 1.

Legal Proceedings


42Item 1A.

Risk Factors


42Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds


42Item 3.

Defaults upon Senior Securities


42Item 4.

Submission of Matters to a Vote of Security Holders


42Item 5.

Other Information


42Item 6.

Exhibits


42Signatures


43


1

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Table of Contents

PART IFINANCIAL INFORMATION

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

December 31,
2007

June 30,
2008ASSETSCURRENT ASSETS:Cash and cash equivalents

$
9,735

$
4,547Accounts receivable, net of allowance for doubtful accounts of $850 at December 31, 2007 and June 30, 2008


55,597


72,727Inventories


10,377


8,724Prepaid expenses and other current assets


4,391


2,474Income tax receivable


6,725


6,625Deferred income taxes


21,967


82,167Commodity derivatives


7,780


11,221Total current assets


116,572


188,485PROPERTY, PLANT AND EQUIPMENT, AT COST:Oil and natural gas properties (full cost method, of which $12,034 and $14,592 for unproved properties were excluded from amortization at December 31, 2007 and June 30,
 2008, respectively)


1,331,531


1,482,770Drilling equipment


14,460


14,460Other property and equipment


17,208


19,209Total property, plant and equipment


1,363,199


1,516,439Accumulated depletion, depreciation and amortization


(232,167
)

(293,249
)Net property, plant and equipment


1,131,032


1,223,190OTHER ASSETS:Commodity derivatives


3,768


3,150Deferred loan costs


9,699


8,678Other


4,414


1,339Deferred income taxes





44,856Total other assets


17,881


58,023TOTAL ASSETS

$
1,265,485


1,469,698LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIES:Accounts payable and accrued liabilities

$
82,094

$
68,347Undistributed revenue payable


11,298


12,864Interest payable


6,839


5,722Current maturities of long-term debt


3,449


4,425Commodity and interest derivatives


68,756


230,205Total current liabilities


172,436


321,563LONG-TERM DEBT


691,896


740,204DEFERRED INCOME TAXES


16,607


COMMODITY AND INTEREST DERIVATIVES


87,224


298,399ASSET RETIREMENT OBLIGATIONS


51,720


56,533Total liabilities


1,019,883


1,416,699COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS' EQUITY:Common stock, $.01 par value (200,000,000 shares authorized; 50,593,403 and 51,457,224 shares issued and outstanding at December 31, 2007 and June 30, 2008,
respectively)


506


514Additional paid-in capital


309,887


314,924Retained earnings (accumulated deficit)


(62,462
)

(260,487
)Accumulated other comprehensive loss


(2,329
)

(1,952
)Total stockholders' equity


245,602


52,999TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
1,265,485

$
1,469,698


See notes to condensed consolidated financial statements.

2

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Table of Contents

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

Three Months Ended
June 30,

Six Months Ended
June 30,2007

2008

2007

2008REVENUES:Oil and natural gas sales

$
89,930

$
167,132

$
163,358

$
303,797Other


752


915


1,565


1,700Total revenues


90,682


168,047


164,923


305,497EXPENSESOil and natural gas production


25,946


33,138


51,033


65,147Transportation expense


1,407


1,382


3,284


2,679Depletion, depreciation and amortization


23,556


29,870


44,155


61,116Accretion of asset retirement obligations


844


1,028


1,617


2,021General and administrative, net of amounts capitalized


7,238


12,165


17,033


21,231Total expenses


58,991


77,583


117,122


152,194Income (loss) from operations


31,691


90,464


47,801


153,303FINANCING COSTS AND OTHER:Interest expense, net


15,823


13,169


29,102


27,758Amortization of deferred loan costs


985


889


2,230


1,888Interest rate derivative losses (gains), net


189


(9,908
)

237


4,063Loss on extinguishment of debt


12,063





12,063


Commodity derivative losses, net


7,854


364,783


26,357


439,419Total financing costs and other


36,914


368,933


69,989


473,128Income (loss) before income taxes


(5,223
)

(278,469
)

(22,188
)

(319,825
)Income tax provision (benefit)


(2,100
)

(105,900
)

(8,700
)

(121,800
)Net income (loss)

$
(3,123
)
$
(172,569
)
$
(13,488
)
$
(198,025
)Earnings per common share:Basic

$
(0.07
)
$
(3.43
)
$
(0.32
)
$
(3.94
)Diluted

$
(0.07
)
$
(3.43
)
$
(0.32
)
$
(3.94
)Weighted average common shares outstanding:Basic


42,812


50,347


42,801


50,287Diluted


42,812


50,347


42,801


50,287


See
notes to condensed consolidated financial statements.

3

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

Three Months Ended
June 30,

Six Months Ended
June 30,2007

2008

2007

2008Net income (loss)

$
(3,123
)
$
(172,569
)
$
(13,488
)
$
(198,025
)OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAX:Hedging activities:Reclassification adjustments for settled contracts


354


197


484


377Changes in fair value of effective portion of outstanding hedging positions








(2,740
)

Other comprehensive income (loss)


354


197


(2,256
)

377Comprehensive income (loss)

$
(2,769
)
$
(172,372
)
$
(15,744
)
$
(197,648
)


See
notes to condensed consolidated financial statements.

4

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Table of Contents

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

Six Months Ended June 30,2007

2008CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)

$
(13,488
)
$
(198,025
)Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depletion, depreciation and amortization


44,155


61,116Accretion of abandonment liability


1,617


2,021Deferred income taxes (benefit)


(8,800
)

(121,900
)Share-based compensation


2,600


2,520Amortization of deferred loan costs


2,230


1,888Loss on extinguishment of debt


12,063


Unrealized interest rate swap derivative losses


181


340Amortization of bond discounts and other non-cash interest


779


254Unrealized commodity derivative losses and amortization of premiums and other
comprehensive loss


27,168


383,914Changes in operating assets and liabilities:Accounts receivable


(6,648
)

(17,130
)Inventories


574


1,653Prepaid expenses and other current assets


2,888


1,861Income tax receivable


(680
)

100Other assets


(1,063
)

3,075Accounts payable and accrued liabilities


7,383


(1,658
)Undistributed revenue payable


(1,773
)

1,566Net premiums paid on derivative contracts


(2,079
)

(13,839
)Net cash provided by operating activities


67,107


107,756CASH FLOWS FROM INVESTING ACTIVITIES:Expenditures for oil and natural gas properties


(149,024
)

(156,583
)Acquisitions of oil and natural gas properties


(116,430
)

(4,624
)Expenditures for drilling equipment


(129
)

Expenditures for other property and equipment


(3,081
)

(2,481
)Net cash used in investing activities


(268,664
)

(163,688
)CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from long-term debt


705,421


135,000Principal payments on long-term debt


(492,303
)

(93,787
)Payments for deferred loan costs


(4,790
)

(811
)Premium to retire debt


(3,489
)

Proceeds from derivative premium financing


1,676


7,817Proceeds from exercise of stock options


208


2,530Excess income tax benefits from share-based compensation


1,053


Stock issuance costs





(5
)Net cash provided by financing activities


207,776


50,744Net increase (decrease) in cash and cash equivalents


6,219


(5,188
)Cash and cash equivalents, beginning of period


8,364


9,735Cash and cash equivalents, end of period

$
14,583

$
4,547Supplemental Disclosure of Cash Flow InformationCash paid for interest

$
29,961

$
28,795Cash paid for income taxes

$
780


Supplemental Disclosure of Noncash ActivitiesAccrued capital expenditures at period end

$
42,725

$
29,474Decrease (increase) in accrued capital expenditures

$
(3,210
)
$
13,206


See notes to condensed consolidated financial statements.

5

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Table of Contents

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 six months ended June 30, 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 service conditions.
Non-vested restricted shares with service and market conditions are excluded from basic earnings per common share calculations until they vest.

6

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VENOCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

1. SIGNIFICANT ACCOUNTING POLICIES (Continued)

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
June 30,

Six Months Ended
June 30,2007

2008

2007

2008Dilutive











Anti-dilutive


4,765,913


4,022,266


4,748,156


4,086,883


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

Three Months Ended
June 30,

Six Months Ended
June 30,2007

2008

2007

2008Net income (loss)

$
(3,123
)
$
(172,569
)
$
(13,488
)
$
(198,025
)Adjustments to net income for dilution











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

$
(3,123
)
$
(172,569
)
$
(13,488
)
$
(198,025
)Basic weighted average common shares outstanding


42,812


50,347


42,801


50,287Add: dilutive effect of stock options











Add: dilutive effect of non-vested restricted stock











Diluted weighted average common shares outstanding


42,812


50,347


42,801


50,287Basic earnings per common share

$
(0.07
)
$
(3.43
)
$
(0.32
)
$
(3.94
)Diluted earnings per common share

$
(0.07
)
$
(3.43
)
$
(0.32
)
$
(3.94
)


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 addition, commodity
derivative losses were reclassified from revenues to financing costs and other in the condensed consolidated statements of operations so as not to distort revenue trends with significant
non-designated future economic hedging. These reclassifications had no impact on the Company's financial position, income (loss) before taxes or cash flows from operating, investing or financing
activities.



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

7

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VENOCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

1. SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 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"). 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. The adoption of SFAS 161 is not
expected to have an impact on the Company's consolidated financial statements, other than additional disclosures.

In
December 2007, the FASB issued Statement No. 141R,Business Combinations("SFAS 141R"). 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. 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.

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.

8

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VENOCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

1. SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 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

9

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VENOCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

1. SIGNIFICANT ACCOUNTING POLICIES (Continued)

industry-standard
models described above, however, these derivatives are classified in Level 3 because of inputs that may not be observable.

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 June 30, 2008 (in thousands).

Level 1

Level 2

Level 3

Fair Value
as of June 30,
2008Assets (Liabilities):Commodity derivatives

$


$
14,371

$


$
14,371Commodity derivatives





(510,458
)




(510,458
)Interest rate swaps





(18,146
)




(18,146
)


The
fair value of the interest rate swaps are valued using Level 2 fair value methodologies. 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.

In
the first quarter of 2008, commodity derivative instruments were classified as a Level 3 measurement because the Company was unable to document certain observable factors. In
the second quarter of 2008, the commodity derivatives previously classified as a Level 3 measurement were transferred to a Level 2 measurement classification due to additional
documentation obtained by the Company to support such a classification. 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 six month period ended June 30, 2008 (in thousands).

Six Months Ended
June 30, 2008Beginning Balance

$
(126,625
)Realized and Unrealized Losses(1)


(56,373
)Purchases, issuances and settlements


8,510Transfers in and out of Level 3


174,488Balance as of June 30, 2008

$
Change in unrealized gains (losses) included in earnings relating to Level 3 derivatives still held as of June 30, 2008

$







10

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Table of Contents

VENOCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)



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.

The
following unaudited pro forma condensed consolidated operating results for the six months ended June 30, 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).

Six Months Ended
June 30, 2007Pro FormaTotal revenues

$
147,911Net income (loss)

$
(11,431
)Basic earnings per common share

$
(0.27
)Diluted earnings per common share

$
(0.27
)


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

June 30,
2008Revolving credit agreement due March 2011

$
42,000

$
85,000Second lien term loan due September 2011


500,000


500,0008.75% senior notes due December 2011


149,453


149,521Financed derivative premiums due through 2011


3,892


10,108Total long-term debt


695,345


744,629Less: current portion of long-term debt


3,449


4,425Long-term debt, net of current portion

$
691,896

$
740,204


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

11

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Table of Contents

VENOCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

3. LONG-TERM DEBT (Continued)

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 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 August 6, 2008, the Company had available borrowing capacity of
$119.3 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 June 30, 2008.

12

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Table of Contents

VENOCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

3. LONG-TERM DEBT (Continued)

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.

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):

Three Months Ended
June 30,

Six Months Ended
June 30,2007

2008

2007

2008Realized commodity derivative (gains) losses

$
151

$
37,856

$
(23
)
$
56,119Amortization of commodity derivative premiums


1,842


1,765


3,529


3,529Unrealized commodity derivative (gains) losses:Change in fair value of derivatives that do not qualify for hedge accounting


5,861


325,162


22,964


379,771Ineffective portion of derivatives qualifying for hedge accounting








(113
)

Total unrealized commodity derivative (gains) losses


5,861


325,162


22,851


379,771Commodity derivative (gains) losses

$
7,854

$
364,783

$
26,357

$
439,419


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. The Company amortized accumulated
other

13

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Table of Contents

VENOCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

4. HEDGING AND DERIVATIVE FINANCIAL INSTRUMENTS (Continued)

comprehensive
loss into oil and natural gas sales of $0.6 million and $0.3 million during the quarters ended June 30, 2007 and 2008, respectively, and $0.8 million and
$0.6 million for the six month periods ended June 30, 2007 and 2008, respectively.

As
of June 30, 2008, the remaining unrealized derivative fair value loss of $3.1 million ($2.0 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 $2.0 million ($1.2 million after tax) out of
accumulated other comprehensive loss into earnings during the next twelve months.

Crude Oil Agreements.As of June 30, 2008, the Company had entered into option, swap and collar agreements to receive average minimum and maximum New York
Mercantile Exchange (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

MaximumBarrels/day

Avg. Prices

Barrels/day

Avg. PricesCrude oil derivatives at June 30, 2008 for production:July 1December 31, 2008


11,100

$
63.92


9,100

$
79.92January 1December 31, 2009


7,983

$
59.58


7,983

$
82.60January 1December 31, 2010


7,150

$
62.34


7,150

$
83.66January 1December 31, 2011


7,000

$
70.00


7,000

$
141.64


Natural Gas Agreements.As of June 30, 2008, the Company had entered into option, swap and collar agreements to receive average minimum and maximum PG&E
Citygate prices as follows:

Minimum

MaximumMMBtu/Day

Avg. Prices

MMBtu/Day

Avg. PricesNatural gas derivatives at June 30, 2008 for production:July 1December 31, 2008


32,650

$
7.56


31,032

$
11.35January 1December 31, 2009


43,125

$
8.02


23,125

$
11.42January 1December 31, 2010


17,900

$
7.32


17,900

$
11.03January 1December 31, 2011


12,000

$
7.50


12,000

$
13.50


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

14

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Table of Contents

VENOCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

4. HEDGING AND DERIVATIVE FINANCIAL INSTRUMENTS (Continued)

term
loan facility will effectively bear interest at a fixed rate of approximately 9.3% until June 2010 (including the 4.0% margin payable on borrowed amounts). The Company has not designated either
interest rate swap as a hedge.

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

Three months
ended
June 30,

Six months
ended
June 30,2007

2008

2007

2008Realized interest rate derivative (gains) losses

$
31

$
3,307

$
55

$
3,724Unrealized interest rate derivative (gains) losses


158


(13,215
)

182


339Interest rate derivative (gains) losses, net

$
189

$
(9,908
)
$
237

$
4,063


The
estimated fair values of derivatives included in the consolidated balance sheets at December 31, 2007 and June 30, 2008 are summarized below. The net fair value of the
Company's derivatives increased by $369.8 million from a net liability of $144.4 million at December 31, 2007 to a net liability of $514.2 million at June 30, 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

June 30,
2008Derivative assets:Oil derivative contracts

$
3,341

$
8,844Gas derivative contracts


8,207


5,527Derivative liabilities:Oil derivative contracts


(134,505
)

(466,649
)Gas derivative contracts


(3,668
)

(43,809
)Interest rate derivative contracts


(17,807
)

(18,146
)Net derivative liability

$
(144,432
)
$
(514,233
)


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

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Table of Contents

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 six months ended June 30, 2007 and 2008 (in thousands):

Six Months Ended
June 30, 2007

Six Months Ended
June 30, 2008Asset retirement obligations at beginning of period

$
42,049

$
52,220Revisions of estimated liabilities


1,201


768Liabilities incurred


3,919


2,127Liabilities settled


(52
)

(103
)Accretion expense


1,617


2,021Asset retirement obligations at end of period


48,734


57,033Less: current asset retirement obligations (classified with accounts payable and accrued liabilities)


(5,813
)

(500
)Long-term asset retirement obligations

$
42,921

$
56,533


6. CAPITAL STOCK

The Company has 57.3 million shares of common stock issued or reserved for issuance at June 30, 2008, including 5.6 million shares reserved for issuance under the
Company's stock incentive plans. At June 30, 2008, the Company has 51,457,224 common shares issued and outstanding, of which 849,646 shares are restricted stock granted under the Company's 2005
stock incentive plan. At June 30, 2008, the Company had approximately 3.8 million options outstanding and 1.8 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 June 30, 2008, there are a total of 3,751,913 options
outstanding with a weighted average exercise price of $9.41 ($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 June 30, 2008, there are a total of 849,646 shares of restricted stock 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
June 30, 2008, none of the shares subject to market conditions have vested.

16

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Table of Contents

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 $1.5 million and $1.2 million during the quarters ended June 30, 2007 and 2008, respectively, and
$2.6 million and $2.5 million for the six month periods ended June 30, 2007 and 2008, respectively. As of June 30, 2008, there was $3.5 million of total unrecognized
compensation cost related to stock options which is expected to be amortized over a weighted-average period of 2.0 years and $8.1 million of total unrecognized compensation cost related
to restricted stock which is expected to be amortized over a weighted-average period of 3.3 years.

The
following summarizes the Company's stock option activity for the six months ended June 30, 2008:

Shares

Weighted
Average
Exercise
PriceOutstanding, beginning of period


4,159,463

$
9.19Granted





Exercised


(384,960
)

6.62Cancelled


(22,590
)

17.36Outstanding, end of period


3,751,913

$
9.41Exercisable, end of period


2,617,010

$
8.58


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. Certain defendants have made claims for indemnity for events occurring prior to 1995, which the Company is disputing. The Company cannot predict the cost of these indemnity
claims at the present time.

17

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Table of Contents

VENOCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

8. LITIGATION (Continued)

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 judgment, 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.



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. 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 June 30, 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.

18

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Table of Contents

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

Venoco, Inc.

Guarantor
Subsidiaries

Non-
Guarantor
Subsidiary

Eliminations

ConsolidatedREVENUES:Oil and natural gas sales

$
68,445

$
21,485

$


$


$
89,930Other


617


35


1,232


(1,132
)

752Total revenues


69,062


21,520


1,232


(1,132
)

90,682EXPENSES:Oil and natural gas production


17,161


8,373


412





25,946Transportation expense


2,560


(91
)




(1,062
)

1,407Depletion, depreciation and amortization


18,801


4,734


21





23,556Accretion of abandonment liability


707


134


3





844General and administrative, net of amounts capitalized


6,714


524


70


(70
)

7,238Total Expenses


45,943


13,674


506


(1,132
)

58,991Income from operations


23,119


7,846


726





31,691FINANCING COSTS AND OTHER:Interest expense, net


16,510


(26
)

(661
)




15,823Amortization of deferred loan costs


985











985Interest rate derivative losses, net


189











189Loss on extinguishment of debt


12,063











12,063Commodity derivative losses


7,854











7,854Total financing costs and other


37,601


(26
)

(661
)




36,914Equity in subsidiary income


5,679








(5,679
)

Income (loss) before income taxes


(8,803
)

7,872


1,387


(5,679
)

(5,223
)Income tax provision (benefit)


(5,680
)

3,038


542





(2,100
)Net income (loss)

$
(3,123
)
$
4,834

$
845

$
(5,679
)
$
(3,123
)


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Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS        THREE MONTHS ENDED JUNE 30, 2008 (Unaudited)        (in thousands)

Venoco, Inc.

Guarantor
Subsidiaries

Non-
Guarantor
Subsidiary

Eliminations

ConsolidatedREVENUES:Oil and natural gas sales

$
120,452

$
46,680

$


$


$
167,132Other


699


16


1,192


(992
)

915Total revenues


121,151


46,696


1,192


(992
)

168,047EXPENSES:Oil and natural gas production


19,468


13,070


600





33,138Transportation expense


2,297


4





(919
)

1,382Depletion, depreciation and amortization


23,715


6,132


23





29,870Accretion of asset retirement obligations


815


197


16





1,028General and administrative, net of amounts capitalized


11,239


926


73


(73
)

12,165Total expenses


57,534


20,329


712


(992
)

77,583Income from operations


63,617


26,367


480





90,464FINANCING COSTS AND OTHER:Interest expense, net


13,957


(6
)

(782
)




13,169Amortization of deferred loan costs


889











889Interest rate derivative losses, net


(9,908
)










(9,908
)Loss on extinguishment of debt














Commodity derivative losses, net


364,783











364,783Total financing costs and other


369,721


(6
)

(782
)




368,933Equity in subsidiary income


17,180








(17,180
)

Income (loss) before income taxes


(288,924
)

26,373


1,262


(17,180
)

(278,469
)Income tax provision (benefit)


(116,355
)

9,980


475





(105,900
)Net income (loss)

$
(172,569
)
$
16,393

$
787

$
(17,180
)
$
(172,569
)


20

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Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS        SIX MONTHS ENDED JUNE 30, 2007 (Unaudited)        (in thousands)

Venoco, Inc.

Guarantor
Subsidiaries

Non-
Guarantor
Subsidiary

Eliminations

ConsolidatedREVENUES:Oil and natural gas sales

$
128,677

$
34,681

$


$


$
163,358Other


1,299


37


2,415


(2,186
)

1,565Total revenues


129,976


34,718


2,415


(2,186
)

164,923EXPENSES:Oil and natural gas production


33,541


16,556


936





51,033Transportation expense


5,330








(2,046
)

3,284Depletion, depreciation and amortization


35,941


8,179


35





44,155Accretion of abandonment liability


1,357


253


7





1,617General and administrative, net of amounts capitalized


15,462


1,570


141


(140
)

17,033Total Expenses


91,631


26,558


1,119


(2,186
)

117,122Income from operations


38,345


8,160


1,296





47,801FINANCING COSTS AND OTHER:Interest, net


30,437


(45
)

(1,290
)




29,102Amortization of deferred loan costs


2,230











2,230Interest rate derivative losses, net


237











237Loss on extinguishment of debt


12,063











12,063Commodity derivative losses, net


26,357











26,357Total financing costs and other


71,324


(45
)

(1,290
)




69,989Equity in subsidiary income


6,614








(6,614
)

Income (loss) before income taxes


(26,365
)

8,205


2,586


(6,614
)

(22,188
)Income tax provision (benefit)


(12,877
)

3,168


1,009





(8,700
)Net income (loss)

$
(13,488
)
$
5,037

$
1,577

$
(6,614
)
$
(13,488
)


21

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Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS        SIX MONTHS ENDED JUNE 30, 2008 (Unaudited)        (in thousands)

Venoco, Inc.

Guarantor
Subsidiaries

Non-
Guarantor
Subsidiary

Eliminations

ConsolidatedREVENUES:Oil and natural gas sales

$
222,455

$
81,342

$


$


$
303,797Other


1,382


25


2,403


(2,110
)

1,700Total revenues


223,837


81,367


2,403


(2,110
)

305,497EXPENSES:Oil and natural gas production


40,379


23,819


949





65,147Transportation expense


4,638


4





(1,963
)

2,679Depletion, depreciation and amortization


48,964


12,106


46





61,116Accretion of asset retirement obligations


1,599


390


32





2,021General and administrative, net of amounts capitalized


19,707


1,524


147


(147
)

21,231Total expenses


115,287


37,843


1,174


(2,110
)

152,194Income from operations


108,550


43,524


1,229





153,303FINANCING COSTS AND OTHER:Interest expense, net


29,304


(14
)

(1,532
)




27,758Amortization of deferred loan costs


1,888











1,888Interest rate derivative losses, net


4,063











4,063Loss on extinguishment of debt














Commodity derivative losses, net


439,419











439,419Total financing costs and other


474,674


(14
)

(1,532
)




473,128Equity in subsidiary income


28,668








(28,668
)

Income (loss) before income taxes


(337,456
)

43,538


2,761


(28,668
)

(319,825
)Income tax provision (benefit)


(139,431
)

16,580


1,051





(121,800
)Net income (loss)

$
(198,025
)
$
26,958

$
1,710

$
(28,668
)
$
(198,025
)


22

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Table of Contents

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

Venoco, Inc.

Guarantor
Subsidiaries

Non-
Guarantor
Subsidiary

Eliminations

ConsolidatedASSETSCURRENT ASSETS:Cash and cash equivalents

$
8,762

$
973

$


$


$
9,735Accounts receivable


38,020


17,512


65





55,597Inventories


5,217


5,160








10,377Prepaid expenses and other current assets


4,391











4,391Income taxes receivable


6,725











6,725Deferred income taxes


21,967











21,967Commodity derivatives


7,780











7,780TOTAL CURRENT ASSETS


92,862


23,645


65





116,572PROPERTY, PLANT & EQUIPMENT, NET


755,487


374,246


1,299





1,131,032COMMODITY DERIVATIVES


3,768











3,768INVESTMENTS IN AFFILIATES


431,083








(431,083
)

OTHER


13,296


817








14,113TOTAL ASSETS

$
1,296,496

$
398,708

$
1,364

$
(431,083
)
$
1,265,485LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIES:Accounts payable and accrued liabilities

$
75,524

$
6,570

$


$


$
82,094Undistributed revenue payable


11,298











11,298Interest payable


6,839











6,839Current maturities of long-term debt


3,449











3,449Commodity and interest derivatives


68,756











68,756TOTAL CURRENT LIABILITIES:


165,866


6,570








172,436LONG-TERM DEBT


691,896











691,896DEFERRED INCOME TAXES


16,607











16,607COMMODITY AND INTEREST DERIVATIVES


87,224











87,224ASSET RETIREMENT OBLIGATIONS


40,587


10,317


816





51,720INTERCOMPANY PAYABLES (RECEIVABLES)


48,714


(11,705
)

(37,009
)




TOTAL LIABILITIES


1,050,894


5,182


(36,193
)




1,019,883TOTAL STOCKHOLDERS' EQUITY


245,602


393,526


37,557


(431,083
)

245,602TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
1,296,496

$
398,708

$
1,364

$
(431,083
)
$
1,265,485


23

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Table of Contents

CONDENSED CONSOLIDATING BALANCE SHEETS        AT JUNE 30, 2008 (Unaudited)        (in thousands)

Venoco, Inc.

Guarantor
Subsidiaries

Non-Guarantor
Subsidiary

Eliminations

ConsolidatedASSETSCURRENT ASSETS:Cash and cash equivalents

$
4,546

$
1

$


$


$
4,547Accounts receivable


51,398


21,124


205





72,727Inventories


4,112


4,612








8,724Prepaid expenses and other current assets


2,474











2,474Income taxes receivable


6,625











6,625Deferred income taxes


82,167











82,167Commodity derivatives


11,221











11,221TOTAL CURRENT ASSETS


162,543


25,737


205





188,485PROPERTY, PLANT & EQUIPMENT, NET


832,649


389,301


1,240





1,223,190COMMODITY DERIVATIVES


3,150











3,150INVESTMENTS IN AFFILIATES


477,381








(477,381
)

DEFERRED INCOME TAXES


44,856











44,856OTHER


9,234


783








10,017TOTAL ASSETS

$
1,529,813

$
415,821

$
1,445

$
(477,381
)
$
1,469,698LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIES:Accounts payable and accrued liabilities

$
60,354

$
7,993

$


$


$
68,347Undistributed revenue payable


12,864











12,864Interest payable


5,722











5,722Current maturities of long-term debt


4,425











4,425Deferred income taxes














Commodity and interest derivatives


230,205











230,205TOTAL CURRENT LIABILITIES:


313,570


7,993








321,563LONG-TERM DEBT


740,204











740,204DEFERRED INCOME TAXES














COMMODITY AND INTEREST DERIVATIVES


298,399











298,399ASSET RETIREMENT OBLIGATIONS


44,724


10,961


848





56,533INTERCOMPANY PAYABLES (RECEIVABLES)


79,917


(40,195
)

(39,722
)




OTHER LONG-TERM LIABILITIES














TOTAL LIABILITIES


1,476,814


(21,241
)

(38,874
)




1,416,699TOTAL STOCKHOLDERS' EQUITY


52,999


437,062


40,319


(477,381
)

52,999TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
1,529,813

$
415,821

$
1,445

$
(477,381
)
$
1,469,698


24

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Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS        SIX MONTHS ENDED JUNE 30, 2007 (Unaudited)        (in thousands)

Venoco, Inc.

Guarantor
Subsidiaries

Non-
Guarantor
Subsidiary

Eliminations

ConsolidatedCASH FLOWS FROM OPERATING ACTIVITIES:Net cash provided by (used in) operating activities

$
53,677

$
11,823

$
1,607

$


$
67,107CASH FLOWS FROM INVESTING ACTIVITIES:Expenditures for oil and natural gas properties


(89,917
)

(59,107
)







(149,024
)Acquisitions of oil and natural gas properties


(66,776
)

(49,654
)







(116,430
)Expenditures for property and equipment and other


(2,945
)

(265
)







(3,210
)Net cash provided by (used in) investing activities


(159,638
)

(109,026
)







(268,664
)CASH FLOWS FROM FINANCING ACTIVITIES:Net proceeds from (repayments of) intercompany borrowings


(92,363
)

93,988


(1,625
)




Proceeds from long-term debt


705,421











705,421Principal payments on long-term debt


(492,303
)










(492,303
)Premium to retire debt


(3,489
)










(3,489
)Proceeds from derivative premium financing


1,676











1,676Deferred loan costs


(4,790
)










(4,790
)Proceeds from exercise of stock options


208











208Excess income tax benefits from share-based compensation


1,053











1,053Net cash provided by (used in) financing activities


115,413


93,988


(1,625
)




207,776Net increase (decrease) in cash and cash equivalents


9,452


(3,215
)

(18
)




6,219Cash and cash equivalents, beginning of period


(12
)

8,358


18





8,364Cash and cash equivalents, end of period

$
9,440

$
5,143

$


$


$
14,583


25

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Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS        SIX MONTHS ENDED JUNE 30, 2008 (Unaudited)        (in thousands)

Venoco, Inc.

Guarantor
Subsidiaries

Non-
Guarantor
Subsidiary

Eliminations

ConsolidatedCASH FLOWS FROM OPERATING ACTIVITIES:Net cash provided by operating activities

$
68,275

$
37,834

$
1,647

$


$
107,756CASH FLOWS FROM INVESTING ACTIVITIES:Expenditures for oil and natural gas properties


(129,790
)

(26,806
)

13





(156,583
)Acquisitions of oil and natural gas properties


(2,589
)

(2,035
)







(4,624
)Expenditures for property and equipment and other


(2,395
)

(86
)







(2,481
)Proceeds from sale of oil and natural gas properties














Acquisition of Texcal Energy, net of cash acquired














Net cash provided by (used in) investing activities


(134,774
)

(28,927
)

13





(163,688
)CASH FLOWS FROM FINANCING ACTIVITIES:Net proceeds from (repayments of) intercompany borrowings


11,539


(9,879
)

(1,660
)




Proceeds from long-term debt


135,000











135,000Principal payments on long-term debt


(93,787
)










(93,787
)Deferred loan costs


(811
)










(811
)Premium to retire debt














Proceeds from derivative premium financing


7,817











7,817Proceeds from issuance of common stock














Stock issuance costs


(5
)










(5
)Proceeds from exercise of stock options


2,530











2,530Excess income tax benefits from share-based compensation














Dividend paid to shareholder














Net cash provided by (used in) financing activities


62,283


(9,879
)

(1,660
)




50,744Net increase (decrease) in cash and cash equivalents


(4,216
)

(972
)







(5,188
)Cash and cash equivalents, beginning of period


8,762


973








9,735Cash and cash equivalents, end of period

$
4,546

$
1

$


$


$
4,547


26

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Table of Contents

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 21,033 BOE/d in the second quarter of 2008, compared to 21,026 BOE/d in the first quarter of 2008 and 19,628 BOE/d in the second 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 development,
exploitation and exploration 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. Our development, exploitation and exploration capital expenditure budget for 2008 is $235.0 million, of which approximately $143.8 million (excluding changes in accrued capital
expenditures) was expended in the first half 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. If oil and natural gas prices remain at high levels, we may increase our capital expenditure budget to accelerate the
development of some 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 2008 capital spending program:

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. We worked over five wells and returned five wells to production during the
first half of the year and plan to return an additional four wells to production later this year. We also plan to drill two new development wells in the field during the second half of the year. We
plan to commission a seismic survey to assist us in designing and optimizing an infill development program. This survey will most likely be conducted in late 2008 or early 2009.

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 redrilled
one well

27

---



Table of Contents

as
an injector and performed two successful workovers in the field during the second quarter. Three additional workovers are planned in view of the favorable production response from our initial
efforts. We also continue to develop our plans for additional infill development drilling, waterflood expansion and natural gas production.

In
the South Ellwood field, the permitting process continues for our full-field development project. We received the draft environmental impact report for this project from
the California State Lands Commission in June, and will now focus on the project approval hearings which we expect to commence later this year. Key components of the project include an extension of
our current lease area (which would effectively double the size of the existing lease area) and the installation of an onshore oil transport pipeline to replace the existing barge. Development of the
extended lease area can be accomplished from the field's existing platform.

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
half of 2008, we spudded 59 wells, completed 44 wells, and performed 55 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 35 wells during the first half of 2008. We are encouraged by the success of these early wells and are currently conducting a comprehensive analysis of the results in
order to optimize future fracture stimulations in the basin. We currently plan to fracture more than 60 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. During the first half of the year, we performed 61 workovers and recompletions and converted 14 wells into injectors at the Hastings complex. We are also focused on lowering
operating expenses in the Hastings complex as we reduce our remediation and redevelopment activities there. At Manvel, we performed five workovers and converted one well to an injector during the
first half of the year and have seen daily production increase by 22% from the first quarter to the second. During the second half of the year, we plan to continue our work at Hastings and Manvel and
to drill up to three new development wells in other Texas fields.

Higher Impact Exploration Activities

In 2008, we expect to drill as many as fifteen higher impact exploration wells. During the first half of the year we drilled one higher
impact exploration well in Texas and three in the Sacramento Basin. The Texas well is a new discovery in our South Liberty field.

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.

28

---



Table of Contents

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 and the workover program we began this year on Platform Gail in the Sockeye field. In the Sacramento Basin, we are continuing our multi-year drilling program and our
hydraulic fracturing program and anticipate production increases from both. We continue to assess and develop plans for a further expansion of our activities in the area. 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 capacity and performing workovers and recompletions. 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 half 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. If oil and natural gas prices continue to rise, 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.

29

---



Table of Contents

Results of Operations

The following table reflects the components of our oil and natural gas production and sales prices and sets forth our operating
revenues, costs and expenses on a BOE basis for the three and six months ended June 30, 2007 and 2008.

Three Months Ended
June 30,

Six Months Ended
June 30,2007

2008

2007

2008Production Volume:Oil (MBbls)


1,006


975


1,889


1,959Natural gas (MMcf)


4,681


5,634


8,925


11,210MBOE


1,786


1,914


3,377


3,827Daily Average Production Volume:Oil (Bbls/d)


11,055


10,714


10,436


10,764Natural gas (Mcf/d)


51,440


61,912


49,309


61,593BOE/d


19,628


21,033


18,654


21,030Oil Price per Bbl Produced (in dollars):Realized price

$
56.37

$
114.37

$
53.04

$
102.55Realized commodity derivative gain (loss) and amortization of commodity derivative premiums


(0.10
)

(38.44
)

0.11


(28.42
)Net realized price

$
56.27

$
75.93

$
53.15

$
74.13Natural Gas Price per Mcf (in dollars):Realized price

$
6.96

$
10.39

$
7.04

$
9.14Realized commodity derivative loss and amortization of commodity derivative premiums


(0.01
)

(0.07
)

(0.02
)

(0.04
)Net realized price

$
6.95

$
10.32

$
7.02

$
9.10Average Price per BOE(1)

$
48.42

$
67.46

$
47.09

$
63.25Expense per BOE:Production expenses(2)

$
14.53

$
17.31

$
15.11

$
17.02Transportation expenses


0.79


0.72


0.97


0.70Depreciation, depletion and amortization


13.19


15.61


13.08


15.97General and administrative expense(3)


4.05


6.36


5.04


5.55Interest expense


8.86


6.88


8.62


7.25


---

Comparison of Quarter Ended June 30, 2008 to Quarter Ended June 30, 2007

Oil and Natural Gas Sales.Oil and natural gas sales increased $77.2 million (86%) to $167.1 million for the quarter ended June 30, 2008 from
$89.9 million for the same period in 2007. The increase was primarily due to a 39% increase in average sales prices and a 7% increase in production as described below.

Oil
sales increased by $51.1 million (89%) in the second quarter of 2008 to $108.6 million compared to $57.5 million in the second quarter of 2007. Oil production
decreased by 3%, with

30

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production
of 975 MBbl in the second quarter of 2008 compared to 1,006 MBbl in the second quarter of 2007. The production decrease was primarily related to scheduled downtime in the Sockeye and South
Ellwood fields in April and June 2008, respectively. The decrease was partially offset by the effect of a full quarter of production from the West Montalvo field, which was acquired in May 2007. Our
average realized price for oil increased $58.00 (103%) to $114.37 per Bbl for the period.

Natural
gas sales increased $26.1 million (80%) in the second quarter of 2008 to $58.5 million compared to $32.4 million in the second quarter of 2007. Natural gas
production increased 20%, with production of 5,634 MMcf in the second quarter of 2008 compared to 4,681 MMcf in the second quarter of 2007. The increase was due primarily to drilling, recompletion and
hydraulic fracturing activities in the Sacramento Basin. These increases were partially offset by decreases in natural gas production in the South Ellwood field due to the scheduled downtime. Our
average realized price for natural gas increased $3.43 (49%) to $10.39 per Mcf for the period.

Other Revenues.Other revenue remained relatively constant at $0.9 million in the second quarter of 2008 compared to $0.8 million in the second
quarter of 2007.

Production Expenses.Production expenses, which consist of lease operating expenses ("LOE") and production/property taxes, increased $7.2 million (28%) to
$33.1 million in the second quarter of 2008 from $25.9 million in the second quarter of 2007. The increase was primarily due to maintenance costs related to the scheduled downtime at
South Ellwood, production expenses attributable to the Montalvo and Manvel acquisitions, which reflect a full quarter of expense in 2008, the workover program at the Hastings complex and an increase
in the number of producing wells at other properties. On a per unit basis, LOE increased to $15.40 per BOE in the second quarter of 2008 from $13.00 per BOE in the same period in 2007. Also
contributing to the overall increase in production expeses was 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 of $1.4 million remained unchanged for the second quarter of 2008 relative to the 2007 period. On a per BOE
basis, transportation expenses decreased $.07 per BOE, from $.79 per BOE in the second quarter of 2007 to $.72 per BOE in the second quarter of 2008.

Depletion, Depreciation and Amortization (DD&A).DD&A expense increased $6.3 million (27%) to $29.9 million in the second quarter of 2008 from
$23.6 million in the second quarter of 2007. DD&A expense rose $2.42 per BOE, from $13.19 per BOE in the second quarter of 2007 to $15.61 per BOE in the second quarter of 2008. The increase was
primarily due to a higher depletion expense based on an increase in our oil and natural gas property cost resulting from our capital expenditure program.

Accretion of Abandonment Liability.Accretion expense was $1.0 million in the second quarter of 2008 compared to $0.8 million in the second quarter
of 2007. The increase was due to accretion from new wells drilled and completed in 2007 and the first half of 2008.

General and Administrative (G&A).G&A expense increased $5.0 million (68%) to $12.2 million in the second quarter of 2008 from $7.2 million in
the second quarter of 2007. The increase resulted primarily from costs of $2.7 million that were expensed in the second quarter of 2008 in connection with the cancellation of a planned master
limited partnership, or MLP, offering. The increase also resulted from an increase in our professional staff and related infrastructure. Non-cash SFAS 123R compensation expense
charged to G&A decreased $0.3 million (20%) from $1.4 million in 2007 to $1.1 million in 2008 as a result of the settlement of an employment contract in 2007.

Interest Expense, Net.Interest expense, net of interest income, decreased $2.6 million (17%) from $15.8 million in the second quarter of 2007 to
$13.2 million in the second quarter of 2008. The

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decrease
was primarily the result of a decrease in interest rates realized during the second quarter of 2008, partially offset by an increase in average debt outstanding.

Amortization of Deferred Loan Costs.Amortization of deferred loan costs decreased $0.1 million, from $1.0 million in the second quarter of 2007 to
$0.9 million in the second quarter of 2008. The decrease was primarily due to the write-off of deferred loan costs in connection with the refinancing of our term loan facility in the second
quarter of 2007, as well as the amendment to the revolving credit facility in May 2008 which extended the maturity date of the facility.

Interest Rate Derivative Losses (Gains), Net.Changes in the fair value of our interest rate swap derivative instruments resulted in unrealized gains of
$13.2 million in the second quarter of 2008 and a loss of $0.2 million 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 an increase in estimated interest rates used to determine the fair value of the derivative instruments during the second quarter of 2008. Realized interest rate swap
losses were $3.3 million in the second quarter of 2008 compared to $31,000 in the second quarter of 2007.

Loss on Extinguishment of Debt.We incurred a loss on extinguishment of debt of $12.1 million in the second quarter of 2007 when we prepaid our original
second lien term loan facility and replaced it with our current term loan facility. We paid a premium of $3.5 million and wrote off related deferred loan costs of $8.6 million in
connection with the prepayment of the prior term loan facility.

Commodity Derivative Losses, Net.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
June 30,2007

2008Realized commodity derivative (gains) losses

$
151

$
37,856Unrealized commodity derivative (gains) losses


5,861


325,162Amortization of derivative premiums


1,842


1,765Total

$
7,854

$
364,783


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 second 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 decrease in amortization of derivative premiums and other comprehensive losses in the 2008 period reflects lower premiums paid in connection with the
contracts outstanding in 2008.

Income Tax Expense.The net loss in the second quarter of 2008 resulted in an income tax benefit of $105.9 million compared to the income tax benefit of
$2.1 million for the second quarter of 2007.

Net Income (Loss).The net loss for the second quarter of 2008 was $172.6 million compared to a net loss of $3.1 million for the same period in 2007.
The change between periods is the result of the items discussed above.

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Comparison of Six Months Ended June 30, 2008 to Six Months Ended June 30, 2007

Oil and Natural Gas Sales.Oil and natural gas sales increased $140.4 million (86%) to $303.8 million for the six months ended June 30, 2008
from $163.4 million for the same period in 2007. The increase was primarily due to a 34% increase in realized sales prices and a 13% increase in production, as further described below.

Oil
sales increased by $100.5 million (100%) in the first half of 2008 to $201.3 million from $100.8 million in the first half of 2007. Oil production rose 4%, with
production of 1,959 MBbl in the first half of 2008 compared to 1,889 MBbl in the first half of 2007. The production increase was attributable primarily to the effect of a full period of production
from the Manvel field, which was purchased in April 2007, and from the West Montalvo field, which was purchased in May 2007. The increase was offset by a reduction in production from the Sockeye and
South Ellwood fields due to scheduled downtime in April and June 2008, respectively. Our average realized price for oil increased $49.51 (93%) to $102.55 per Bbl for the period.

Natural
gas sales increased $39.9 million (64%) in the first six months of 2008 to $102.5 million compared to $62.6 million in the first six months of 2007. Natural
gas production increased 26%, with production of 11,210 MMcf compared to 8,925 MMcf in the first six months of 2007. The increase was due primarily to drilling, recompletion and hydraulic fracturing
activities in the Sacramento Basin. The increase was partially offset by decreased production from the South Ellwood field due to scheduled downtime in June 2008. Our average realized price for
natural gas increased $2.10 (30%) to $9.14 per Mcf for the period.

Other Revenues.Other revenue remained relatively flat at $1.7 million in the first half of 2008 compared to $1.6 million in the first half of 2007.

Production Expenses.Production expenses, which consist of lease operating expenses and production/property taxes, increased $14.1 million (28%) to
$65.1 million in the first half of 2008 from $51.0 million in the first half of 2007. The increase was primarily due to maintenance costs associated with the scheduled downtime at
Sockeye and South Ellwood during the second quarter of 2008, as well as the effect of a full six months of expense related to the Manvel and Montalvo acquisitions, which occurred in April and May
2007, respectively. The continuing workover program at the Hastings complex also contributed to the increase. On a per unit basis, LOE increased to $15.04 per BOE in the first half of 2008 compared to
$13.99 per BOE in the same period in 2007.

Transportation Expenses.Transportation expenses decreased 18%, from $3.3 million in the first half of 2007 to $2.7 million in the first half of
2008. On a per BOE basis, transportation expenses decreased $.27 per BOE, from $.97 per BOE in the first half of 2007 to $.70 per BOE in the first half of 2008.

Depletion, Depreciation and Amortization (DD&A).DD&A expense increased $16.9 million (38%) to $61.1 million in the first half of 2008 from
$44.2 million in the first half of 2007. DD&A expense per BOE rose $2.89, from $13.08 per BOE in the first half of 2007 to $15.97 per BOE in the first half of 2008. The increase was primarily
due to a higher depletion expense based on an increase in the oil and natural gas property costs resulting from our capital expenditure program.

Accretion of Asset Retirement Obligations.Accretion expense was $2.0 million in the first half of 2008 compared to $1.6 million in the first half of
2007. The increase was primarily due to accretion from new wells drilled and completed in 2007 and the first half of 2008.

General and Administrative (G&A).G&A expense, net of amounts capitalized, increased $4.2 million (25%) to $21.2 million in the first half of 2008
from $17.0 million in the first half of 2007. The increase resulted primarily from costs of $2.7 million that were expensed in the second quarter of

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2008
in connection with the cancellation of a planned MLP offering. The increase also resulted from an increase in our professional staff and related infrastructure. Non-cash
SFAS 123R share-based compensation expense for the first half of 2007 was $2.5 million and was $2.3 million in the first half of 2008.

Interest Expense, Net.Interest expense, net of interest income, decreased $1.3 million (5%) from $29.1 million in the first half of 2007 to
$27.8 million in the first half of 2008, primarily as a result of a decrease in interest rates during the first half of 2008, partially offset by an increase in average debt outstanding.

Amortization of Deferred Loan Costs.Amortization of deferred loan costs decreased $0.3 million (15%) from $2.2 million in the first half of 2007 to
$1.9 million in the first half of 2008. The decrease was primarily due to the write-off of deferred loan costs in connection with the refinancing of our term loan facility in the first half of
2007, as well as the amendment to the revolving credit facility in May 2008 which extended the maturity date of the facility.

Interest Rate Derivative Losses (Gains), Net.Changes in the fair value of our interest rate swap derivative instruments resulted in unrealized losses of
$0.3 million in the first half of 2008 and $0.2 million in the first half of 2007. Realized interest rate swap losses were $3.7 million in the first half of 2008 compared to
$0.1 million in the first half of 2007.

Loss on Extinguishment of Debt.We incurred a loss on extinguishment of debt of $12.1 million in the first half of 2007 when we prepaid our original second
lien term loan facility and replaced it with our current term loan facility. We paid a premium of $3.5 million and wrote off related deferred loan costs of $8.6 million in connection
with the prepayment.

Commodity Derivative Losses, Net.The following table sets forth the components of commodity derivative (gains) losses, net in our consolidated statements of
operations for the periods indicated (in thousands):

Six Months Ended
June 30,2007

2008Realized commodity derivative (gains) losses

$
(23
)
$
56,119Unrealized commodity derivative (gains) losses


22,851


379,771Amortization of derivative premiums


3,529


3,529Total

$
26,357

$
439,419


Realized
commodity derivative gains or losses represent the difference between the strike price in the contracts settled during the period and the ultimate settlement prices. The
realized commodity derivative gains in the 2007 period reflect the settlement of contracts at prices below the strike price, whereas the realized commodity derivative losses in the 2008 period reflect
the settlement of contracts at prices above the strike price. Unrealized commodity derivative gains (losses) represent the change in the fair value of our open derivative contracts from period to
period. The change in unrealized commodity derivative losses reflects an increase in the notional volumes under derivative contracts outstanding in the 2008 period as well as an increase in the
futures prices used to estimate the fair value of those contracts at the end of the period. Derivative premiums are amortized over the term of the underlying derivative contracts. The decrease in
amortization of derivative premiums and other comprehensive losses in the 2008 period reflects lower premiums paid in connection with the contracts outstanding in 2008.

Income Tax Expense.The loss before taxes in the first half of 2008 resulted in an income tax benefit of $121.8 million compared to income tax benefit of
$8.7 million for the first half of 2007.

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Net Income (Loss).The net loss for the first half of 2008 was $198.0 million compared to net loss of $13.5 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

Six Months Ended
June 30,2007

2008(in thousands)Cash provided by operating activities

$
67,107

$
107,756Cash used in investing activities


(268,664
)

(163,688
)Cash provided by financing activities


207,776


50,744


Net
cash provided by operating activities was $107.8 million in the first half of 2008 compared with $67.1 million in the first half of 2007. Cash flows from operating
activities in the first half 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 half of 2008 by increases in receivables and premiums paid for derivative contracts.

Net
cash used in investing activities was $163.7 million in the first half of 2008 compared with $268.7 million in the first half of 2007. The primary investing activities
in the first half of 2008 include $161.2 million in capital expenditures on oil and natural gas properties related to our 2008 capital expenditure program. The primary investing activities in
the first half of 2007 include $149.0 million in capital expenditures on oil and gas properties and $116.4 million paid for acquisitions, including the West Montalvo and Manvel fields.

Net
cash provided by financing activities was $50.7 million in the first half of 2008 compared to $207.8 million in the first half of 2007. The primary financing activities
in the first half of 2008 were $43.0 million in net borrowings under our revolving credit facility to fund capital expenditures and working capital needs. The primary financing activities in
the first half of 2007 were $151.1 million in net borrowings under the second lien term loan facility and $64.4 million in net borrowings under the revolving credit facility to fund
acquisitions, 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
if oil and natural gas prices remain at high levels. We currently 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 August 6, 2008, we had
$119.3 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 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

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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. Our subsidiary, Venoco Acquisition Company, L.P., which we
refer to as the master limited partnership or the MLP, previously filed a preliminary registration statement on Form S-1 relating to a proposed offering of limited partnership
interests in the MLP. We anticipated receiving an initial cash distribution in connection with the offering, which would have been an additional source of liquidity for us. However, we recently
decided not to pursue the offering and the MLP has withdrawn its registration statement. We do not expect the cancellation of the MLP offering to significantly affect our ability to satisfy our
liquidity needs.

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 covenants that restrict our ability to incur indebtedness
and 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 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 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 projected 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 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."

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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 June 30, 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.

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

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Commodity Derivative Transactions

Oil.As of June 30, 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

MaximumBbls/d

Weighted Avg.
Prices

Bbls/d

Weighted Avg.
PricesCrude oil derivatives at June 30, 2008 for production:July 1December 31, 2008


11,100

$
63.92


9,100

$
79.92January 1December 31, 2009


7,983

$
59.58


7,983

$
82.60January 1December 31, 2010


7,150

$
62.34


7,150

$
83.66January 1December 31, 2011


7,000

$
70.00


7,000

$
141.64


Natural Gas.As of June 30, 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

MaximumMMBtu/d

Weighted Avg.
Prices

MMBtu/d

Weighted Avg.
PricesNatural gas derivatives at June 30, 2008 for production:July 1December 31, 2008


32,650

$
7.56


31,032

$
11.35January 1December 31, 2009


43,125

$
8.02


23,125

$
11.42January 1December 31, 2010


17,900

$
7.32


17,900

$
11.03January 1December 31, 2011


12,000

$
7.50


12,000

$
13.50


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Table of Contents

Portfolio of Derivative Transactions

Our portfolio of commodity derivative transactions as of June 30, 2008 is summarized below:

Oil

Type of Contract

Basis

Quantity
(Bbl/d)

Strike Price
($/Bbl)

TermCollar

NYMEX


2,450

$52.00/$75.00


Jul 1Dec 31, 08Collar

NYMEX


1,000

$58.00/$78.00


Jul 1Dec 31, 08Collar

NYMEX


1,500

$58.00/$75.25


Jan 1Dec 31, 08Swap

NYMEX


2,500

$67.25


Jan 1Dec 31, 08Collar

NYMEX


800

$60.00/$82.75


Jan 1Dec 31, 08Collar

NYMEX


(150
)
$60.00/$82.75


Jan 1Dec 31, 08Collar

NYMEX


1,000

$70.00/$130.75


Mar 1Dec 31, 08Put

NYMEX


2,000

$80.00


Jan 1Dec 31, 08Collar

NYMEX


2,170

$50.00/$75.00


Jan 1Jun 30, 09Collar

NYMEX


1,000

$56.00/$79.25


Jul 1Dec 31, 09Collar

NYMEX


3,000

$55.00/$77.00


Jan 1Dec 31, 09Swap

NYMEX


2,000

$67.22


Jan 1Dec 31, 09Collar

NYMEX


750

$60.00/$82.75


Jan 1Dec 31, 09Collar

NYMEX


(700
)
$60.00/$82.75


Jan 1Jun 30, 09Collar

NYMEX


1,000

$70.00/$140.00


Jan 1Dec 31, 09Collar

NYMEX


1,000

$60.00/$72.80


Jan 1Dec 31, 10Collar

NYMEX


3,500

$60.00/$73.00


Jan 1Dec 31, 10Swap

NYMEX


1,000

$66.75


Jan 1Dec 31, 10Collar

NYMEX


650

$60.00/$81.75


Jan 1Dec 31, 10Collar

NYMEX


1,000

$70.00/$150.00


Jan 1Dec 31, 10Collar

NYMEX


2,000

$70.00/$144.75


Jan 1Dec 31, 11Collar

NYMEX


2,000

$70.00/$141.00


Jan 1Dec 31, 11Collar

NYMEX


3,000

$70.00/$140.00


Jan 1Dec 31, 11


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Table of Contents

Natural Gas

Type of Contract

Basis

Quantity
(MMBtu/d)

Strike Price
($/MMBtu)

TermPut

NYMEX


6,000

$8.00 Floor


Jan 1Dec 31, 08Call

NYMEX


4,382

$10.60 Cap


Jul 1Dec 31, 08Collar

NYMEX


7,500

$8.00/$12.75


Jan 1Dec 31, 08Collar

NYMEX


5,700

$7.75/$10.05


Jan 1Dec 31, 08Basis Swap

PG&E Citygate


10,000

$(0.32)


Jan 1Dec 31, 08Basis Swap

PG&E Citygate


10,000

$(0.38)


Jan 1Dec 31, 08Collar

NYMEX


1,450

$8.00/$12.95


Jan 1Dec 31, 08Collar

NYMEX


12,000

$7.50/$11.75


Mar 1Dec 31, 08Swap

NYMEX


1,250

$8.72 Fixed


Jan 1Jun 30, 09Collar

NYMEX


1,250

$7.75/$13.05


Jan 1Jun 30, 09Swap

NYMEX


1,250

$8.00 Fixed


Jul 1Dec 31, 09Collar

NYMEX


1,250

$7.25/$11.30


Jul 1Dec 31, 09Collar

NYMEX


7,000

$7.50/$12.75


Jan 1Dec 31, 09Basis Swap

PG&E Citygate


6,000

$0.10


Jan 1Dec 31, 09Basis Swap

PG&E Citygate


7,500

$0.11


Jan 1Dec 31, 09Collar

NYMEX


4,000

$7.30/$9.85


Jan 1Dec 31, 09Collar

NYMEX


1,125

$8.00/$12.00


Jan 1Dec 31, 09Collar

NYMEX


8,500

$7.50/$11.15


Jan 1Dec 31, 09Put

NYMEX


10,000

$8.50 Floor


Jan 1Dec 31, 09Put

NYMEX


10,000

$8.50 Floor


Jan 1Dec 31, 09Collar

NYMEX


10,000

$7.00/$10.35


Jan 1Dec 31, 10Basis Swap

PG&E Citygate


10,000

$0.22


Jan 1Dec 31, 10Collar

NYMEX


1,000

$7.00/$9.10


Jan 1Dec 31, 10Collar

NYMEX


900

$7.50/$12.20


Jan 1Dec 31, 10Collar

NYMEX


6,000

$7.50/$11.95


Jan 1Dec 31, 10Collar

NYMEX


12,000

$7.50/$13.50


Jan 1Dec 31, 11


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. As of June 30,
2008, the fair value of our commodity derivatives was a liability of $496.1 million.

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. 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. As of August 6, 2008, there was approximately $80.0 million outstanding under that facility. A 1.0% increase in interest
rates on unhedged variable rate borrowings of $85 million at June 30, 2008 would result in additional annualized interest expense of $0.9 million. As of June 30, 2008, the
fair value of our interest rate derivatives was a liability of $18.1 million.

See
notes to our consolidated financial statements for a discussion of our long-term debt as of June 30, 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 June 30, 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
June 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Table of Contents

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

The 2008 annual meeting of our stockholders was held on May 15, 2008 in Denver, Colorado. The following table summarizes the
proposals submitted to a vote of the stockholders and the results of the voting:

For

Against

Abstain or WithholdElection of directorsJ.C. "Mac" McFarland


49,206,342





13,072Joel L. Reed


49,206,342





13,072Ratification of Deloitte & Touche LLP as independent registered public accounting firm for 2008


49,179,736


23,824


15,854


The
terms of office of directors Timothy M. Marquez, Timothy Brittan, Dr. M.W. Scoggins, Mark A. Snell, and Richard S. Walker continued after the meeting. Of the
50,867,872 shares of common stock issued and outstanding as of the record date for the meeting, 49,219,414 shares were present by proxy at the meeting.

Item 5.    OTHER INFORMATION

Not Applicable

Item 6.    EXHIBITS

Exhibit
Number

Exhibit31.1

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.

August 6,
2008

VENOCO, INC.By:

/s/TIMOTHY M. MARQUEZName: Timothy M. Marquez
Title:Chairman and Chief Executive OfficerBy:

/s/TIMOTHY A. FICKERName: Timothy A. Ficker
Title:Chief Financial Officer


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