1.                      Basis of Presentation

These Condensed Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial reporting.  All adjustments which are, in the opinion of management, necessary to present fairly Berry Petroleum Company’s (the Company) financial position at June 30, 2010 and December 31, 2009 and results of operations and comprehensive income (loss) for the three and six months ended June 30, 2010 and 2009, and its cash flows for the six months ended June 30, 2010 and 2009 have been included. Interim results are not necessarily indicative of expected annual results because of the impact of fluctuations in prices received for oil and natural gas, as well as other factors.  In the course of preparing the Condensed Financial Statements, manag ement makes various assumptions, judgments and estimates to determine the reported amounts of assets, liabilities, revenues 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 previously established.

The Company’s Financial Statements have been prepared on a basis consistent with the accounting principles and policies reflected in the Company’s audited financial statements as of and for the year ended December 31, 2009.  The year-end Condensed Balance Sheet was derived from audited Financial Statements included in such report, but does not include all disclosures required by GAAP.  Certain prior period amounts have been reclassified to properly conform to current period financial statement classification and presentation requirements.  We have revised our Condensed Statement of Comprehensive Income (Loss) to reflect the correction of a prior period presentation error.  The Company has concluded that the presentation error was immaterial to the previously filed financial statements.  See Note 14 to the C ondensed Financial Statements.

The Company’s cash management process provides for the daily funding of checks as they are presented to the bank. Included in accounts payable at June 30, 2010 and December 31, 2009 is $17.7 million and $15.7 million, respectively, representing outstanding checks in excess of the bank balance (book overdraft).

2.                      Bad Debt Allowance

The Company recognized $38.5 million in bad debt expense in the year ended December 31, 2008 related to Flying J, Inc., its wholly owned subsidiary Big West Oil, LLC and its wholly owned subsidiary Big West of California, LLC (BWOC) filing for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code on December 22, 2008.  On July 6, 2010, the Joint Plan of Reorganization of Flying J, Inc., BWOC, Big West Oil, LLC, Big West Transportation, LLC and Longhorn Partners Pipeline, L.P. was confirmed under Chapter 11 of the United State Bankruptcy Code.  Additionally, on July 6, 2010, the United States Bankruptcy Court approved and confirmed that certain June 15, 2010 Stipulation and Agreed Order (the Stipulation) with Flying J Inc. and certain of its affiliates (collectively Flying J), re garding the resolution of the Company’s claim in Flying J’s pending bankruptcy.  Pursuant to the Stipulation, each of the Company and Flying J agreed that the total amount owed to the Company by Flying J was $60.5 million and, as a result, the Company received $60.5 million in cash on July 23, 2010.  In the second quarter ended June 30, 2010, the Company recorded a settlement of its Flying J bankruptcy claim of $22.0 million and a bad debt recovery of $38.5 million.  See Notes 12 and 13 to the Condensed Financial Statements.

3.         Fair Value Measurements

The authoritative guidance for fair value measurements establishes a three-tier fair value hierarchy, which prioritizes the inputs used to measure fair value. These tiers include: Level 1, defined as unadjusted quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for use when little or no market data exists, therefore requiring an entity to develop its own assumptions.

A financial instrument’s categorization within the fair value hierarchy is based upon 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 classification of assets and liabilities within the fair value hierarchy. The Company utilizes a mid-market pricing convention (the mid-point price between bid and ask prices) for valuation as a practical expedient for assigning fair value. Oil swaps, natural gas swaps and interest rate swaps are valued using models which are based on active market data and are classified within Level 2 of the fair value hierarchy. Derivatives that are valued based upon models with significant unobservable market inputs (primarily volatility), and that are normally tra ded less actively are classified within Level 3 of the valuation hierarchy. These models are industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures.  The fair value of all derivative instruments are estimated using a combined income and market valuation methodology based upon forward commodity price and volatility curves. The curves are obtained from independent pricing services, and the Company has made no adjustments to the obtained prices.  The pricing services publish observable market information from multiple brokers and exchanges.  No proprietary models are used by the pricing services for the inputs.  All valuations were compared against counterparty valuations to verify the reasonableness of prices. The Company also considers counterparty credit risk and its own cr edit risk in its determination of all estimated fair values. The Company has consistently applied these valuation techniques in all periods presented and believes it has obtained the most accurate information available for the types of derivative contracts it holds.  Level 3 derivatives include oil collars, natural gas collars and natural gas basis swaps.  The Company recognizes transfers between levels at the end of the reporting period for which the transfer has occurred.

The following tables set forth by level within the fair value hierarchy the Company’s net derivative assets and liabilities that were measured at fair value on a recurring basis as of June 30, 2010 and December 31, 2009.

Assets and liabilities measured at fair value on a recurring basis

Changes in Level 3 fair value measurements

The table below includes a rollforward of the Condensed Balance Sheet amounts (including the change in fair value) for financial instruments classified by the Company within Level 3 of the fair value hierarchy. When a determination is made to classify a financial instrument within Level 3 of the fair value hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources).

The $3.4 million of transfers out of Level 3 for the six months ended June 30, 2009 represent crude oil collars that were converted to crude oil swaps during the first quarter of 2009.

For further discussion related to the Company’s derivatives see Note 4 to the Condensed Financial Statements.

Fair Market Value of Financial Instruments

The Company used various assumptions and methods in estimating the fair values of its financial instruments. The carrying amounts of cash and cash equivalents and accounts receivable approximated their fair value due to the short-term maturity of these instruments. The carrying amount of the Company’s credit facilities approximated fair value, because the interest rates on the credit facilities are variable and could be at similar rates today. The fair values of the 8.25% senior subordinated notes due 2016 and the 10.25% senior notes due 2014 were estimated based on quoted market prices. The fair values of the Company’s derivative instruments and other investments are discussed above.

4.                      Derivative Instruments

The Company uses financial derivative instruments as part of its price risk management program to achieve a more predictable, economic cash flow from its oil and natural gas production by reducing its exposure to price fluctuations. The Company has entered into financial commodity swap and collar contracts to fix the floor and ceiling prices received for a portion of the Company’s oil and natural gas production.   The terms of the contracts depend on various factors, including management’s view of future crude oil and natural gas prices, acquisition economics on purchased assets and future financial commitments.  The Company periodically enters into interest rate derivative agreements to protect against changes in interest rates on its floating rate debt.  For further discussion related to the fair value of the Company 6;s derivatives see Note 3 to the Condensed Financial Statements.

As of June 30, 2010, the Company had the following commodity derivatives:

The Company entered into the following crude oil two-way collars during the six months ended June 30, 2010:

The Company entered into the following crude oil three-way collars during the six months ended June 30, 2010:

The Company entered into the following natural gas swaps during the six months ended June 30, 2010: