Results of Operations - For the Three Months Ended September 30, 2008

Oil and natural gas sales. For the three months ended September 30, 2008, oil and natural gas sales revenue increased $41,680,987 to $68,412,686, compared to $26,731,699 for the same period during 2007. Oil sales increased $36,911,946 and natural gas sales increased $4,769,041. The increases were the result of our increased volumes due to our development and increased oil and gas prices between periods. For the three months ended September 30, 2008, oil sales volume increased 183,645 barrels to 528,044 barrels, compared to 344,399 barrels for the same period in 2007. The average realized per barrel oil price increased 65% from $69.78 for the three months ended September 30, 2007 to $115.41 for the three months ended September 30, 2008. For the three months ended September 30, 2008, gas sales volume increased 193,248 thousand cubic feet (MCF) to 544,746 MCF, compared to 351,498 MCF for the same period in 2007. The average realized natural gas price per MCF increased 78% from $7.68 for the three months ended September 30, 2007 to $13.71 for the three months ended September 30, 2008.

Oil and gas production costs. Our lease operating expenses (LOE) increased from $2,969,674 or $7.37 per barrel of oil equivalent (BOE) for the three months ended September 30, 2007 to $5,790,236 or $9.36 per BOE for the three months ended September 30, 2008. The increase in total LOE was due to our on-going development projects as well as rising rates for labor, services and particularly electric utilities. The increase in the per BOE amounts is a result of rising rates for labor, services and electric utilities.

Production taxes. Production taxes as a percentage of oil and natural gas sales were 6% during the three months ended September 30, 2007 and decreased to 5% for the three months ended September 30, 2008. Our oil and gas production taxes increased from $1,541,612, or $3.83 per BOE, for the three months ended September 30, 2007 to $3,629,326, or $5.86 per BOE for the three months ended September 30, 2008. The increase in total is the result of increased volumes and increased commodity prices. The increase per BOE is the result of higher commodity prices. However, production taxes vary from state to state. Therefore, these taxes may vary in the future depending on the mix of production we generate from various states, as well as the possibility that any state may raise its production tax rate.

Realized loss on oil derivatives. For the three months ended September 30, 2008 we realized a loss on oil derivatives of $3,462,283. There was no realized loss on oil derivatives for the three months ended September 30, 2007. This increase is the result of the reference price being between the floor and ceiling on our derivative contracts during the three months ended September 30, 2007 and the reference price being above our ceiling price during the three months ended September 30, 2008.

Depreciation, depletion and amortization. Our depreciation, depletion and amortization expense increased by $6,802,443 to $9,841,972 for the three months ended September 30, 2008, compared to $3,039,529 for the same period in 2007. The increase was primarily a result of an increase in volume and in the average depletion rate from $7.40 per BOE during the three months ended September 30, 2007 to $13.81 per BOE during the three months ended September 30, 2008. The increased depletion rate was the result of increased capitalized costs and development costs.

General and administrative expenses. General and administrative expenses increased by $1,947,734 to $3,420,589 for the three months ended September 30, 2008, compared to $1,472,855 for the same period in 2007. A portion of this increase was due to the increase of stock-based compensation expense to $1,845,863 as compared to $956,072 for the same period in 2007. The remaining increase was primarily related to increases in compensation expense associated with an increase in personnel required to administer our growth.

Interest expense. Interest expense was $0 for the three months ended September 30, 2008, compared to $20,032 for the three months ended June 30, 2007. The decrease was the result of no outstanding balances for the period in 2008.

Income tax expense. Our effective tax rate was 37% during the three months ended September 30, 2007 and remained steady at 37% for the three months ended September 30, 2008.

Net income. Net income increased from $11,403,777 for the three months ended September 30, 2007 to $26,922,966 for the same period in 2008. The primary reasons for this increase include increased volumes as a result of the development of our properties and higher commodity prices between periods, partially offset by higher lease operating expense, general and administrative expense and income tax expense due to our growth.

Results of Operations - For the Nine Months Ended September 30, 2008

Oil and natural gas sales. For the nine months ended September 30, 2008, oil and natural gas sales revenue increased $110,881,060 to $175,884,359, compared to $65,003,299 for the same period during 2007. Oil sales increased $102,199,638 and natural gas sales increased $8,681,422. The increases were the result of our increased volumes due to our development and increased oil and gas prices between periods. For the nine months ended September 30, 2008, oil sales volume increased 504,302 barrels to 1,458,530 barrels, compared to 954,228 barrels for the same period in 2007. The average realized per barrel oil price increased 82% from $60.14 for the nine months ended September 30, 2007 to $109.42 for the nine months ended September 30, 2008. For the nine months ended September 30, 2008, gas sales volume increased 390,385 thousand cubic feet (MCF) to 1,414,987 MCF, compared to 1,024,602 MCF for the same period in 2007. The average realized natural gas price per MCF increased 55% from $7.43 for the nine months ended September 30, 2007 to $11.51 for the nine months ended September 30, 2008.

Oil and gas production costs. Our lease operating expenses (LOE) increased from $7,946,155 or $7.06 per barrel of oil equivalent (BOE) for the nine months ended September 30, 2007 to $12,979,837 or $7.66 per BOE for the nine months ended September 30, 2008. The increase in total LOE was due to our on-going development projects as well as rising rates for labor, services and particularly electric utilities. The increase in the per BOE amounts is a result of rising rates for labor, services and electric utilities.

Production taxes. Production taxes as a percentage of oil and natural gas sales were 6% during the nine months ended September 30, 2007 and decreased to 5% for the nine months ended September 30, 2008. Our oil and gas production taxes increased from $3,717,095, or $3.30 per BOE, for the nine months ended September 30, 2007 to $8,942,914, or $5.28 per BOE for the nine months ended September 30, 2008. The increase in total is the result of increased volumes and increased commodity prices. The increase per BOE is the result of higher commodity prices. However, production taxes vary from state to state. Therefore, these taxes may vary in the future depending on the mix of production we generate from various states, as well as the possibility that any state may raise its production tax rate.

Realized loss on oil derivatives. For the nine months ended September 30, 2008 we realized a loss on oil derivatives of $9,008,822. There was no realized loss on oil derivatives for the nine months ended September 30, 2007. This increase is the result of the reference price being above our ceiling price during the three months ended September 30, 2008 compared to the contracts not being in effect during the majority of the nine months ended September 30, 2007 and the reference price being between the floor and ceiling of our derivative contract during the time period in which it was in effect.

General and administrative expenses. General and administrative expenses increased by $5,189,257 to $9,696,477 for the nine months ended September 30, 2008, compared to $4,507,220 for the same period in 2007. A portion of this increase was due to the increase of stock-based compensation expense to $5,095,580 as compared to $2,476,823 for the same period in 2007. The remaining increase was primarily related to increases in compensation expense associated with an increase in personnel required to administer our growth.

Interest income. Interest income was $835,755 for the nine months ended September 30, 2008, compared to $633,451 for the nine months ended September 30, 2007. The increase was due to higher cash balances between periods.

Interest expense. Interest expense was $1,145,456 for the nine months ended September 30, 2008, compared to $1,252,499 for the nine months ended September 30, 2007. The decrease was due to higher debt outstanding during the period in 2007.

Income tax expense. Our effective tax rate was 37% during the nine months ended September 30, 2007 and remained steady at 37% for the nine months ended September 30, 2008.

Net income. Net income increased from $25,011,045 for the nine months ended September 30, 2007 to $70,035,710 for the same period in 2008. The primary reasons for this increase include increased volumes as a result of the development of our properties and higher commodity prices between periods, partially offset by higher lease operating expense, general and administrative expense and income tax expense due to our growth.

Revenues Year to Date by Geographic section

Our net oil and gas revenues for the year through September 30, 2008 are applicable to the following geographic sectors:

OIL
                              Net Production Volume        Net Revenue
            Texas Leases           1,264,523  BBLS    $  138,373,615
            Oklahoma Leases           28,389  BBLS    $    3,167,267
            New Mexico Leases        165,618  BBLS    $   18,050,044

GAS
                               Net Production Volume        Net Revenue
            Texas Leases             1,037,646  MCF    $   12,535,634
            Oklahoma Leases             16,880  MCF    $      133,467
            New Mexico Leases          227,598  MCF    $    2,846,075
            Kansas Leases              132,863  MCF    $      778,257

On October 29, 2008, the Company announced that as a result of the recent volatility of commodity prices of oil and natural gas, it was reducing its estimated capital expenditure budget approximately $59 million, to $189 million for the fiscal year ending December 31, 2008.

Capital Resources and Liquidity

As shown in the financial statements for the nine months ended September 30, 2008, the Company had cash on hand of $79,243,230, compared to $5,213,459 as of December 31, 2007. The Company had net cash provided by operating activities for the nine months ended September 30, 2008 of $142,458,786, compared to $34,321,101 for the same period 2007. Other significant sources of cash inflow were net proceeds from issuance of common stock of $116,130,189 in 2008 and $95,099,298 in 2007, proceeds from issuance of notes payable of $11,000,000 in 2008 and $30,700,000 in 2007, proceeds from option and warrant exercises of $4,653,439 in 2008 and $1,557,003 in 2007 and proceeds from the sale of oil and gas properties of $1,915,640 in 2007. The most significant cash outflows during the nine months ended September 30, 2008 and 2007 were capital expenditures of $154,212,644 in 2008 and $89,619,376 in 2007 and repayment of notes payable of $46,000,000 in 2008 and $50,400,000 in 2007.

In June 2008, the Company entered into an amended agreement that increased the borrowing base under its credit facility to $150,000,000, while leaving the credit facility at $150,000,000. All other terms and conditions remained the same. As of September 30, 2008, the Company was in compliance with all covenants and did not have any amount outstanding under this credit facility.

As noted above, the Company has, subsequent to September 30, 2008, determined to reduce its estimated capital expenditure budget for 2008. In doing so, the Company intends to operate within existing cash flows. At current commodity prices, the revised capital expenditure budget would allow it to operate within existing cash flow while still continuing to increase its estimated production and proven reserves.

Disclosures About Market Risks

Like other natural resource producers, Arena faces certain unique market risks. The two most salient risk factors are the volatile prices of oil and gas and certain environmental concerns and obligations.

Oil and Gas Prices

Current competitive factors in the domestic oil and gas industry are unique. The actual price range of crude oil is largely established by global supply and demand, which can result in price fluctuations. Recently, these price fluctuations have been extremely volatile. While on a global scale, it appears the demand for crude oil will continue to exceed supply, the recent volatility in oil prices appears to have had some impact, at least in the United States, on short-term demand. Natural gas prices are established on a more regional and seasonal basis. However, Arena's natural gas prices are projected to remain relatively consistent with current prices.

Despite the recent price volatility, Arena does not see itself as directly competitive with other producers, nor does the Company currently feel there is any significant risk that the Company could not sell all production at current prices with a reasonable profit margin. The risk of domestic overproduction at current prices is not deemed significant. The primary competitive risks would still come from falling international prices which could render current production uneconomical.

It is also significant that more favorable prices can usually be negotiated for larger quantities of oil and/or gas product, such that Arena views itself as having a price disadvantage to larger producers. Large producers also have a competitive advantage to the extent they can devote substantially more resources to acquiring prime leases and resources to better find and develop prospects.

Environmental

Oil and gas production is a highly regulated activity which is subject to significant environmental and conservation regulations both on a federal and state level. Historically, most of the environmental regulation of oil and gas production has been left to state regulatory boards or agencies in those jurisdictions where there is significant gas and oil production, with limited direct regulation by such federal agencies as the Environmental Protection Agency. However, while the Company believes this generally to be the case for its production activities in Texas, Oklahoma, Kansas and New Mexico, it should be noticed that there are various Environmental Protection Agency regulations which would govern significant spills, blow-outs, or uncontrolled emissions.

In Oklahoma, Texas, Kansas and New Mexico specific oil and gas regulations exist related to the drilling, completion and operations of wells, as well as disposal of waste oil. There are also procedures incident to the plugging and abandonment of dry holes or other non-operational wells, all as governed by the Oklahoma Corporation Commission, Oil and Gas Division, the Texas Railroad Commission, Oil and Gas Division, the Kansas Corporation Commission, Oil and Gas Division or the New Mexico Oil Conservation Division.

Compliance with these regulations may constitute a significant cost and effort for Arena. No specific accounting for environmental compliance has been maintained or projected by Arena to date. Arena does not presently know of any environmental demands, claims, or adverse actions, litigation or administrative proceedings in which it or the acquired properties are involved or subject to or arising out of its predecessor operations.

In the event of a breach of environmental regulations, these environmental regulatory agencies have a broad range of alternative or cumulative remedies to include: ordering a cleanup of any spills or waste material and restoration of the soil or water to conditions existing prior to the environmental violation; fines; or enjoining further drilling, completion or production activities. In certain egregious situations the agencies may also pursue criminal remedies against the Company or its principals.

Forward-Looking Information

Certain statements in this Section and elsewhere in this report are forward-looking in nature and relate to trends and events that may affect the Company's future financial position and operating results. Such statements are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. The terms "expect," "anticipate," "intend," and "project" and similar words or expressions are intended to identify forward-looking statements. These statements speak only as of the date of this report. The statements are based on current expectations, are inherently uncertain, are subject to risks, and should be viewed with caution. Actual results and experience may differ materially from the forward-looking statements as a result of many factors, including changes in economic conditions in the markets served by the company, increasing competition, fluctuations in raw materials and energy prices, and other unanticipated events and conditions. It is not possible to foresee or identify all such factors. The company makes no commitment to update any forward-looking statement or to disclose any facts, events, or circumstances after the date hereof that may affect the accuracy of any forward-looking statement.