Results of Operations - For the Three Months Ended September 30, 2009

Oil and natural gas sales. For the three months ended September 30, 2009, oil and natural gas sales revenue decreased $32,351,808 to $36,060,878, compared to $68,412,686 for the same period during 2008. Oil sales decreased $28,153,050 and natural gas sales decreased $4,198,758. The decreases were the result of significantly lower oil and gas prices between periods and lower oil production. For the three months ended September 30, 2009, oil sales volume decreased 16,940 barrels to 511,104 barrels, compared to 528,044 barrels for the same period in 2008. The average realized per barrel oil price decreased 44% from $115.41 for the three months ended September 30, 2008 to $64.16 for the three months ended September 30, 2009. For the three months ended September 30, 2009, gas sales volume increased 64,283 thousand cubic feet (MCF) to 609,030 MCF, compared to 544,746 MCF for the same period in 2008. The average realized natural gas price per MCF decreased 61% from $13.71 for the three months ended September 30, 2008 to $5.37 for the three months ended September 30, 2009.

Oil and gas production costs. Our lease operating expenses (LOE) decreased from $5,790,236 or $9.36 per barrel of oil equivalent (BOE) for the three months ended September 30, 2008 to $3,137,035 or $5.12 per BOE for the three months ended September 30, 2009. The decreases in total LOE and on a per BOE basis were the result of lower costs for services and equipment.

Production taxes. Production taxes as a percentage of oil and natural gas sales were 5% during the three months ended September 30, 2008 and remained steady at 5% for the three months ended September 30, 2009. 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.

Depreciation, depletion and amortization. Our depreciation, depletion and amortization expense decreased by $847,583 to $8,994,389 for the three months ended September 30, 2009, compared to the same period in 2008. The decrease was primarily a result of slightly lower production volume and a decrease in the average depletion rate from $13.81 per BOE during the three months ended September 30, 2008 to $13.55 per BOE during the three months ended September 30, 2009.

General and administrative expenses. General and administrative expenses decreased by $452,737 to $2,967,852 for the three months ended September 30, 2009, compared to the same period in 2008. The decrease was primarily the result of a decrease in stock-based compensation expense from $1,845,863 for the three months ended September 30, 2008 to $1,098,081 for the three months ended September 30, 2009 partially offset by higher overall compensation expense between periods.

Interest income. Interest income was $202,340 for the three months ended September 30, 2009, compared to $546,089 for the three months ended September 30, 2008. The decrease was due to lower interest rates and a lower cash balance in 2009.

Income tax expense. Our effective tax rate was 37% during the three months ended September 30, 2008 and remained steady at 37% for the three months ended September 30, 2009.

Net income. Net income decreased from $26,922,966 for the three months ended September 30, 2008 to $12,113,026 for the same period in 2009. The primary reason for this decrease is the lower commodity prices between periods.

Results of Operations - For the Nine Months Ended September 30, 2009

Oil and natural gas sales. For the nine months ended September 30, 2009, oil and natural gas sales revenue decreased $91,993,626 to $83,890,733, compared to $175,884,359 for the same period during 2008. Oil sales decreased $83,266,046 and natural gas sales decreased $8,727,580. The decreases were the result of significantly lower oil and gas prices between periods partially offset by higher production. For the nine months ended September 30, 2009, oil sales volume increased 3,314 barrels to 1,461,844 barrels, compared to 1,458,530 barrels for the same period in 2008. The average realized per barrel oil price decreased 52% from $109.42 for the nine months ended September 30, 2008 to $52.21 for the nine months ended September 30, 2009. For the nine months ended September 30, 2009, gas sales volume increased 184,155 thousand cubic feet (MCF) to 1,599,142 MCF, compared to 1,414,987 MCF for the same period in 2008. The average realized natural gas price per MCF decreased 59% from $11.51 for the nine months ended September 30, 2008 to $4.73 for the nine months ended September 30, 2009.

Oil and gas production costs. Our lease operating expenses (LOE) decreased from $12,979,837 or $7.66 per barrel of oil equivalent (BOE) for the nine months ended September 30, 2008 to $10,614,882 or $6.14 per BOE for the nine months ended September 30, 2009. The decrease in total LOE was the result of variations in costs for services and equipment between periods.

Production taxes. Production taxes as a percentage of oil and natural gas sales were 5% during the nine months ended September 30, 2008 and remained steady at 5% for the nine months ended September 30, 2009. 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.

Depreciation, depletion and amortization. Our depreciation, depletion and amortization expense increased by $78,199 to $23,634,894 for the nine months ended September 30, 2009, compared to the same period in 2008. The increase was primarily a result of higher production volume, partially offset by a decrease in the average depletion rate from $13.81 per BOE during the nine months ended September 30, 2008 to $13.55 per BOE during the nine months ended September 30, 2009.

General and administrative expenses. General and administrative expenses decreased by $589,746 to $9,106,731 for the nine months ended September 30, 2009, compared to the same period in 2008. The decrease was primarily the result of a decrease in stock-based compensation expense from $5,095,580 for the nine months ended September 30, 2008 to $3,648,020 for the nine months ended September 30, 2009 partially offset by higher overall compensation expense between periods.

Interest income. Interest income was $678,646 for the nine months ended September 30, 2009, compared to $835,755 for the nine months ended September 30, 2008. The decrease was due to lower interest rates and a lower cash balance in 2009.

Interest expense. Interest expense was zero for the nine months ended September 30, 2009, compared to $1,145,456 for the nine months ended September 30, 2008. The decrease was due to no amounts being outstanding on our credit facility during the nine months ended September 30, 2009 while there were amounts outstanding on our credit facility during the nine months ended September 30, 2008.

Income tax expense. Our effective tax rate was 37% during the nine months ended September 30, 2008 and remained steady at 37% for the nine months ended September 30, 2009.

Net income. Net income decreased from $70,035,710 for the nine months ended September 30, 2008 to $33,014,540 for the same period in 2009. The primary reason for this decrease is the lower commodity prices between periods.

Revenues Year to Date by Geographic section

Arena reports its net oil and gas revenues for the year to date as applicable to the following geographic sectors:

OIL
                                 Net Production Volume   Net Revenue
              Texas Leases              1,276,351 BBLS  $ 66,657,204
              Oklahoma Leases              28,248 BBLS  $  1,565,549
              New Mexico Leases           157,245 BBLS  $  8,102,127

 GAS
                                 Net Production Volume   Net Revenue
              Texas Leases               1,232,259 MCF  $  6,030,302
              Oklahoma Leases               14,468 MCF  $     43,201
              New Mexico Leases            243,586 MCF  $  1,207,858
              Kansas Leases                108,829 MCF  $    284,492

Significant Subsequent Events occurring after September 30, 2009:

Subsequent to September 30, 2009, the Company entered into an agreement for zero-cost collars on a portion of oil production, equal to 1,000 barrels of oil per day, beginning in January 2010 and continuing through December 2010. Under the collar agreements, the floor price is $70.00 and the ceiling price is $92.85 based on the WTI index price.

Capital Resources and Liquidity

As shown in the financial statements for the nine months ended September 30, 2009, the Company had cash on hand of $67,779,486, compared to $58,489,574 as of December 31, 2008. The Company had net cash provided by operating activities for the nine months ended September 30, 2009 of $77,212,801, compared to $142,458,787 for the same period 2008. Other significant sources of cash inflow include proceeds from option and warrant exercises of $2,065,881 and $4,653,439 for 2009 and 2008, respectively, and proceeds from issuance of common stock of $116,130,189 and $11,000,000 drawn down on the Company's credit facility in 2008. The most significant cash outflows during the nine months ended September 30, 2009 and 2008 were capital expenditures of $69,988,770 and $154,212,644, respectively, and $46,000,000 payment on notes payable in 2008.

Effective as of June 30, 2009, we entered into a new agreement that provides for a credit facility of $150 million with a borrowing base of $75 million with the structure in place to increase that borrowing base an additional $75 million. The new facility has an interest rate grid with a range of LIBOR plus 2.25% to 3.25%, depending upon our level of utilization of the credit facility with the total interest rate to be charged being no less than 4.00%. As of September 30, 2009, we were in compliance with all covenants and did not have any amount outstanding under this credit facility.

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.

Current competitive factors in the domestic oil and gas industry are unique. The actual price range of crude oil is largely established by major international producers. Pricing for natural gas is more regional. Because domestic demand for oil and gas exceeds supply, there is little risk that all current production will not be sold at relatively fixed prices. To this extent Arena does not see itself as directly competitive with other producers, nor is there 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 come from falling international prices which could render current production uneconomical.

Secondarily, Arena is presently committed to use the services of the existing gatherers in its present areas of production. This gives to such gatherers certain short term relative monopolistic powers to set gathering and transportation costs, because obtaining the services of an alternative gathering company would require substantial additional costs since an alternative gatherer would be required to lay new pipeline and/or obtain new rights-of-way in the lease.

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.