# United States Securities and Exchange CommissionWashington, D.C. 20549

# Form 10-K

| | (Mark One)                                                                                     | 
| | ---------------------------------------------------------------------------------------------- | 
| | |X|   Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934     | 
| |                                                                                                | 
| | For the fiscal year ended December 31, 2008                                                    | 
| | Or                                                                                             | 
| | |_|   Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | 
| |                                                                                                | 
| | For the transition period from ___________to ___________                                       | 

_________________

# Commission file number 001-31657

_________________

|Arena Resources, Inc.                                         
|--------------------------------------------------------------
|(Exact name of registrant as specified in its charter)        
|                                                              
|Nevada                                                        
|(State or other jurisdiction of incorporation or organization)

|6555 South Lewis AvenueTulsa, Oklahoma   |  | 74136     
|---------------------------------------- |  | ----------
|(Address of principal executive offices) |  | (Zip Code)

(918) 747-6060(Registrant's
                                 telephone number, including area code)
    _________________

# Securities registered under Section 12(b) of the Exchange Act:

|Title of Each Class       | Name of Each Exchange On Which Registered
|------------------------- | -----------------------------------------
|                          |                                          
|Common - $0.001 Par Value | New York Stock Exchange                  

Securities registered under Section 12(g) of the Exchange Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes |X|  No |_|

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act.
Yes |_|  No |X|

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act 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 |X|  No |_|

---



Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer.

|Large accelerated filer  |X| | Accelerated filer |_| | Non-accelerated filer |_|
|---------------------------- | --------------------- | -------------------------

Indicate by check mark whether the registrant is shell company (as defined in Rule 12b-2 of the Act). Yes |_|  No
|X|

As of June 30, 2008, the aggregate market value of the common voting stock
held by non-affiliates of the issuer, based upon the closing stock price of
$52.82 per share, was approximately $1,924,472,984.

As of February 26, 2008, the issuer had outstanding 38,210,187 shares of
common stock ($0.001 par value).

---





|TABLE OF CONTENTS
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|Item 1           
|Item 1A          
|Item 1B          
|Item 2           
|Item 3           
|Item 4           
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|Item 5           
|Item 6           
|Item 7           
|Item 7A          
|Item 8           
|Item 9           
|Item 9A          
|Item 9B          
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|Item 10          
|Item 11          
|Item 12          
|Item 13          
|Item 14          
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|Item 15          

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# Forward Looking
Statements

All
statements, other than statements of historical fact included in this Annual Report on
Form 10-K (herein, Annual Report) regarding our strategy, future operations,
financial position, estimated revenues and losses, projected costs, prospects, plans and
objectives of management are forward-looking statements. When used in this Annual Report,
the words could, believe, anticipate,
intend, estimate, expect, project and
similar expressions are intended to identify forward-looking statements, although not all
forward-looking statements contain such identifying words. All forward-looking statements
speak only as of the date of this Annual Report. You should not place undue reliance on
these forward-looking statements. Although we believe that our plans, intentions and
expectations reflected in or suggested by the forward-looking statements we make in this
Annual Report are reasonable, we can give no assurance that these plans, intentions or
expectations will be achieved. We disclose important factors that could cause our actual
results to differ materially from our expectations under Risk Factors,
Managements Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere in this Annual Report. These cautionary statements qualify
all forward-looking statements attributable to us or persons acting on our behalf.

Unless
the context otherwise requires, references in this Annual Report to Arena,
we, us, our or ours refer to Arena
Resources, Inc.

# PART I

|Item 1: |  | Business
|------- |  | --------

# General

Arena
Resources, Inc. was incorporated in Nevada on August 31, 2000. Our principal executive
offices are located at 6555 South Lewis Avenue, Tulsa, Oklahoma 74136, and our telephone
number is (918) 747-6060. Our Internet website can be found at www.arenaresourcesinc.com.
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d)
of the Exchange Act of 1934 will be available through our Internet website as soon as
reasonably practical after we electronically file such material with, or furnish it to,
the Securities and Exchange Commission.

We
are engaged in oil and natural gas acquisition, exploration, development and production,
with activities currently in Oklahoma, Texas, New Mexico and Kansas. Our focus will be on
developing our existing properties, while continuing to pursue acquisitions of oil and gas
properties with upside potential.

# Business Development

Between
our inception in August 2000 through 2004, we have built our asset base and achieved
growth primarily through property acquisitions. Beginning in 2005, while we continued to
grow through acquisition, we shifted our focus to growth through development of our
existing properties. From our inception through December 31, 2008, we have increased our
proved reserves to approximately 65.6 million Boe (barrel of oil equivalent). As of
December 31, 2008, our estimated proved reserves had a pre-tax PV10 (present value of
future net revenues before income taxes discounted at 10%) of approximately $651.6 million
and a Standardized Measure of Discounted Future Net Cash Flows of approximately $460.7
million. The difference between these two amounts is the effect of income taxes. The
Company presents the pre-tax PV-10 value, which is a non-GAAP financial measure, because
it is a widely used industry standard which we believe is useful to those who may review
this Annual Report when comparing our asset base and performance to other comparable oil
and gas exploration and production companies. We spent approximately $475.9 million on
acquisitions and capital projects during 2006, 2007 and 2008.

---



We
have a portfolio of oil and natural gas reserves, with approximately 85% of our proved
reserves consisting of oil and approximately 15% consisting of natural gas. Of those
reserves approximately 31% of our proved reserves are classified as proved developed
producing, or PDP, approximately 7% of our proved reserves are classified as
proved developed non-producing, or PDNP, and approximately 62% are classified
as proved undeveloped, or PUD.

# Competitive Business
Conditions

We
operate in a highly competitive environment for acquiring properties, marketing oil and
natural gas and securing trained personnel. Some of our competitors possess and employ
financial resources substantially greater than ours and some of our competitors employ
more technical personnel. These factors can be particularly important in the areas in
which we operate. Those companies may be able to pay more for productive oil and natural
gas properties and exploratory prospects and to evaluate, bid for and purchase a greater
number of properties and prospects than what our financial or technical resources permit.
Our ability to acquire additional properties and to find and develop reserves in the
future will depend on our ability to identify, evaluate and select suitable properties and
to consummate transactions in a highly competitive environment. Also, there is substantial
competition for capital available for investment in the oil and natural gas industry.

The
actual price range of crude oil is largely established by major crude oil purchasers and
commodities trading. Pricing for natural gas is based on regional supply and demand
conditions. To this extent we believe we receive oil and gas prices comparable to other
producers. There is little risk in our ability to sell all our current production at
current prices with a reasonable profit margin. The risk of domestic overproduction at
current prices is not deemed significant. We view our primary pricing risk to be related
to a potential decline in prices to a level which could render our current production
uneconomical.

We
are presently committed to use the services of the existing gathering systems of the
companies that purchase our natural gas production. This commitment is tied to existing
natural gas purchase contracts associated with our production This commitment potentially
gives such gathering companies 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
gathering company would be required to lay new pipeline and/or obtain new rights of way to
any lease from which we are selling production). We are not subject to third party
gathering systems for our oil production. Some of our oil production is sold through a
third party pipeline which has no regional competition. All other oil production is
transported by the oil purchaser by trucks with competitive trucking costs in the area.

# Major Customers

We
principally sell our oil and natural gas production to end users, marketers and other
purchasers that have access to nearby pipeline facilities. In areas where there is no
practical access to pipelines, oil is trucked to storage facilities. Our marketing of oil
and natural gas can be affected by factors beyond our control, the effects of which cannot
be accurately predicted. For fiscal year 2008, sales to three customers, Navajo Refining
Company, DCP Midstream, LP and Conoco Phillips, represented 83%, 8% and 5% of oil and gas
revenues, respectively. At December 31, 2008, these customers represented 84%, 9% and 5%
of our accounts receivable. However, we believe that the loss of these customers would not
materially impact our business, because we could readily find other purchasers for our oil
and gas as produced.

---



# Governmental Regulations

Regulation of
Transportation of Oil

Sales
of crude oil, condensate and natural gas liquids are not currently regulated and are made
at negotiated prices. Nevertheless, Congress could reenact price controls in the future.

Our
sales of crude oil are affected by the availability, terms and cost of transportation. The
transportation of oil in common carrier pipelines is also subject to rate regulation. The
Federal Energy Regulatory Commission, or the FERC, regulates interstate oil pipeline
transportation rates under the Interstate Commerce Act. Intrastate oil pipeline
transportation rates are subject to regulation by state regulatory commissions. The basis
for intrastate oil pipeline regulation, and the degree of regulatory oversight and
scrutiny given to intrastate oil pipeline rates, varies from state to state.

Insofar
as effective interstate and intrastate rates are equally applicable to all comparable
shippers, we believe that the regulation of oil transportation rates will not affect our
operations in any way that is of material difference from those of our competitors.
Further, interstate and intrastate common carrier oil pipelines must provide service on a
non-discriminatory basis. Under this open access standard, common carriers must offer
service to all shippers requesting service on the same terms and under the same rates.
When oil pipelines operate at full capacity, access is governed by pro-rationing
provisions set forth in the pipelines published tariffs. Accordingly, we believe
that access to oil pipeline transportation services generally will be available to us to
the same extent as to our competitors.

Regulation of
Transportation and Sale of Natural Gas

Historically,
the transportation and sale for resale of natural gas in interstate commerce have been
regulated pursuant to the Natural Gas Act of 1938, the Natural Gas Policy Act of 1978 and
regulations issued under those Acts by the FERC. In the past, the federal government has
regulated the prices at which natural gas could be sold. While sales by producers of
natural gas can currently be made at uncontrolled market prices, Congress could reenact
price controls in the future.

Since
1985, the FERC has endeavored to make natural gas transportation more accessible to
natural gas buyers and sellers on an open and non-discriminatory basis. The FERC has
stated that open access policies are necessary to improve the competitive structure of the
interstate natural gas pipeline industry and to create a regulatory framework that will
put natural gas sellers into more direct contractual relations with natural gas buyers by,
among other things, unbundling the sale of natural gas from the sale of transportation and
storage services. Although the FERCs orders do not directly regulate natural gas
producers, they are intended to foster increased competition within all phases of the
natural gas industry.

We
cannot accurately predict whether the FERCs actions will achieve the goal of
increasing competition in markets in which our natural gas is sold. Therefore, we cannot
provide any assurance that the less stringent regulatory approach recently established by
the FERC will continue. However, we do not believe that any action taken will affect us in
a way that materially differs from the way it affects other natural gas producers.

Intrastate
natural gas transportation is subject to regulation by state regulatory agencies. The
basis for intrastate regulation of natural gas transportation and the degree of regulatory
oversight and scrutiny given to intrastate natural gas pipeline rates and services varies
from state to state. Insofar as such regulation within a particular state will generally
affect all intrastate natural gas shippers within the state on a comparable basis, we
believe that the regulation of similarly situated intrastate natural gas transportation in
any states in which we operate and ship natural gas on an intrastate basis will not affect
our operations in any way that is of material difference from those of our competitors.

---



Regulation of Production

The
production of oil and natural gas is subject to regulation under a wide range of local,
state and federal statutes, rules, orders and regulations. Federal, state and local
statutes and regulations require permits for drilling operations, drilling bonds and
reports concerning operations. All of the states in which we own and operate properties
have regulations governing conservation matters, including provisions for the unitization
or pooling of oil and natural gas properties, the establishment of maximum allowable rates
of production from oil and natural gas wells, the regulation of well spacing, and plugging
and abandonment of wells. The effect of these regulations is to limit the amount of oil
and natural gas that we can produce from our wells and to limit the number of wells or the
locations at which we can drill, although we can apply for exceptions to such regulations
or to have reductions in well spacing. Moreover, each state generally imposes a production
or severance tax with respect to the production and sale of oil, natural gas and natural
gas liquids within its jurisdiction.

The
failure to comply with these rules and regulations can result in substantial penalties.
Our competitors in the oil and natural gas industry are subject to the same regulatory
requirements and restrictions that affect our operations

# Environmental Compliance
and Risks

Our
oil and natural gas exploration, development and production operations are subject to
stringent federal, state and local laws and regulations governing the discharge of
materials into the environment or otherwise relating to environmental protection.
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 we believe this generally to be the case
for our production activities in Oklahoma, Texas, New Mexico and Kansas, there are various
regulations issued by the Environmental Protection Agency (EPA) and other
governmental agencies that would govern significant spills, blow-outs, or uncontrolled
emissions.

In
Oklahoma, Texas, New Mexico and Kansas specific oil and gas regulations apply to the
drilling, completion and operations of wells, and the disposal of waste oil and salt
water. There are also procedures incident to the plugging and abandonment of dry holes or
other non-operational wells, all as governed by the applicable governing state agency.

At
the federal level, among the more significant laws and regulations that may affect our
business and the oil and gas industry are: The Comprehensive Environmental Response,
Compensation and Liability Act of 1980, also known as CERCLA or
Superfund; the Oil Pollution Act of 1990; the Resource Conservation and Recovery
Act, also known as RCRA,; the Clean Air Act; Federal Water Pollution Control
Act of 1972, or the Clean Water Act; and the Safe Drinking Water Act of 1974.

Compliance
with these regulations may constitute a significant cost and effort for us. No specific
accounting for environmental compliance has been maintained or projected by us at this
time. We are not presently aware of any environmental demands, claims, or adverse actions,
litigation or administrative proceedings in which either we or our acquired properties are
involved in or subject to, or arising out of any predecessor operations.

In
the event of a breach of environmental regulations, these environmental regulatory
agencies have a broad range of alternative or cumulative remedies which include: ordering
a clean-up 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 us or our principal officers.

---



# Current Employees

As
of December 31, 2008, we had 71 full-time employees, including 25 employed by Arena
Drilling Company, a wholly owned subsidiary. Our employees are not represented by any
labor union. We consider our relations with our employees to be satisfactory and have
never experienced a work stoppage or strike.

We
retain certain engineers, geologists, landmen, pumpers and other personnel on a contract
or fee basis as necessary for our operations.

|Item 1A. |  | Risk Factors
|-------- |  | ------------

The
following risks and uncertainties may affect our performance, results of operations and
the trading price of our common stock.

Risks Relating to the Oil
and Natural Gas Industry and Our Business

A substantial or extended decline
in oil and natural gas prices may adversely affect our business, financial condition or
results of operations and our ability to meet our capital expenditure obligations and
financial commitments.

The
price we receive for our oil and natural gas production heavily influences our revenue,
profitability, access to capital and future rate of growth. Oil and natural gas are
commodities and, therefore, their prices are subject to wide fluctuations in response to
relatively minor changes in supply and demand. Historically, the markets for oil and
natural gas have been volatile. These markets will likely continue to be volatile in the
future. The prices we receive for our production, and the levels of our production, depend
on numerous factors beyond our control. These factors include, but are not limited to, the
following:

| |  |  | changes
in global supply and demand for oil and natural gas;
| | - |  | ------------------------------------------------------------

| |  |  | the
actions of the Organization of Petroleum Exporting Countries, or OPEC;
| | - |  | --------------------------------------------------------------------------

| |  |  | the
price and quantity of imports of foreign oil and natural gas;
| | - |  | -----------------------------------------------------------------

| |  |  | political
conditions, including embargoes, in or affecting other oil-producing activity;
| | - |  | ----------------------------------------------------------------------------------------

| |  |  | the
level of global oil and natural gas exploration and production activity;
| | - |  | ----------------------------------------------------------------------------

| |  |  | the
level of global oil and natural gas inventories;
| | - |  | ----------------------------------------------------

| |  |  | weather
conditions;
| | - |  | -------------------

| |  |  | technological
advances affecting energy consumption; and
| | - |  | --------------------------------------------------------

| |  |  | the
price and availability of alternative fuels.
| | - |  | ------------------------------------------------

Lower
oil and natural gas prices may not only decrease our revenues on a per unit basis but also
may reduce the amount of oil and natural gas that we can produce economically. Lower
prices will also negatively impact the value of our proved reserves. A substantial or
extended decline in oil or natural gas prices may materially and adversely affect our
future business, financial condition, results of operations, liquidity or ability to
finance planned capital expenditures.

A substantial percentage of our
proven properties are undeveloped; therefore the risk associated with our success is
greater than would be the case if the majority of our properties were categorized as
proved developed producing.

Because
a substantial percentage of our proven properties are proved undeveloped (approximately
62%) or proved developed non-producing (approximately 7%), we will require significant
additional capital to develop such properties before they may become productive. Further,
because of the inherent uncertainties associated with drilling for oil and gas, some of
these properties may never be developed to the extent that they result in positive cash
flow. Even if we are successful in our development efforts, it could take several years
for a significant portion of our undeveloped properties to be converted to positive cash
flow.

---



While
our current business plan is to fund the development costs with cash flow from our other
producing properties, if such cash flow is not sufficient we may be forced to seek
alternative sources for cash, through the issuance of additional equity or debt
securities, increased borrowings or other means.

Approximately 26% of our proven
reserves depend upon secondary recovery techniques to establish production.

Approximately
twenty-six percent (26%) of our reserves for the year ended December 31, 2008 are
associated with secondary recovery projects that are either in the initial stage of
implementation or are scheduled for implementation. We anticipate that secondary recovery
will be attempted by the use of waterflood of these reserves, and the exact project
initiation dates and, by the very nature of waterflood operations, the exact completion
dates of such projects, are uncertain. In addition, the reserves associated with these
secondary recovery projects, as with any reserves, are estimates only, as the success of
any development project, including these waterflood projects, cannot be ascertained in
advance. If we are not successful in developing a significant portion of our reserves
associated with secondary recovery methods, it could have a negative impact on our
earnings and our stock price.

Drilling for and producing oil and
natural gas are high risk activities with many uncertainties that could adversely affect
our business, financial condition or results of operations.

Our
future success will depend on the success of our exploitation, exploration, development
and production activities. Our oil and natural gas exploration and production activities
are subject to numerous risks beyond our control; including the risk that drilling will
not result in commercially viable oil or natural gas production. Our decisions to
purchase, explore, develop or otherwise exploit prospects or properties will depend in
part on the evaluation of data obtained through geophysical and geological analyses,
production data and engineering studies, the results of which are often inconclusive or
subject to varying interpretations. Please read Reserve estimates depend on
many assumptions that may turn out to be inaccurate (below) for a discussion of the
uncertainty involved in these processes. Our cost of drilling, completing and operating
wells is often uncertain before drilling commences. Overruns in budgeted expenditures are
common risks that can make a particular project uneconomical. Further, many factors may
curtail, delay or cancel drilling, including the following:

| |  |  | delays
imposed by or resulting from compliance with regulatory requirements;
| | - |  | ----------------------------------------------------------------------------

| |  |  | pressure
or irregularities in geological formations;
| | - |  | ----------------------------------------------------

| |  |  | shortages
of or delays in obtaining equipment and qualified personnel;
| | - |  | ----------------------------------------------------------------------

| |  |  | equipment
failures or accidents;
| | - |  | --------------------------------

| |  |  | adverse
weather conditions;
| | - |  | ---------------------------

| |  |  | reductions
in oil and natural gas prices;
| | - |  | -----------------------------------------

| |  |  | title
problems; and
| | - |  | -------------------

| |  |  | limitations
in the market for oil and natural gas.
| | - |  | --------------------------------------------------

If our assessments of recently
purchased properties are materially inaccurate, it could have significant impact on future
operations and earnings.

We
have aggressively expanded our base of producing properties. The successful acquisition of
producing properties requires assessments of many factors, which are inherently inexact
and may be inaccurate, including the following:

---



| |  |  | the
amount of recoverable reserves;
| | - |  | -----------------------------------

| |  |  | future
oil and natural gas prices;
| | - |  | ----------------------------------

| |  |  | estimates
of operating costs;
| | - |  | -----------------------------

| |  |  | estimates
of future development costs;
| | - |  | --------------------------------------

| |  |  | estimates
of the costs and timing of plugging and abandonment; and
| | - |  | ------------------------------------------------------------------

| |  |  | potential
environmental and other liabilities.
| | - |  | ----------------------------------------------

Our
assessment will not reveal all existing or potential problems, nor will it permit us to
become familiar enough with the properties to assess fully their capabilities and
deficiencies. As noted previously, we plan to undertake further development of our
properties through the use of cash flow from existing production. Therefore, a material
deviation in our assessments of these factors could result in less cash flow being
available for such purposes than we presently anticipate, which could either delay future
development operations (and delay the anticipated conversion of reserves into cash), or
cause us to seek alternative sources to finance development activities.

Decreases in oil and natural gas
prices may require us to take write-downs of the carrying values of our oil and natural
gas properties, potentially requiring earlier than anticipated debt repayment and
negatively impacting the trading value of our securities.

Accounting
rules require that we review periodically the carrying value of our oil and natural gas
properties for possible impairment. Based on specific market factors and circumstances at
the time of prospective impairment reviews, and the continuing evaluation of development
plans, production data, economics and other factors, we may be required to write down the
carrying value of our oil and natural gas properties. Because our properties serve as
collateral for advances under our existing credit facilities, a write-down in the carrying
values of our properties could require us to repay debt earlier than we would otherwise be
required. A write-down could also constitute a non-cash charge to earnings. It is likely
the cumulative effect of a write-down could also negatively impact the trading price of
our securities.

Reserve estimates depend on many
assumptions that may turn out to be inaccurate. Any material inaccuracies in these reserve
estimates or underlying assumptions will materially affect the quantities and present
value of our reserves.

The
process of estimating oil and natural gas reserves is complex. It requires interpretations
of available technical data and many assumptions, including assumptions relating to
economic factors. Any significant inaccuracies in these interpretations or assumptions
could materially affect the estimated quantities and present value of our reported
reserves.

In
order to prepare our estimates, we must project production rates and timing of development
expenditures. We must also analyze available geological, geophysical, production and
engineering data. The extent, quality and reliability of this data can vary. The process
also requires economic assumptions about matters such as oil and natural gas prices,
drilling and operating expenses, capital expenditures, taxes and availability of funds.
Therefore, estimates of oil and natural gas reserves are inherently imprecise.

Actual
future production, oil and natural gas prices, revenues, taxes, development expenditures,
operating expenses and quantities of recoverable oil and natural gas reserves most likely
will vary from our estimates. Any significant variance could materially affect the
estimated quantities and present value of our reported reserves. In addition, we may
adjust estimates of proved reserves to reflect production history, results of exploration
and development, prevailing oil and natural gas prices and other factors, many of which
are beyond our control.

---



You
should not assume that the present value of future net revenues from our reported proved
reserves is the current market value of our estimated oil and natural gas reserves. In
accordance with SEC requirements, we generally base the estimated discounted future net
cash flows from our proved reserves on prices and costs on the date of the estimate.
Actual future prices and costs may differ materially from those used in the present value
estimate. If future values decline or costs increase it could negatively impact our
ability to finance operations, and individual properties could cease being commercially
viable, affecting our decision to continue operations on producing properties or to
attempt to develop properties. All of these factors would have a negative impact on
earnings and net income, and most likely the trading price of our securities. These
factors could also result in the acceleration of debt repayment and a reduction in our
borrowing base under our credit facilities.

Prospects that we decide to drill
may not yield oil or natural gas in commercially viable quantities.

Our
prospects are in various stages of evaluation, ranging from prospects that are currently
being drilled, to prospects that will require substantial additional seismic data
processing and interpretation. There is no way to predict in advance of drilling and
testing whether any particular prospect will yield oil or natural gas in sufficient
quantities to recover drilling or completion costs or to be economically viable. This risk
may be enhanced in our situation, due to the fact that a significant percentage (62%) of
our proved reserves is currently proved undeveloped reserves. The use of seismic data and
other technologies and the study of producing fields in the same area will not enable us
to know conclusively prior to drilling whether oil or natural gas will be present or, if
present, whether oil or natural gas will be present in commercial quantities. We cannot
assure you that the analogies we draw from available data from other wells, more fully
explored prospects or producing fields will be applicable to our drilling prospects.

We may incur substantial losses
and be subject to substantial liability claims as a result of our oil and natural gas
operations.

We
are not insured against all risks. Losses and liabilities arising from uninsured and
underinsured events could materially and adversely affect our business, financial
condition or results of operations. Our oil and natural gas exploration and production
activities are subject to all of the operating risks associated with drilling for and
producing oil and natural gas, including the possibility of:

| |  |  | environmental
hazards, such as uncontrollable flows of oil, natural gas, brine, well fluids, toxic gas
or other pollution into the environment, including groundwater and shoreline
contamination;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | abnormally
pressured formations;
| | - |  | --------------------------------

| |  |  | mechanical
difficulties, such as stuck oil field drilling and service tools and casing collapse;
| | - |  | ------------------------------------------------------------------------------------------------

| |  |  | fires
and explosions;
| | - |  | ---------------------

| |  |  | personal
injuries and death; and
| | - |  | --------------------------------

| |  |  | natural
disasters.
| | - |  | ------------------

Any
of these risks could adversely affect our ability to conduct operations or result in
substantial losses to our company. We may elect not to obtain insurance if we believe that
the cost of available insurance is excessive relative to the risks presented. In addition,
pollution and environmental risks generally are not fully insurable. If a significant
accident or other event occurs and is not fully covered by insurance, then it could
adversely affect us.

We are subject to complex laws
that can affect the cost, manner or feasibility of doing business.

Exploration,
development, production and sale of oil and natural gas are subject to extensive federal,
state, local and international regulation. We may be required to make large expenditures
to comply with governmental regulations. Matters subject to regulation include:

---



| |  |  | discharge
permits for drilling operations;
| | - |  | ------------------------------------------

| |  |  | drilling
bonds;
| | - |  | ---------------

| |  |  | reports
concerning operations;
| | - |  | ------------------------------

| |  |  | the
spacing of wells;
| | - |  | ---------------------

| |  |  | unitization
and pooling of properties; and
| | - |  | ------------------------------------------

| |  |  | taxation.
| | - |  | ---------

Under
these laws, we could be liable for personal injuries, property damage and other damages.
Failure to comply with these laws also may result in the suspension or termination of our
operations and subject us to administrative, civil and criminal penalties. Moreover, these
laws could change in ways that substantially increase our costs. Any such liabilities,
penalties, suspensions, terminations or regulatory changes could materially adversely
affect our financial condition and results of operations.

Our operations may incur
substantial liabilities to comply with the environmental laws and regulations.

Our
oil and natural gas operations are subject to stringent federal, state and local laws and
regulations relating to the release or disposal of materials into the environment or
otherwise relating to environmental protection. These laws and regulations may require the
acquisition of a permit before drilling commences, restrict the types, quantities and
concentration of substances that can be released into the environment in connection with
drilling and production activities, limit or prohibit drilling activities on certain lands
lying within wilderness, wetlands and other protected areas, and impose substantial
liabilities for pollution resulting from our operations. Failure to comply with these laws
and regulations may result in the assessment of administrative, civil and criminal
penalties, incurrence of investigatory or remedial obligations or the imposition of
injunctive relief. Changes in environmental laws and regulations occur frequently, and any
changes that result in more stringent or costly waste handling, storage, transport,
disposal or cleanup requirements could require us to make significant expenditures to
maintain compliance, and may otherwise have a material adverse effect on our results of
operations, competitive position or financial condition as well as the industry in
general. Under these environmental laws and regulations, we could be held strictly liable
for the removal or remediation of previously released materials or property contamination
regardless of whether we were responsible for the release or if our operations were
standard in the industry at the time they were performed.

# If our indebtedness
increases, it could reduce our financial flexibility.

We
have a $150 million credit facility in place with a current borrowing base of $150
million. As of December 31, 2008, no amount was outstanding on our credit facility. If in
the future we utilize this facility, the level of our indebtedness could affect our
operations in several ways, including the following:

| |  |  | a
significant portion of our cash flow could be used to service the indebtedness,
| | - |  | ---------------------------------------------------------------------------------

| |  |  | a
high level of debt would increase our vulnerability to general adverse economic and
industry conditions,
| | - |  | ----------------------------------------------------------------------------------------------------------

| |  |  | the
covenants contained in our credit facility limit our ability to borrow additional funds,
dispose of assets, pay dividends and
make certain investments,
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | a high level of debt could impair our ability to
obtain additional financing in the future for working capital, capital expenditures,
acquisitions, general corporate or other purposes.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
addition, our bank borrowing base is subject to semi-annual redeterminations. We could be
forced to repay a portion of our bank borrowings due to redeterminations of our borrowing
base. If we are forced to do so, we may not have sufficient funds to make such repayments.
If we do not have sufficient funds and are otherwise unable to negotiate renewals of our
borrowings or arrange new financing, we may have to sell significant assets. Any such sale
could have a material adverse effect on our business and financial results.

---



Unless we replace our oil and
natural gas reserves, our reserves and production will decline, which would adversely
affect our cash flows and income.

Unless
we conduct successful development, exploitation and exploration activities or acquire
properties containing proved reserves, our proved reserves will decline as those reserves
are produced. Producing oil and natural gas reservoirs generally are characterized by
declining production rates that vary depending upon reservoir characteristics and other
factors. Our future oil and natural gas reserves and production, and, therefore our cash
flow and income, are highly dependent on our success in efficiently developing and
exploiting our current reserves and economically finding or acquiring additional
recoverable reserves. If we are unable to develop, exploit, find or acquire additional
reserves to replace our current and future production, our cash flow and income will
decline as production declines, until our existing properties would be incapable of
sustaining commercial production.

If our access to markets is
restricted, it could negatively impact our production, our income and ultimately our
ability to retain our leases.

Market
conditions or the unavailability of satisfactory oil and natural gas transportation
arrangements may hinder our access to oil and natural gas markets or delay our production.
The availability of a ready market for our oil and natural gas production depends on a
number of factors, including the demand for and supply of oil and natural gas and the
proximity of reserves to pipelines and terminal facilities. Our ability to market our
production depends in substantial part on the availability and capacity of gathering
systems, pipelines and processing facilities owned and operated by third parties. Our
failure to obtain such services on acceptable terms could materially harm our business.

Currently,
the majority of our production is sold to marketers and other purchasers that have access
to nearby pipeline facilities. However, as we begin to further develop our properties, we
may find production in areas with limited or no access to pipelines, thereby necessitating
delivery by other means, such as trucking, or requiring compression facilities. Such
restrictions on our ability to sell our oil or natural gas have several adverse affects,
including higher transportation costs, fewer potential purchasers (thereby potentially
resulting in a lower selling price) or, in the event we were unable to market and sustain
production from a particular lease for an extended time, possibly causing us to lose a
lease due to lack of production.

Risks Relating to Our
Common Stock

We have no plans to pay dividends
on our common stock. You may not receive funds without selling your shares.

We
do not anticipate paying any cash dividends on our common stock in the foreseeable future.
We currently intend to retain future earnings, if any, to finance the expansion of our
business. Our future dividend policy is within the discretion of our board of directors
and will depend upon various factors, including our business, financial condition, results
of operations, capital requirements and investment opportunities. In addition, our credit
facility prohibits us from paying dividends.

Provisions under Nevada law could
delay or prevent a change in control of our company, which could adversely affect the
price of our common stock.

While
we do not believe that we currently have any provisions in our organizational documents
that could prevent or delay a change in control of our company (such as provisions calling
for a staggered board of directors, or the issuance of stock with super-majority voting
rights), the existence of some provisions under Nevada law could delay or prevent a change
in control of our company, which could adversely affect the price of our common stock.
Nevada law imposes some restrictions on mergers and other business combinations between us
and any holder of 10% or more of our outstanding common stock.

---



|Item 1B: |  | Unresolved Staff Comments
|-------- |  | -------------------------

None.

|Item 2: |  | Properties
|------- |  | ----------

# General Background

From
our inception in August 2000 through 2004, we built our asset base and achieved growth
primarily through property acquisitions. Beginning in 2005, while we have continued to
grow through acquisition, we have shifted our focus to growth through development of our
existing properties.

As
of December 31, 2008, our estimated proved reserves had a pre-tax PV10 value of
approximately $651.6 million and a Standardized Measure of Discounted Future Cash Flows of
approximately $460.7 million, approximately 75% of which relate to our properties in
Texas, approximately 20% of which relate to our properties located in New Mexico,
approximately 4% relate to our properties in Oklahoma and less than 1% relate to our
properties in Kansas. We spent approximately $475.9 million on acquisitions and capital
projects during 2006, 2007 and 2008. We expect to further develop these properties through
additional drilling. We will closely manage our capital expenditures to our cash flow. As
commodity prices change we will consider the resulting impact on our cash flow and adjust
our capital expenditures up or down accordingly. We have maintained a strong current cash
position with no long-term debt; we will continue to seek acquisition opportunities that
complement our core assets.

The
following table summarizes our total net proved reserves, pre-tax PV10 value and
Standardized Measure of Discounted Future Net Cash Flows as of December 31, 2008.

|GeographicArea |  | Oil(Bbl) |  | Natural Gas(Mcf) | Total(Boe) | Pre-Tax PV10Value | Standardized Measure of Discounted Future Net Cash Flows
|-------------- |  | -------- |  | ---------------- | ---------- | ----------------- | --------------------------------------------------------
|               |  |          |  |                  |            |                   |                                                         
|New Mexico     |  |          |  | 11,562,062       |            |                   | 10,027,712                                              
|Texas          |  |          |  | 41,446,289       |            |                   | 46,659,956                                              
|Oklahoma       |  |          |  | 2,836,906        |            |                   | 223,942                                                 
|Kansas         |  |          |  | -                |            |                   | 1,893,052                                               
|               |  |          |  |                  |            |                   |                                                         
|Total          |  |          |  | 55,845,257       |            |                   | 58,804,662                                              
|               |  |          |  |                  |            |                   |                                                         

# Proved Reserves

Our
65,646,034 Boe of proved reserves, which consist of approximately 85% oil and 15% natural
gas, are summarized below as of December 31, 2008, on a net pre-tax PV10 value and
Standardized Measure of Discounted Future Net Cash Flows basis. Our reserve estimates have
not been filed with any Federal authority or agency (other than the SEC).

---



As
of December 31, 2008, our Texas proved reserves had a net pre-tax PV10 value of $473.6
million and Standardized Measure of Discounted Future Net Cash Flows of $340.3 million,
our proved reserves in New Mexico had a net pre-tax PV10 value of $142.7 million and
Standardized Measure of Discounted Future Net Cash Flows of $96.7 million, our proved
reserves in Oklahoma had a net pre-tax PV10 value of $34.1 million and a Standardized
Measure of Discounted Future Net Cash Flows of $22.1 million and our proved reserves in
Kansas had a net pre-tax PV10 value of $1.3 million and a Standardized Measure of
Discounted Future Net Cash Flows of $1.6 million.

As
of December 31, 2008, approximately 31% of the proved reserves have been classified as
proved developed producing, or PDP. Proved developed non-producing, or
PDNP reserves constitute approximately 7% and proved undeveloped, or
PUD, reserves constitute approximately 62%, of the proved reserves as of
December 31, 2008.

Total
proved reserves had a net pre-tax PV10 value as of December 31, 2008 of approximately
$651.6 million and a Standardized Measure of Discounted Future Net Cash Flows of
approximately $460.7 million, 32.8% or $213.7 million and $152.9 million, respectively, of
which is associated with the PDP reserves. An additional $57.0 million and $39.8 million,
respectively, is associated with the PDNP reserves, or 8.7% of total proved reserves
pre-tax PV10 value. The remaining $380.9 million and $269.0 million, respectively, was
associated with PUD reserves.

---



Our
proved reserves as of December 31, 2008 are summarized in the table below.

|              | Oil(Bbl)   |  | Gas(Mcf)   |  | Total(Boe) |  | % of Total Proved |  |   | Pre-taxPV10(In thousands) |  |   | Standardized Measure of Discounted Future Net Cash Flows |  |   | Future CapitalExpenditures(In thousands)
|------------- | ---------- |  | ---------- |  | ---------- |  | ----------------- |  | - | ------------------------- |  | - | -------------------------------------------------------- |  | - | ----------------------------------------
|New Mexico:   |            |  |            |  |            |  |                   |  |   |                           |  |   |                                                          |  |   |                                         
|PDP           | 3,514,564  |  | 5,058,089  |  | 4,357,579  |  | 7%                |  | $ | 29,705                    |  | $ | 20,144                                                   |  | $ | -                                       
|PDNP          | 1,898,696  |  | 1,883,264  |  | 2,212,573  |  | 3%                |  |   | 28,745                    |  |   | 19,493                                                   |  |   | 4,072                                   
|PUD           | 6,148,802  |  | 3,086,359  |  | 6,663,195  |  | 10%               |  |   | 84,205                    |  |   | 57,103                                                   |  |   | 50,171                                  
|              |            |  |            |  |            |  |                   |  |   |                           |  |   |                                                          |  |   |                                         
|Total Proved: | 11,562,062 |  | 10,027,712 |  | 13,233,347 |  | 20%               |  | $ | 142,655                   |  | $ | 96,740                                                   |  | $ | 54,243                                  
|              |            |  |            |  |            |  |                   |  |   |                           |  |   |                                                          |  |   |                                         

|Texas:        |            |  |            |  |            |  |     |  |   |         |  |   |         |  |   |        
|------------- | ---------- |  | ---------- |  | ---------- |  | --- |  | - | ------- |  | - | ------- |  | - | -------
|PDP           | 13,391,728 |  | 11,101,118 |  | 15,241,914 |  | 23% |  | $ | 181,321 |  | $ | 130,285 |  | $ | -      
|PDNP          | 1,183,124  |  | 8,628,648  |  | 2,621,232  |  | 4%  |  |   | 28,227  |  |   | 20,282  |  |   | 10,842 
|PUD           | 26,871,437 |  | 26,930,190 |  | 31,359,803 |  | 48% |  |   | 264,007 |  |   | 189,698 |  |   | 256,592
|              |            |  |            |  |            |  |     |  |   |         |  |   |         |  |   |        
|Total Proved: | 41,446,289 |  | 46,659,956 |  | 49,222,949 |  | 75% |  | $ | 473,555 |  | $ | 340,265 |  | $ | 267,434
|              |            |  |            |  |            |  |     |  |   |         |  |   |         |  |   |        

|Oklahoma:     |           |  |         |  |           |  |    |  |   |        |  |   |        |  |   |      
|------------- | --------- |  | ------- |  | --------- |  | -- |  | - | ------ |  | - | ------ |  | - | -----
|PDP           | 243,365   |  | 94,862  |  | 259,175   |  | 0% |  | $ | 1,372  |  | $ | 890    |  | $ | -    
|PUD           | 2,593,541 |  | 129,080 |  | 2,615,054 |  | 4% |  |   | 32,698 |  |   | 21,220 |  |   | 8,995
|              |           |  |         |  |           |  |    |  |   |        |  |   |        |  |   |      
|Total Proved: | 2,836,906 |  | 223,942 |  | 2,874,229 |  | 4% |  | $ | 34,070 |  | $ | 22,110 |  | $ | 8,995
|              |           |  |         |  |           |  |    |  |   |        |  |   |        |  |   |      

|Kansas:       |   |  |           |  |         |  |    |  |   |       |  |   |       |  |   |  
|------------- | - |  | --------- |  | ------- |  | -- |  | - | ----- |  | - | ----- |  | - | -
|PDP           | - |  | 1,893,052 |  | 315,509 |  | 1% |  | $ | 1,275 |  | $ | 1,572 |  | $ | -
|              |   |  |           |  |         |  |    |  |   |       |  |   |       |  |   |  
|Total Proved: | - |  | 1,893,052 |  | 315,509 |  | 1% |  | $ | 1,275 |  | $ | 1,572 |  | $ | -
|              |   |  |           |  |         |  |    |  |   |       |  |   |       |  |   |  

|Total:        |            |  |            |  |            |  |      |  |   |         |  |   |         |  |   |        
|------------- | ---------- |  | ---------- |  | ---------- |  | ---- |  | - | ------- |  | - | ------- |  | - | -------
|PDP           | 17,149,657 |  | 18,147,121 |  | 20,174,177 |  | 31%  |  | $ | 213,673 |  | $ | 152,891 |  | $ | -      
|PDNP          | 3,081,820  |  | 10,511,912 |  | 4,833,805  |  | 7%   |  |   | 56,972  |  |   | 39,775  |  |   | 14,914 
|PUD           | 35,613,780 |  | 30,145,629 |  | 40,638,052 |  | 62%  |  |   | 380,910 |  |   | 268,021 |  |   | 315,758
|              |            |  |            |  |            |  |      |  |   |         |  |   |         |  |   |        
|Total Proved: | 55,845,257 |  | 58,804,662 |  | 65,646,034 |  | 100% |  | $ | 651,555 |  | $ | 460,687 |  | $ | 330,672
|              |            |  |            |  |            |  |      |  |   |         |  |   |         |  |   |        

# Estimated Costs Related
to Conversion of Proved Undeveloped Reserves to Proved Developed Reserves

The
following table indicates projected reserves that we currently estimate will be converted
from proved undeveloped or proved developed non-producing to proved developed, as well as
the estimated costs per year involved in such development.

|Year | Estimated OilReservesDeveloped (Bbls) |  | Estimated GasReservesDeveloped (Mcf) |  | Total Boe  |  |   | EstimatedDevelopment Costs
|---- | ------------------------------------- |  | ------------------------------------ |  | ---------- |  | - | --------------------------
|     |                                       |  |                                      |  |            |  |   |                           
|2009 | 8,645,952                             |  | 19,144,177                           |  | 11,836,648 |  | $ | 68,536,928                
|2010 | 11,813,008                            |  | 10,124,718                           |  | 13,500,461 |  |   | 95,088,268                
|2011 | 9,103,092                             |  | 6,365,262                            |  | 10,163,969 |  |   | 96,918,071                
|2012 | 9,133,548                             |  | 5,023,384                            |  | 9,970,779  |  |   | 70,129,190                
|     |                                       |  |                                      |  |            |  |   |                           
|     | 38,695,600                            |  | 40,657,541                           |  | 45,471,857 |  | $ | 330,672,457               
|     |                                       |  |                                      |  |            |  |   |                           

---



# Production

Our
estimated average daily production for the month of December, 2008, is summarized below.
These tables indicate the percentage of our estimated December 2008 average daily
production of 7,003 Boe/d attributable to each state and to oil versus natural gas
production.

|State      |  | AverageDailyProduction |  | Oil    |  | NaturalGas
|---------- |  | ---------------------- |  | ------ |  | ----------
|Texas      |  | 86.30%                 |  | 76.12% |  | 10.18%    
|New Mexico |  | 10.83%                 |  | 8.77%  |  | 2.06%     
|Oklahoma   |  | 1.71%                  |  | 1.61%  |  | 0.10%     
|Kansas     |  | 1.16%                  |  | 0.00%  |  | 1.16%     
|           |  |                        |  |        |  |           
|Total      |  | 100%                   |  | 86.50% |  | 13.50%    

# Summary of Oil and
Natural Gas Properties and Projects

Significant
New Mexico Operations

East
Hobbs San Andres Unit  Lea County, New Mexico. In May, 2004 we acquired an
82.24% working interest and a 67.60% net revenue interest in this lease. The property has
been in continuous production since that time. Net revenue interest is the
owners percentage share of the monthly income realized from the sale of a
wells produced oil and gas. The net revenue interest is a lesser number as compared
to the working interest, due to the mineral owner royalty and other overriding royalties
on the well. The lease contains approximately 920 acres, all held by production, on which
there are 31 producing wells. We believe the property can support 27 additional wells
which are included in our estimate of PUD in this report. We believe the property also has
additional potential through waterflooding. A waterflood operation is a method of
secondary recovery in which water is injected into the reservoir formation to displace
residual oil. The water from injection wells physically sweeps the displaced oil to
adjacent production wells. These estimates are included in our estimates of PUD potential.

Seven
Rivers Queen Unit  Lea County, New Mexico. In May, 2003 we acquired a 71.11%
working interest and a 56.91% net revenue interest in this mature waterflood property. The
property consists of 2,240 acres, all held by production. The property has 55 producing
wells. We believe the property has remaining potential from waterflood expansion but no
costs have been budgeted for this development for 2009.

Humphrey
Queen Unit  Lea County, New Mexico. We acquired a 100% working interest and a
75.08% net revenue interest in this mature waterflood in December, 2007. The property
contains 16 producing wells and approximately 760 acres, all held by production. We
believe the property can support activities to drill 22 additional PUD wells, which are
included in our reserve estimates.

Langlie
Mattix Queen Unit  Lea County, New Mexico. We acquired a 100% working interest
and a 75.09% net revenue interest in this mature waterflood property in December, 2007.
The property has 16 producing wells on approximately 1,040 acres, all held by production.
We believe the property can support activity to drill 24 additional PUD wells, which are
included in our reserve estimates.

---



South
Leonard Queen Unit  Lea County, New Mexico. We acquired a 100% working interest
and a 75.09% net revenue interest in this mature waterflood in December, 2007. The
property contains 7 producing wells on approximately 680 acres with all of the acreage
being held by production. We believe the property can support activity to drill four
additional PUD wells, which are included in our reserve estimates.

North
Benson Queen Unit  Eddy County, New Mexico. We acquired a 100% working interest
and a 69.44% net revenue interest in this mature waterflood property in October, 2003. The
property has 27 producing wells and contains approximately 1,800 acres, all held by
production. We have reactivated the waterflood by constructing a new water supply system,
building new injection facilities, and returning previously idle water injection wells to
service. We think the property can support workovers in existing wells to open additional
zones and drilling 28 additional wells which are included as PUD in our reserve estimate.

Red
Lake Unit  Eddy County, New Mexico. In October, 2007 we acquired a 100% working
interest and an 80.56% net revenue interest in this property. The lease has 16 producing
wells on approximately 1,090 acres, all held by production. We believe the property can
support activity to drill three additional PUD wells, which are included in our reserve
estimates.

Phillips
Lea, Hale State, State 36 and Corbin 35 leases  Lea County, New Mexico. In June,
2008 we acquired a 100% working interest with net revenue interests ranging from 80.31% to
82.81% in these leases. The leases have 16 producing wells on approximately 800 acres, all
held by production. We think the property can support workovers in existing wells to open
new zones in existing wells and drilling 11 additional wells which are included as PUD in
our reserve estimate.

Significant
Texas Operations

Fuhrman
Mascho leases  Andrews County, Texas. In December 2004 we acquired a 100%
working interest and a 75% net revenue interest in these leases. Throughout 2005, 2006,
2007 and 2008 we acquired working and net revenue interests in additional producing leases
and acquired additional undeveloped acreage in and around our Fuhrman Mascho leases. The
working interests range from 20-100% and the net revenue interests range from 16-80%. In
total, we now own 36,279 acres, with 24,760 acres developed and held by production and the
remaining 11,479 acres being undeveloped. We believe the Fuhrman Mascho leases contain
considerable remaining potential for San Andres zone PUD drilling. Our reserve estimate
includes 499 PUD Grayburg-San Andres wells. The Fuhrman Mascho leases also contain
potential for Yates zone gas development from workovers in existing wells and PUD
locations. Our reserve estimates include potential development expenditures for 2009 and
beyond.

Y6
lease  Fisher County, Texas. We acquired a 100% working interest and an 80% net
revenue interest in this partially developed waterflood property in June, 2001. There are
15 producing wells on approximately 1,697 acres, which is held by production. We believe
the property can support activity to drill four additional PUD wells, which are included
in our reserve estimates.

Significant
Oklahoma Operations

Ona
Morrow Sand Unit  Cimarron and Texas Counties, Oklahoma. We acquired a 100%
working interest and an 81.32% net revenue interest in this waterflood property in June,
2001. There are 13 producing wells on approximately 2,120 acres, which is held by
production. We believe the property can support three additional PUD wells, which are
included in our estimate of PUD.

---



Eva
South Morrow Sand Unit  Texas County, Oklahoma. We purchased a 100% working
interest and an 85.41% net revenue interest in this waterflood property in July, 2002. The
lease has seven producing wells on approximately 489 acres, which is held by production.
We believe this property can support two additional wells which are included in our
estimate of PUD.

Midwell,
Appleby, Smaltz, and Hanes Leases  Cimarron County, Oklahoma. We acquired a 100%
working interest and an 80% net revenue interest in these leases in September, 2002. The
leases contain 11 wells on approximately 2,280 acres, which is held by production. We
believe the leases contain PUD potential from waterflood operations and six PUD wells,
which are included in our estimate of PUD. We began implementing the waterflood operations
during 2008 and will continue those efforts during 2009.

# Acreage

The
following table summarizes gross and net developed and undeveloped acreage at December 31,
2008 by region (net acreage is our percentage ownership of gross acreage). Acreage in
which our interest is limited to royalty and overriding royalty interests is excluded.

|           | Developed Acreage |  | Undeveloped Acreage |  | Total Acreage
|---------- | ----------------- |  | ------------------- |  | -------------
|           |                   |  |                     |  |              
|           | Gross             |  | Net                 |  | Gross        
|           |                   |  |                     |  |              
|New Mexico | 9,850             |  | 7,069               |  | -            
|           |                   |  |                     |  |              
|Texas      | 27,027            |  | 20,391              |  | 13,009       
|           |                   |  |                     |  |              
|Oklahoma   | 5,529             |  | 4,122               |  | -            
|           |                   |  |                     |  |              
|Kansas     | 5,200             |  | 4,160               |  | -            
|           |                   |  |                     |  |              
|Total      | 47,606            |  | 35,742              |  | 13,009       
|           |                   |  |                     |  |              

# Production History

The
following table presents the historical information about our produced natural gas and oil
volumes.

|                                   | Year Ended December 31,
|---------------------------------- | -----------------------
|                                   |                        
|                                   |                        
|Oil production (Bbls)              |                        
|Natural gas production (Mcf)       |                        
|Total production (Boe)             |                        
|Daily production (Boe/d)           |                        
|Average sales price:               |                        
|Oil (per Bbl)                      | $                      
|Natural gas (per Mcf)              |                        
|Total (per Boe)                    |                        
|Average production cost (per Boe)  | $                      
|Average production taxes (per Boe) |                        

---



The
average oil sales price amounts above are calculated by dividing revenue from oil sales by
the volume of oil sold, in Bbl. The average gas sales price amounts above are calculated
by dividing revenue from gas sales by the volume of gas sold, in Mcf. The total average
sales price amounts are calculated by dividing total revenues by total volume sold, in
Boe. The average production costs above are calculated by dividing production costs by
total production in Boe.

# Productive Wells

The
following table presents our ownership at December 31, 2008, in productive oil and natural
gas wells by region (a net well is our percentage ownership of a gross well).

|           | Oil Wells |  | Gas wells |  | Total Wells
|---------- | --------- |  | --------- |  | -----------
|           |           |  |           |  |            
|           | Gross     |  | Net       |  | Gross      
|           |           |  |           |  |            
|New Mexico | 194       |  | 136       |  | -          
|Texas      | 755       |  | 567       |  | -          
|Oklahoma   | 31        |  | 25        |  | -          
|Kansas     | -         |  | -         |  | 10         
|           |           |  |           |  |            
|Total      | 980       |  | 728       |  | 10         
|           |           |  |           |  |            

# Drilling Activity

During
2008 we completed the drilling of 233 wells. All but seven of these wells were drilled on
our Fuhrman Mascho properties in Andrews County, Texas, five of which were Yates gas wells
with the remainder being San Andres wells. Of the remaining wells drilled, three were on
our East Hobbs San Andres Unit in Lea County, New Mexico and one each was drilled on our
Y-6 lease in Fischer County, Texas, our Phillips Lea lease in Lea County, New Mexico, our
Hale State lease in Lea County, New Mexico and our Homann lease in Gaines County, Texas.

# Cost Information

We
conduct our oil and natural gas activities entirely in the United States. As noted
previously in the table appearing under Production History, our average
production costs, per Boe, were $6.06 in 2006, $7.34 in 2007 and $7.63 in 2008 and our
average production taxes, per BOE, were $3.29 in 2006, $3.61 in 2007 and $4.50 in 2008.
These amounts are calculated by dividing our total production costs or total production
taxes by our total volume sold, in Boe.

Costs
incurred for property acquisition, exploration and development activities during the years
ended December 31, 2006, 2007 and 2008 are shown below.

|                                   | For the Years Ended December 31,
|---------------------------------- | --------------------------------
|                                   |                                 
|                                   |                                 
|                                   |                                 
|Acquisition of proved properties   | $                               
|Acquisition of unproved properties |                                 
|Exploration costs                  |                                 
|Development costs                  |                                 
|                                   |                                 
|Total Costs Incurred               | $                               
|                                   |                                 

(1)   The amount shown for 2007 for acquisition of proved properties is
          net of proceeds received from the sale of our interest in the West San Andres
          property.

---



# Reserve Quantity
Information

Our
estimates of proved reserves and related valuations were based on internal reports and
audited by Lee Keeling and Associates, Inc. (Kansas and Oklahoma Properties) and
Williamson Petroleum Consultants, Inc. (New Mexico and Texas Properties), independent
petroleum engineers, in accordance with the provisions of SFAS 69, Disclosures About
Oil and Gas Producing Activities. The estimates of proved reserves are inherently
imprecise and are continually subject to revision based on production history, results of
additional exploration and development, price changes and other factors.

Our
oil and natural gas reserves are attributable solely to properties within the United
States. A summary of the changes in quantities of proved (developed and undeveloped) oil
and natural gas reserves is shown below.

|                           |                               | Oil (Bbls)  |            | Natural Gas(Mcf)
|-------------------------- | ----------------------------- | ----------- | ---------- | ----------------
|                           |                               |             |            |                 
|Balance, December 31, 2005 | 24,867,189                    |             | 31,982,079
|                           | Purchase of minerals in place | 3,644,144   |            | 2,605,212       
|                           | Extensions and discoveries    | 8,952,460   |            | 10,206,642      
|                           | Production                    | (900,616)   |            | (989,991)       
|                           | Revisions of estimates        | (498,904)   |            | (1,379,743)     
|                           |                               |             |            |                 
|                           |                               |             |            |                 
|Balance, December 31, 2006 | 36,064,273                    |             | 42,424,199
|                           | Purchase of minerals in place | 7,021,972   |            | 4,330,246       
|                           | Extensions and discoveries    | 6,016,660   |            | 6,852,346       
|                           | Production                    | (1,316,025) |            | (1,503,612)     
|                           | Revisions of estimates        | (373,558)   |            | (4,028,217)     
|                           |                               |             |            |                 
|                           |                               |             |            |                 
|Balance, December 31, 2007 | 47,413,322                    |             | 48,074,962
|                           | Purchase of minerals in place | 3,638,095   |            | 2,364,908       
|                           | Extensions and discoveries    | 9,547,981   |            | 11,391,853      
|                           | Production                    | (2,018,335) |            | (1,911,713)     
|                           | Revisions of estimates        | (2,735,806) |            | (1,115,348)     
|                           |                               |             |            |                 
|                           |                               |             |            |                 
|Balance, December 31, 2008 | 55,845,257                    |             | 58,804,662
|                           |                               |             |            |                 

---



Our proved oil and natural gas
reserves are shown below.

|                  |             |  | For the Years Ended December 31,
|----------------- | ----------- |  | --------------------------------
|                  |             |  | 2006                            
|                  |             |  |                                 
|Oil (Bbls)        |             |  |                                 
|                  | Developed   |  | 11,566,185                      
|                  | Undeveloped |  | 24,498,088                      
|                  |             |  |                                 
|                  | Total       |  | 36,064,273                      
|                  |             |  |                                 
|                  |             |  |                                 
|Natural Gas (Mcf) |             |  |                                 
|                  | Developed   |  | 29,679,974                      
|                  | Undeveloped |  | 12,744,225                      
|                  |             |  |                                 
|                  | Total       |  | 42,424,199                      
|                  |             |  |                                 
|                  |             |  |                                 
|Total (Boe)       |             |  |                                 
|                  | Developed   |  | 16,512,848                      
|                  | Undeveloped |  | 26,622,126                      
|                  |             |  |                                 
|                  | Total       |  | 43,134,974                      
|                  |             |  |                                 

# Standardized Measure of
Discounted Future Net Cash Flows

Our
standardized measure of discounted future net cash flows relating to proved oil and
natural gas reserves and changes in the standardized measure as described below were
prepared in accordance with the provisions of SFAS 69. Future cash inflows were computed
by applying year-end prices to estimated future production. Future production and
development costs are computed by estimating the expenditures to be incurred in producing
and developing the proved oil and natural gas reserves at year end, based on year-end
costs and assuming continuation of existing economic conditions.

Future
income tax expenses are calculated by applying appropriate year-end tax rates to future
pre-tax net cash flows relating to proved oil and natural gas reserves, less the tax basis
of properties involved. Future income tax expenses give effect to permanent differences,
tax credits and loss carryforwards relating to the proved oil and natural gas reserves.
Future net cash flows are discounted at a rate of 10% annually to derive the standardized
measure of discounted future net cash flows. This calculation procedure does not
necessarily result in an estimate of the fair market value or the present value of our oil
and natural gas properties.

The
standardized measure of discounted future net cash flows relating to the proved oil and
natural gas reserves are shown below.

|December 31,                                           |   | 2008          |  |  |   | 2007            |  |  |   | 2006          | 
|------------------------------------------------------ | - | ------------- |  |  | - | --------------- |  |  | - | ------------- | 
|                                                      
|Future cash flows                                      | $ | 2,391,888,946 |  |  | $ | 4,634,645,500   |  |  | $ | 2,206,997,329 | 
|Future production costs                                |   | (716,121,604) |  |  |   | (790,284,047)   |  |  |   | (436,830,228) | 
|Future development costs                               |   | (330,672,457) |  |  |   | (321,485,125)   |  |  |   | (150,553,635) | 
|Future income taxes                                    |   | (394,800,287) |  |  |   | (1,254,982,170) |  |  |   | (578,112,324) | 
|                                                      
|Future net cash flows                                  |   | 950,294,598   |  |  |   | 2,267,894,158   |  |  |   | 1,041,501,142 | 
|10% annual discount for estimated timing of cash flows |   | (489,607,688) |  |  |   | (991,727,804)   |  |  |   | (496,061,467) | 
|                                                      
|Standardized Measure of Discounted Cash Flows          | $ | 460,686,910   |  |  | $ | 1,276,166,354   |  |  | $ | 545,439,675   | 
|                                                      

---



The
changes in the standardized measure of discounted future net cash flows relating to the
proved oil and natural gas reserves are shown below.

|                                                                    |   | 2008            |  |  |   | 2007          |  |  |   | 2006          | 
|------------------------------------------------------------------- | - | --------------- |  |  | - | ------------- |  |  | - | ------------- | 
|                                                                   
|Beginning of the year                                               | $ | 1,276,166,354   |  |  | $ | 545,439,675   |  |  | $ | 445,600,566   | 
|Purchase of minerals in place                                       |   | 41,597,736      |  |  |   | 325,058,027   |  |  |   | 18,153,711    | 
|Extensions, discoveries and improved recovery, less   related costs |   | 129,110,323     |  |  |   | 297,610,301   |  |  |   | 279,407,782   | 
|Development costs incurred during the year                          |   | 190,631,820     |  |  |   | 113,109,335   |  |  |   | 90,848,604    | 
|Sales of oil and gas produced, net of production costs              |   | (190,374,853)   |  |  |   | (82,949,751)  |  |  |   | (53,324,929)  | 
|Accretion of discount                                               |   | 131,684,244     |  |  |   | 69,291,660    |  |  |   | 47,117,073    | 
|Net changes in price and production costs                           |   | (1,526,963,575) |  |  |   | 592,749,069   |  |  |   | (106,369,988) | 
|Net change in estimated future development costs                    |   | (22,637,628)    |  |  |   | (111,175,136) |  |  |   | (53,640,718)  | 
|Revision of previous quantity estimates                             |   | 293,723,576     |  |  |   | (7,424,163)   |  |  |   | (14,276,840)  | 
|Revision of estimated timing of cash flows                          |   | (409,158,356)   |  |  |   | (62,546,312)  |  |  |   | (38,827,084)  | 
|Net change in income taxes                                          |   | 546,907,269     |  |  |   | (402,996,351) |  |  |   | (69,248,502)  | 
|                                                                   
|End of the Year                                                     | $ | 460,686,910     |  |  | $ | 1,276,166,354 |  |  | $ | 545,439,675   | 
|                                                                   

# Managements
Business Strategy Related to Properties

Our
goal is to increase stockholder value by investing in oil and gas projects with attractive
rates of return on capital employed. We plan to achieve this goal by exploiting and
developing our existing oil and natural gas properties and pursuing acquisitions of
additional properties. Specifically, we have focused, and plan to continue to focus, on
the following:

Developing
and Exploiting Existing Properties. We believe that there is significant value to be
created by drilling the identified undeveloped opportunities on our properties. We own
interests in a total of 47,606 gross (35,742 net) developed acres and operate essentially
all of the net pre-tax PV10 value of our proved undeveloped reserves. In addition, as of
December 31, 2008, we owned interests in approximately 13,009 gross undeveloped acres
(9,757 net). We believe that our current and future cash flow will enable us to undertake
the exploitation of our properties through additional drilling activities. We will closely
manage our capital expenditures to our cash flow. As commodity prices change we will
consider the resulting impact on our cash flow and adjust our capital expenditures
accordingly, be it up or down.

Pursuing
Profitable Acquisitions. We have historically pursued acquisitions of properties that
we believe to have exploitation and development potential comparable to our existing
inventory of drilling locations. We have developed and refined an acquisition program
designed to increase reserves and complement our existing core properties. We have an
experienced team of management and engineering professionals who identify and evaluate
acquisition opportunities, negotiate and close purchases and manage acquired properties.
While our emphasis in 2008 and beyond is anticipated to focus on the further development
of our existing properties, we will continue to look for acquisition opportunities with
existing cash flow from production and future development potential.

Controlling
Costs through Efficient Operation of Existing Properties. We operate essentially 100%
of the pre-tax PV10 value of our total proved reserves, which we believe enables us to
better manage expenses, capital allocation and the decision-making processes related to
our exploitation and exploration activities. For the year ended December 31, 2008, our oil
and gas production costs per Boe averaged $7.63, our oil and gas production taxes per Boe
averaged $4.50 and general and administrative costs averaged $5.80 per Boe produced.

---



# Other Properties and
Commitments

Our
principal executive offices are in a company owned building in Tulsa, Oklahoma. This
office building has approximately 16,000 square feet. Additionally, we own the building in
Hobbs, New Mexico which serves as our primary field office. This office building has
approximately 7,500 square feet. We also own an office building in Andrews, Texas for the
operation of our wholly-owned subsidiary Arena Drilling Company. This office building has
approximately 6,000 square feet. We believe the office space will be adequate for our
current operations as well as allowing for continued growth.

|Item 3: |  | Legal Proceedings
|------- |  | -----------------

In
the ordinary course of business, we may be, from time to time, a claimant or a defendant
in various legal proceedings. We do not presently have any material litigation pending or
threatened.

|Item 4: |  | Submission of Matters to a Vote of Security Holders
|------- |  | ---------------------------------------------------

Our
annual shareholders meeting was held on December 12, 2008. The shareholders
re-elected Messrs. Stanley M. McCabe, Lloyd T. Rochford, Clayton E. Woodrum, Anthony B.
Petrelli and Carl F. Fiddner as Directors with terms ending in 2009. The shareholders
approved an amendment to the Companys executive stock option plan to increase the
number of shares of Common Stock that may be granted under the plan from 5,000,000 to
5,500,000. The following reflects the votes cast for each matter voted on at the annual
meeting:

|                               |  | Votes for  |  |  |  | Votes against |  |  |  | Abstain   | 
|------------------------------ |  | ---------- |  |  |  | ------------- |  |  |  | --------- | 
|                               |  |            |  |  |  |               |  |  |  |           | 
|Lloyd T. Rochford              |  | 32,604,253 |  |  |  | 1,920,110     |  |  |  | -         | 
|Stanley M. McCabe              |  | 27,700,893 |  |  |  | 6,823,470     |  |  |  | -         | 
|Clayton E. Woodrum             |  | 26,001,428 |  |  |  | 8,522,935     |  |  |  | -         | 
|Anthony B. Petrelli            |  | 31,807,392 |  |  |  | 2,716,971     |  |  |  | -         | 
|Carl H. Fiddner                |  | 31,808,367 |  |  |  | 2,715,996     |  |  |  | -         | 
|                               |  |            |  |  |  |               |  |  |  |           | 
|Amendment to stock option plan |  | 18,318,146 |  |  |  | 11,181,573    |  |  |  | 5,024,644 | 

---



# PART II

|Item 5: |  | Market for Registrants Common Stock, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|------- |  | -----------------------------------------------------------------------------------------------------------

# Market for our Common
Stock

Since
August 31, 2006, our common stock has been traded on the New York Stock Exchange, under
the symbol ARD. The following table shows the high and low sales prices for
each quarter during the last two years. All prices shown reflect a two for one stock split
in October 2007.

|Period                                      |   | High Sale |  |  |   | Low Sale | 
|------------------------------------------- | - | --------- |  |  | - | -------- | 
|                                            |   |           |  |  |   |          | 
|1st Quarter 2007                            | $ | 25.33     |  |  | $ | 18.42    | 
|2nd Quarter 2007                            |   | 29.56     |  |  |   | 22.11    | 
|3rd Quarter 2007                            |   | 35.54     |  |  |   | 25.30    | 
|4th Quarter 2007                            |   | 45.35     |  |  |   | 31.50    | 
|                                            |   |           |  |  |   |          | 
|1st Quarter 2008                            | $ | 44.17     |  |  | $ | 29.25    | 
|2nd Quarter 2008                            |   | 57.60     |  |  |   | 38.00    | 
|3rd Quarter 2008                            |   | 56.59     |  |  |   | 32.47    | 
|4th Quarter 2008                            |   | 39.03     |  |  |   | 17.63    | 
|                                            |   |           |  |  |   |          | 
|1st Quarter 2009 (throughFebruary 23, 2009) | $ | 32.79     |  |  | $ | 19.29    | 

# Record Holders

As
of February 25, 2009, there are approximately 16,577 holders of record of our common
stock. As of February 26, 2009, 1,612,886 shares, or approximately 4.2%, of the 38,210,187
shares issued and outstanding as of such date are held by management or affiliated
parties.

# Dividend Policy

We
have not paid any dividends on our common stock during the last three years, and we do not
anticipate paying any cash dividends on our common stock in the foreseeable future. We
currently intend to retain future earnings, if any, to finance the expansion of our
business. Our future dividend policy is within the discretion of our board of directors
and will depend upon various factors, including our results of operations, financial
condition, capital requirements and investment opportunities. In addition, our credit
facility prohibits us from paying dividends.

# Securities Authorized
for Issuance Under Equity Compensation Plans

In
March 2003, our board of directors adopted an executive stock option plan which was
subsequently approved by our shareholders at our annual meeting in July 2003, and which
was amended by our shareholders at our annual meetings in 2004, 2005, 2006 and 2008.
Information regarding this plan and the options that have been granted under this plan may
be found in this Annual Report under Part III, Items 10 and 11.

# Issuer Repurchases

We
did not make any repurchases of our equity securities during the quarter ending December
31, 2008.

---



|Item 6: |  | Selected Financial Data
|------- |  | -----------------------

The
selected consolidated financial information set forth below is derived from our
consolidated balance sheets and statements of operations as of and for the years ended
December 31, 2008, 2007, 2006, 2005, and 2004. The data set forth below should be read in
conjunction with Managements Discussion and Analysis of Financial Condition
and Results of Operations and the consolidated financial statements and related
notes thereto included in this Annual Report.

|                                           | For the Year Ended December 31,
|------------------------------------------ | -------------------------------
|                                           |                                
|                                           | 2008                           
|                                           |                                
|Statement of Operations Data:              |                                
|Revenues                                   | $                              
|Cost of revenues                           |                                
|Realized loss on oil derivative            |                                
|Depreciation, depletion and   amortization |                                
|Accretion                                  |                                
|General and administrative                 |                                
|Net income                                 |                                
|                                           |                                
|Basic income per common share              | $                              
|Diluted income per common share            |                                

|                                                 | As of December 31,
|------------------------------------------------ | ------------------
|                                                 |                   
|                                                 | 2008              
|                                                 |                   
|Balance Sheet Data:                              |                   
|Current assets                                   | $                 
|Oil and gas properties subject   to amortization |                   
|Total assets                                     |                   
|Total current liabilities                        |                   
|Total long-term liabilities                      |                   
|Total stockholders equity                        |                   

|Item 7: |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations
|------- |  | -------------------------------------------------------------------------------------

# Introduction

The
following discussion and analysis should be read in conjunction with our accompanying
financial statements and the notes to those financial statements included elsewhere in
this Annual Report. The following discussion includes forward-looking statements that
reflect our plans, estimates and beliefs. Our actual results could differ materially from
those discussed in these forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed below and
elsewhere in this Annual Report.

# Overview

We
are engaged in oil and natural gas acquisition, exploration and exploitation activities in
the states of Oklahoma, Texas, New Mexico and Kansas. Over the last six years, we have
emphasized the acquisition of properties that provided current production and upside
potential through further development.

We
have increased our reserves significantly by investing approximately $207.4 million in
acquisitions and development in 2008, following total capital expenditures of
approximately $167.2 million in 2007 and $101.3 million in 2006.

---



We
will closely manage our capital expenditures to our cash flow. As commodity prices change
we will consider the resulting impact on our cash flow and adjust our capital expenditures
accordingly, be it up or down. We also intend to continue seeking acquisition
opportunities which compliment our current portfolio. We could draw on our credit facility
or funds derived from future equity transactions for future acquisitions.

Our
business plan has involved increasing our base of proven reserves until we have acquired a
sufficient core to enable us to utilize cash from existing production to fund further
development activities. When we originated our business plan we believed this would allow
us to lessen our risks, including risks associated with borrowing funds to undertake
exploration activities at an earlier time. We increased our base of proven properties and
initiated development activities as oil and natural gas prices increased.

While
our focus has shifted to include more development activity, we plan to continue our
strategy of acquiring producing properties with additional development, exploitation and
exploration potential. Our focus has been on acquiring operated properties (i.e.
properties with respect to which we serve as the operator on behalf of all joint interest
owners) so that we can better control the timing and implementation of capital spending.

Our
revenue, profitability and future growth rate depend substantially on factors beyond our
control, such as economic, political and regulatory developments and competition from
other sources of energy. Oil and natural gas prices historically have been volatile and
may fluctuate widely in the future. Sustained periods of low prices for oil or natural gas
could materially and adversely affect our financial position, our results of operations,
the quantities of oil and natural gas reserves that we can economically produce and our
access to capital.

In
a worst case scenario, future drilling operations could be largely unsuccessful, oil and
gas prices could further decline and/or other factors beyond our control could cause us to
greatly modify or substantially curtail our development plans, which could negatively
impact our earnings, cash flow and most likely the trading price of our securities, as
well as the acceleration of debt repayment and a reduction in our borrowing base under our
credit facilities.

---



# Results of Operations

The
following table sets forth selected operating data for the periods indicated:

|                              |                                                     |   | For the Years Ended December 31,
|----------------------------- | --------------------------------------------------- | - | --------------------------------
|                              |                                                     |  
|                              |                                                     |   | 2006                            
|                              |                                                     |   |                                 
|Net production:               |                                                     |   |                                 
|                              | Oil (Bbls)                                          |   | 900,614                         
|                              | Natural gas (Mcf)                                   |   | 989,991                         
|                              |                                                     |   |                                 
|Net sales:                    |                                                     |   |                                 
|                              | Oil                                                 | $ | 53,367,118                      
|                              | Natural gas                                         |   | 6,392,999                       
|                              |                                                     |   |                                 
|Average sales price:          |                                                     |   |                                 
|                              | Oil (per Bbl)                                       | $ | 59.26                           
|                              | Natural gas (per Mcf)                               |   | 6.46                            
|                              |                                                     |   |                                 
|Production costs and expenses |                                                     |   |                                 
|                              | Oil and gas production costs                        | $ | 6,453,831                       
|                              | Production taxes                                    |   | 3,506,347                       
|                              | Realized loss on oil derivative                     |   | -                               
|                              | Depreciation, depletion and    amortization expense |   | 7,900,099                       
|                              | Accretion expense                                   |   | 127,132                         
|                              | General and administrative    expenses              |   | 3,617,309                       

---



Year Ended December 31,
2008 Compared to Year Ended December 31, 2007

Oil
and natural gas sales.     Oil and natural gas sales revenue increased approximately
$108.8 million to $208.9 million in 2008. Oil sales increased $102.1 million and natural
gas sales increased $6.7 million. The oil sales increase was caused by a sales volume
increase of 702,310 barrels in 2008, and a 41% increase in the average realized per barrel
oil price from $66.82 in 2007 to $94.16 in 2008. These per barrel amounts are calculated
by dividing revenue from oil sales by the volume of oil sold, in barrels. The natural gas
sales increase was caused by a sales volume increase of 408,102 Mcf in 2008, and a 23%
increase in the average realized per barrel oil price from $8.02 in 2007 to $9.84 in 2008.
These per Mcf amounts are calculated by dividing revenue from gas sales by the volume of
gas sold, in Mcf. The volume increase for crude oil and natural gas primarily resulted
from development of our existing properties in 2008.

Oil
and gas production costs.     Our aggregate oil and gas production costs increased from
$11,500,461 in 2007 to $17,833,144, and increased on a Boe basis from $7.34 in 2007 to
$7.63 in 2008. These per Boe amounts are calculated by dividing our total production costs
by our total volume sold, in Boe. This aggregate increase was the result of the drilling
of new wells in 2008 and cost increases. The increase on a per Boe basis is attributable
to rising rates for labor and services.

Oil
and gas production taxes.     Oil and gas production taxes as a percentage of oil and
natural gas sales were 5.65% during 2007 and decreased to 5.04% in 2008. Production taxes
vary from state to state. Therefore, these taxes are likely to vary in the future
depending on the mix of production we generate from various states, and on the possibility
that any state may raise its production tax.

Realized
loss on oil derivative.     Realized loss on oil derivative increased from $932,361 in
2007 to $4,275,330 in 2008. This increase is the result of commodity price increases
during most of 2008.

Depreciation,
depletion and amortization.     Our depreciation, depletion and amortization expense
increased by $11,940,230 to $30,099,196 in 2008. The increase was a result of an increase
in the average depreciation, depletion and amortization rate from $11.59 per Boe during
2007 to $12.88 per Boe during 2008. These per Boe amounts are calculated by dividing our
total depreciation, depletion and amortization expense by our total volume sold, in Boe.
The increased depreciation, depletion and amortization were the result of increased sales
volume and an increase in estimated future development costs.

General
and administrative expenses.     General and administrative expenses increased by
$5,741,481 to $13,557,202 during 2008. This increase was primarily related to increases in
compensation expense associated with an increase in personnel required to administer our
growth and compensation expense related to our stock option plan as a result of the
adoption of FASB 123(R).

Interest
income.     Interest income increased $414,949 to $1,299,939 in 2008. The increase was due
to higher cash balances during periods of the year in 2008.

Interest
expense.     Interest expense decreased $266,064 to $1,145,456 in 2008. The increase was
due to lower amounts of debt being outstanding during periods of the year in 2008.

Income
tax expense.     Our effective tax rate was 37% during 2008 and 38% during 2007.

Net
income.     Net income increased from $34,441,939 for 2007 to $83,617,201 for 2008. The
primary reasons for this increase include higher crude oil and natural gas prices between
periods and an increase in volumes sold, partially offset by higher oil and gas production
costs, oil and gas production taxes and general and administrative expenses due to our
growth.

---



Year Ended December 31,
2007 Compared to Year Ended December 31, 2006

Oil
and natural gas sales.     Oil and natural gas sales revenue increased approximately $40.3
million to $100.1 million in 2007. Oil sales increased $34.6 million and natural gas sales
increased $5.7 million. The oil sales increase was caused by a sales volume increase of
415,411 barrels in 2007, and a 13% increase in the average realized per barrel oil price
from $59.26 in 2006 to $66.82 in 2007. These per barrel amounts are calculated by dividing
revenue from oil sales by the volume of oil sold, in barrels. The natural gas sales
increase was caused by a sales volume increase of 513,621 Mcf in 2007, and a 24% increase
in the average realized per barrel oil price from $6.46 in 2006 to $8.02 in 2007. These
per Mcf amounts are calculated by dividing revenue from gas sales by the volume of gas
sold, in Mcf. The volume increase for crude oil and natural gas primarily resulted from
development of our existing properties in 2007.

Oil
and gas production costs.     Our aggregate oil and gas production costs increased from
$6,453,831 in 2006 to $11,500,461, and increased on a Boe basis from $6.06 in 2006 to
$7.34 in 2007. These per Boe amounts are calculated by dividing our total production costs
by our total volume sold, in Boe. This aggregate increase was the result of the drilling
of new wells in 2007 and cost increases. The increase on a per Boe basis is attributable
to rising rates for labor and services.

Oil
and gas production taxes.     Oil and gas production taxes as a percentage of oil and
natural gas sales were 5.87% during 2006 and decreased to 5.65% in 2007. Production taxes
vary from state to state. Therefore, these taxes are likely to vary in the future
depending on the mix of production we generate from various states, and on the possibility
that any state may raise its production tax.

Realized
loss on oil derivative.     Realized loss on oil derivative increased from $0 in 2006 to
$932,361 in 2007. This increase is the result of the Company not having any derivative
outstanding during 2006 and putting one in place during 2007.

Depreciation,
depletion and amortization.     Our depreciation, depletion and amortization expense
increased by $10,131,735 to $18,158,966 in 2007. The increase was a result of an increase
in the average depreciation, depletion and amortization rate from $7.53 per Boe during
2006 to $11.59 per Boe during 2007. These per Boe amounts are calculated by dividing our
total depreciation, depletion and amortization expense by our total volume sold, in Boe.
The increased depreciation, depletion and amortization were the result of increased sales
volume and an increase in estimated future development costs.

General
and administrative expenses.     General and administrative expenses increased by
$4,198,412 to $7,815,721 during 2007. This increase was primarily related to increases in
compensation expense associated with an increase in personnel required to administer our
growth and compensation expense related to our stock option plan as a result of the
adoption of FASB 123(R).

Other
Financing expense.     Other financing expense was $0 in 2007, compared to $785,598 in
2006. The reduction is the result of the completion in 2006 of the stock offering to which
this financing expense related.

Interest
income.     Interest income increased $596,386 to $884,990 in 2007. The increase was due
to higher cash balances during periods of the year in 2007.

Interest
expense.     Interest expense increased $998,083 to $1,411,520 in 2007. The increase was
due to higher amounts of debt being outstanding during periods of the year in 2007.

Income
tax expense.     Our effective tax rate was 38% during 2007 and 38% during 2006.

---



Net
income.     Net income increased from $23,267,968 for 2006 to $34,441,939 for 2007. The
primary reasons for this increase include higher crude oil and natural gas prices between
periods and an increase in volumes sold, partially offset by higher oil and gas production
costs, oil and gas production taxes and general and administrative expenses due to our
growth.

# Liquidity and Capital
Resources

Historical
Financing.     We have historically funded our operations through equity offerings of
our stock and warrants in 2006, 2007 and 2008.

Credit
Facility.     In April 2006, we entered into a credit agreement establishing a credit
facility at $150,000,000 with a borrowing base of $65,000,000. This agreement replaced the
previous credit agreement we had in place. The interest rate was a floating rate equal to
the 30, 60 or 90 day LIBOR rate plus 2%, payable monthly. Amounts borrowed under the
revolving credit facility are due in May 2009. The revolving credit facility is secured by
our principal mineral interests. The bank credit facility is subject to borrowing base
availability, which is redetermined semiannually based on the banks estimates of the
future net cash flows of our oil and natural gas properties. We are required under the
terms of the credit facility to maintain a 5-to-1 ratio of income before interest, taxes,
depreciation, depletion and amortization to interest expense, maintain a current asset to
current liability ratio of 1-to-1 and a rolling four quarter maximum leverage ratio of no
more than 2.5-to-1.

In
June 2007, we entered into a new agreement that increased the borrowing base under our
credit facility to $100,000,000, while leaving the credit facility at $150,000,000.
Additionally, the interest rate was changed to be a floating rate equal to the 30, 60 or
90 day LIBOR rate plus 1.75%.

In
June 2008, we entered into an amended agreement that increased the borrowing base under
our 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 December 31, 2008, we were in
compliance with all covenants and did not have any amount outstanding under this credit
facility.

Cash
Flows.     Our primary sources of cash have been cash flows from operations and equity
offerings. During the three years ended December 31, 2008, we generated $282,939,711 from
operating activities and financed $249,328,049 through proceeds from the sale of stock and
warrants and exercise of warrants and options. We primarily used this cash generation to
fund our capital expenditures and development aggregating $472,885,433 over the three
years end December 31, 2008. At December 31, 2008, we had cash on hand of $58,489,574 and
working capital of $69,740,590, compared to December 31, 2007 when our cash was $5,213,459
with working capital of $11,606,739.

We
continually evaluate our capital needs and compare them to our capital resources. We will
closely manage our capital expenditures to our cash flow. As commodity prices change we
will consider the resulting impact on our cash flow and adjust our capital expenditures
accordingly, be it up or down. The level of capital expenditures is largely discretionary,
and the amount of funds devoted to any particular activity may increase or decrease
significantly depending on available opportunities, commodity prices, cash flows and
development results, among others.

---



Schedule
of Contractual Obligations.     The following table summarizes our future estimated lease
payments for periods subsequent to December 31, 2008. This lease pertains to an office building in Midland, Texas and involves approximately 1,869 square feet of space.

|Year | Lease Obligation
|---- | ----------------
|     |                 
|2009 | $               
|2010 |                 
|2011 |                 
|2012 |                 
|2013 |                 
|     |                 
|     | $               
|     |                 

# Off-Balance Sheet
Financing Arrangements

As
of December 31, 2008 we had no off-balance sheet financing arrangements.

# New Accounting Policies

In September 2006,
the FASB issued SFAS No. 157, Fair Value Measurement. This statement
defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements. SFAS
No. 157 does not require any new fair value measurements but provides guidance on how
to measure fair value by providing a fair value hierarchy used to classify the source of
the information. We adopted SFAS No. 157 effective January 1, 2008 and the
adoption did not have a significant effect on our consolidated results of operations,
financial position or cash flows. See Note 13 for other disclosures required by SFAS
No. 157. In February 2008, the FASB issued FSP SFAS No. 157-2 which delays
the effective date of SFAS No. 157 for all non-financial assets and non-financial
liabilities except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). This deferral of SFAS No. 157
primarily applies to our asset retirement obligation (ARO), which uses fair value measures
at the date incurred to determine our liability. We are currently evaluating the impact of
the pending adoption in 2009 of SFAS No. 157 non-recurring fair value measures.

In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of FASB Statement
No. 115, effective on January 1, 2008, and permits companies to choose, at
specified dates, to measure certain eligible financial instruments at fair value. The
provisions of SFAS No. 159 apply only to entities that elect to use the fair value
option and to all entities with available-for-sale and trading securities. At the
effective date, companies may elect the fair value option for eligible items that exist at
that date, and the effect of the first remeasurement to fair value must be reported as a
cumulative-effect adjustment to the opening balance of retained earnings. The adoption of
SFAS No. 159 has not had a material impact on the Companys financial position
or results of operations.

Effective
January 1, 2007, the Company adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes  an interpretation of FASB
Statement No. 109 (FIN 48), which clarifies the accounting and disclosure
for uncertainty in tax positions. The Company has analyzed its filing positions in all
jurisdictions where it is required to file income tax returns for the open tax years in
such jurisdictions. The Company has identified its federal income tax return and its state
income tax returns in Texas, New Mexico, Oklahoma and Kansas in which it operates as
major tax jurisdictions. The Companys federal income tax returns for the
years ended December 31, 2005 through 2007 remain subject to examination. The
Companys income tax returns in major state income tax jurisdictions remain subject
to examination for years ended December 31, 2005 through 2007, with the exception of
Texas, which would also include the year ended December 31, 2004. The Company currently
believes that all significant filing positions are highly certain and that all of its
significant income tax filing positions and deductions would be sustained upon audit.
Therefore, the Company has no significant reserves for uncertain tax positions and no
adjustments to such reserves were required upon adoption of FIN 48. No interest or
penalties have been levied against the Company and none are anticipated, therefore
interest or penalty has been included in our provision for income taxes in the
consolidated statements of operations.

---



# Critical Accounting
Policies and Estimates

Our
discussion of financial condition and results of operations is based upon the information
reported in our financial statements. The preparation of these statements requires us to
make assumptions and estimates that affect the reported amounts of assets, liabilities,
revenues and expenses as well as the disclosure of contingent assets and liabilities at
the date of our financial statements. We base our assumptions and estimates on historical
experience and other sources that we believe to be reasonable at the time. Actual results
may vary from our estimates due to changes in circumstances, weather, politics, global
economics, mechanical problems, general business conditions and other factors. Our
significant accounting policies are detailed in Note 1 to our financial statements
included in this Annual Report. We have outlined below certain of these policies as being
of particular importance to the portrayal of our financial position and results of
operations and which require the application of significant judgment by our management.

Revenue
Recognition.     We predominantly derive our revenue from the sale of produced crude oil
and natural gas. Revenue is recorded in the month the product is delivered to the
purchaser. We receive payment from one to three months after delivery. At the end of each
month, we estimate the amount of production delivered to purchasers and the price we will
receive. Variances between our estimated revenue and actual payment are recorded in the
month the payment is received; however, differences have been insignificant.

Full
Cost Method of Accounting.     We account for our oil and natural gas operations using the
full cost method of accounting. Under this method, all costs associated with property
acquisition, exploration and development of oil and gas reserves are capitalized. Costs
capitalized include acquisition costs, geological and geophysical expenditures, lease
rentals on undeveloped properties and cost of drilling and equipping productive and
non-productive wells. Drilling costs include directly related overhead costs. All of our
properties are located within the continental United States.

Oil
and Natural Gas Reserve Quantities.     Reserve quantities and the related estimates of
future net cash flows affect our periodic calculations of depletion and impairment of our
oil and natural gas properties. Proved oil and natural gas reserves are the estimated
quantities of crude oil, natural gas and natural gas liquids which geological and
engineering data demonstrate with reasonable certainty to be recoverable in future periods
from known reservoirs under existing economic and operating conditions. Reserve quantities
and future cash flows included in this Annual Report are prepared in accordance with
guidelines established by the SEC and FASB. The accuracy of our reserve estimates is a
function of:

| |  |  | the
quality and quantity of available data;
| | - |  | -------------------------------------------

| |  |  | the
interpretation of that data;
| | - |  | --------------------------------

| |  |  | the
accuracy of various mandated economic assumptions; and
| | - |  | ----------------------------------------------------------

| |  |  | the
judgments of the persons preparing the estimates.
| | - |  | -----------------------------------------------------

Our
proved reserve information included in this Annual Report were based on internal reports
and audited by Lee Keeling and Associates, Inc. (Kansas and Oklahoma Properties) and
Williamson Petroleum Consultants, Inc. (New Mexico and Texas Properties), independent
petroleum engineers. Because these estimates depend on many assumptions, all of which may
differ substantially from actual results, reserve estimates may be different from the
quantities of oil and natural gas that are ultimately recovered. We continually make
revisions to reserve estimates throughout the year as additional properties are acquired.
We make changes to depletion rates and impairment calculations in the same period that
changes to the reserve estimates are made.

---



All
capitalized costs of oil and gas properties, including estimated future costs to develop
proved reserves and estimated future costs of site restoration, are amortized on the
unit-of-production method using estimates of proved reserves as determined by independent
engineers. Investments in unproved properties and major development projects are not
amortized until proved reserves associated with the projects can be determined.

Impairment
of Oil and Natural Gas Properties.     We review the value of our oil and natural gas
properties whenever management judges that events and circumstances indicate that the
recorded carrying value of properties may not be recoverable. We provide for impairments
on undeveloped property when we determine that the property will not be developed or a
permanent impairment in value has occurred. Impairments of proved producing properties are
calculated by comparing future net undiscounted cash flows using escalated prices to the
net recorded book cost at the end of each period (Ceiling test). If the net
capitalized cost exceeds net future cash flows, the cost of the property is written down
to fair value, which is determined using net discounted future cash flows from
the producing property. Current market conditions, in the form of low commodity prices,
have had a dramatic effect on this calculation. The net discounted future cash flow from
producing properties is directly impacted by commodity prices. Different pricing
assumptions or discount rates could result in a different calculated impairment. We have
never recorded property impairments as a result of the ceiling test.

Our
reserve estimates as of December 31, 2008 are based on an average price of $38.30 for oil
and $4.35 for gas. We have run an impairment test analysis to determine at approximately
what price level impairment would result. Because our reserves are predominantly oil, at
approximately 85% of total reserves, this analysis was based solely on the oil price while
leaving gas prices at the levels used as of December 31, 2008. Based on this analysis, our
contracted oil price would have to drop below $30 per barrel for the ceiling test to
result in impairment to our producing properties.

Income
Taxes.     We provide for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. Deferred income
taxes are provided for the difference between the tax basis of assets and liabilities and
the carrying amount in our financial statements. This difference will result in taxable
income or deductions in future years when the reported amount of the asset or liability is
settled. Since our tax returns are filed after the financial statements are prepared,
estimates are required in valuing tax assets and liabilities. We record adjustments to
actual in the period we file our tax returns.

Derivative
Instruments.     The estimated fair values of our commodity derivative instruments are
recorded in the consolidated balance sheet. At inception, all of our commodity derivative
instruments represent hedges of the price of future oil and gas production. The changes in
fair value of those derivative instruments that qualify for hedge accounting treatment are
recorded in other comprehensive income until the hedged oil or natural gas quantities are
produced. If a hedge becomes ineffective because the hedged production does not occur, or
the hedge otherwise does not qualify for hedge accounting treatment, the changes in the
fair value of the derivative are recorded in the income statement as derivative income or
expense.

Our
hedges are specifically referenced to NYMEX prices. We evaluate the effectiveness of our
hedges at the time we enter the contracts, and periodically over the life of the
contracts, by analyzing the correlation between NYMEX prices and the posted prices we
receive from our designated production. Through this analysis, we are able to determine if
a high correlation exists between the prices received for the designated production and
the NYMEX prices at which the hedges will be settled. At December 31, 2008, our
derivative instruments were considered effective cash flow hedges.

---



# Effects of Inflation and
Pricing

We
did experience increases in costs during 2008 due to increased demand for oil field
products and services. The oil and natural gas industry is very cyclical and the demand
for goods and services of oil field companies, suppliers and others associated with the
industry puts extreme pressure on the economic stability and pricing structure within the
industry. Typically, as prices for oil and natural gas increase, so do all associated
costs, and this proved to be the case in 2008 as oil and gas prices rose significantly.
Costs for oilfield services and materials increased during 2008 due to higher demand as a
result of the higher oil and gas prices. Material changes in prices impact the current
revenue stream, estimates of future reserves, borrowing base calculations of bank loans
and value of properties in purchase and sale transactions. Material changes in prices can
impact the value of oil and natural gas companies and their ability to raise capital,
borrow money and retain personnel. We anticipate business costs will vary in accordance
with commodity prices for oil and natural gas, and the associated increase or decrease in
demand for services related to production and exploration.

|Item 7A |  | Quantitative and Qualitative Disclosure About Market Risk
|------- |  | ---------------------------------------------------------

Commodity Price Risk

Our
major market risk exposure is in the pricing applicable to our oil and natural gas
production. Market risk refers to the risk of loss from adverse changes in oil and natural
gas prices. Realized pricing is primarily driven by the prevailing domestic price for
crude oil and spot prices applicable to the region in which we produce natural gas.
Historically, prices received for oil and natural gas production have been volatile and
unpredictable. We expect pricing volatility to continue. Oil prices we received during
2008 ranged from a low of $34.19 per barrel to a high of $140.23 per barrel. Natural gas
prices we received during 2008 ranged from a low of $.66 per Mcf to a high of $20.64 per
Mcf. A significant decline in the prices of oil or natural gas could have a material
adverse effect on our financial condition and results of operations.

As
of December 31, 2008 the Companys only current derivative contract is a costless
collar. A collar is a contract which combines both a put option or floor and a
call option or ceiling. The Company receives the excess, if any, of the floor
price over the reference price, based on NYMEX quoted prices, and pays the excess, if any,
of the reference price over the ceiling price. The following is information relating to
the Companys collar position as of December 31, 2008.

|Commodity     | Remaining Period             | Volume  | Floor       | Ceiling    
|------------- | ---------------------------- | ------- | ----------- | -----------
|WTI Crude Oil | January 2009 - December 2009 | 365,000 | $    100.00 | $    197.00

The
change in fair value of the oil hedging contract in place at December 31, 2008, resulted
in a net asset of $16,210,478. The after tax impact of the change in the fair value of the
hedge of $10,212,601 is reflected in other comprehensive income as unrealized gain on oil
derivative for the period ended December 31, 2008. Changes in the fair value of derivative
instruments designated as cash flow hedges, to the extent they are effective in offsetting
cash flows attributable to the hedged risk, are recorded in other comprehensive income
until the hedged item is recognized in earnings. Any change in fair value from
ineffectiveness is recognized currently in unrealized derivative gain or loss in the
consolidated statements of operations.

Cash
settlements of cash flow hedges are recorded as a gain or loss on derivatives in the
operating section of the Companys statement of operations. Our statement of
operations includes a loss on derivative instrument of $4,275,330 for 2008 and $932,361
for 2007.

---



Interest Rate Risk

Our
current credit facility has a floating interest rate. Therefore, if we draw funds on this
credit facility, interest rate changes will impact future results of operations and cash
flows.

|Item 8: |  | Financial Statements and Supplementary Data
|------- |  | -------------------------------------------

The
financial statements and supplementary data required by this item are included at page 53.

|Item 9: |  | Changes in and Disagreements with Accountants And Accounting and Financial Disclosure
|------- |  | -------------------------------------------------------------------------------------

None.

|Item 9A: |  | Controls and Procedures
|-------- |  | -----------------------

Evaluation
of Disclosure Controls and Procedures.

We
maintain controls and procedures designed to ensure that information required to be
disclosed in the reports that we file or submit under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission. As of the end of the fiscal
year ended December 31, 2008, our chief executive officer and chief financial officer
evaluated the effectiveness of our disclosure controls and procedures. Based upon their
evaluation of those controls and procedures, the chief executive officer and the chief
financial officer of the Company concluded that as of the end of such period our
disclosure controls and procedures are effective in alerting them to material information
in a timely manner that is required to be included in the reports we file or submit under
the Securities Exchange Act of 1934.

Managements
Annual Report on Internal Control Over Financial Reporting.

Our
management is responsible for establishing and maintaining adequate internal controls over
financial reporting. Our internal control system was designed to provide reasonable
assurance to our management and Board of Directors regarding the preparation and fair
presentation of published financial statements.

All
internal control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and presentation.

In
making our assessment of internal control over financial reporting, our management used
the criteria issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control  Integrated Framework. Based on our
assessment, we believe that, as of December 31, 2008, our internal control over financial
reporting is effective based on those criteria.

Hansen,
Barnett & Maxwell, P.C., our independent registered public accounting firm, has issued
an attestation report on managements assessment of Arenas internal control
over financial reporting.

Date: March 2, 2009

| | /s/ Phillip W. Terry
                                                                       Chief Executive Officer
| | -------------------------------------------------------------------------------------------------------------------

| | /s/ William R. BroaddrickChief Financial Officer
| | ------------------------------------------------

---





|HANSEN, BARNETT & MAXWELL, P.C.                                                                                                                                                                                                          |                                                                                            
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------
|A Professional Corporation
            CERTIFIED PUBLIC ACCOUNTANTS
              5 Triad Center, Suite 750
            Salt Lake City, UT 84180-1128Phone: (801) 532-2200
                 Fax: (801) 532-7944
         www.hbmcpas.com | Registered with the Public Company
Accounting Oversight BoardA Member of the Forum of Firms

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders   of Arena Resources, Inc.

We have audited Arena Resources,
Inc.s internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Arena Resources,
Inc.s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on the Companys
internal control over financial reporting based on our audit.

We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included
performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.

A companys internal control
over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3)
provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material
effect on the financial statements.

Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.

In our opinion, Arena Resources, Inc.
maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2008, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).

---



We have also audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United States), the
balance sheets and the related statements of operations and comprehensive income,
stockholders equity, and cash flows of Arena Resources, Inc. and our report dated
March 2, 2009 expressed an unqualified opinion thereon.

| | /s/ HANSEN, BARNETT & MAXWELL, P.C.
| | -----------------------------------

Salt Lake City, UtahMarch 2, 2009

Changes
in Internal Control Over Financial Reporting

We made no change in our internal
control over financial reporting during our fourth quarter of 2008 that has materially
affected, or is reasonably likely to materially affect our internal control over financial
reporting.

|Item 9B: |  | Other Information
|-------- |  | -----------------

None

---



# PART III

|Item 10: |  | Directors, Executive Officers and Corporate Governance
|-------- |  | ------------------------------------------------------

# Executive Officers and
Directors

The
following table sets forth information regarding our executive officers, certain other
officers and directors as of December 31, 2008:

|Name                  | Age | Position                                  
|--------------------- | --- | ------------------------------------------
|Lloyd T. Rochford     | 62  | Chairman of the Board of Directors        
|Phillip W. Terry      | 61  | President and Chief Executive Officer     
|William R. Broaddrick | 31  | Vice President and Chief Financial Officer
|David D. Ricks        | 48  | Vice President of Operations              
|Stanley M. McCabe     | 76  | Director                                  
|Clayton E. Woodrum    | 68  | Director                                  
|Anthony B. Petrelli   | 56  | Director                                  
|Carl H. Fiddner       | 63  | Director                                  

Each
of the directors identified above were elected for a term of one year (or until their
successors are elected and qualified) at our annual meeting of shareholders in December
2008.

Messrs. Rochford
and McCabe have served as directors since our inception in August 2000.           Mr.
Woodrum has served as a member of our Board since 2003. Mr. Petrelli was
          elected to the Board by the remaining members of the Board of Directors in
          January 2007 to fill the vacancy left by the death of Mr. Chris V. Kemendo, Jr.
          Mr. Fiddner was elected to the Board by the remaining members of the Board of
          Directors on May 1, 2007, to fill the vacancy left by the resignation of
Charles           Crawford.

The
following biographies describe the business experience of our executive officers and
directors:

Lloyd T. Rochford  Chairman
of the Board of Directors.

Mr.  Rochford,
62, has been active as an individual consultant and entrepreneur in           the oil and
gas industry since 1973. In this capacity, he has primarily been           engaged in the
organization and funding of private oil and gas drilling and           completion
projects and ventures within the mid-continent region of the United           States. In
1990 Mr. Rochford was co-founder, director and CEO of a public           company known as
Magnum Petroleum, Inc. (Magnum) which was listed on the New           York Stock
Exchange. Subsequently, Magnum acquired Hunter Resources, Inc. in           August, 1995.
Mr. Rochford served as Chairman of the Board of the combined           companies from
August, 1995 to June, 1997. From July, 1997 until he committed to           participate
in Arena Resources, Mr. Rochford had primarily devoted his time and           efforts to
individual oil and gas acquisition and development. In 1982, Mr.           Rochford was
co-founder of Dana Niguel Bank, a publicly held California bank           operation and
served as a director until 1994. Mr. Rochford attended various           college level
courses in business from 1967 to 1970 in California.

# Phillip W. Terry 
President and Chief Executive Officer.

Mr.
         Terry, 61, has served as President and Chief Operating Officer since February 1,
          2007 and as Chief Executive Officer since May 20, 2008. Mr. Terry joined the
          Company in April 2003, and since that time he has been in charge of all
          engineering and field operations. Immediately prior to joining the Company, Mr.
          Terry owned and operated an independent petroleum engineering consulting firm.
          The Company was one of his clients. In 2001 and 2002, Mr. Terry was Vice
          President of Drilling and Production for Bird Creek Resources, Inc. Mr. Terry
          received his Bachelor of Science degree in Mechanical Engineering from Oklahoma
          State University in 1970, and is a registered Professional Petroleum Engineer
          with over 34 years experience in engineering, production, drilling,
completions,           reservoir engineering, property evaluations and corporate
management in the oil           and gas industry.

---



# William R. Broaddrick
 Vice President and Chief Financial Officer.

Mr.  Broaddrick,
31, was employed from 1997 to 2000 with Amoco Production Company,           performing
lease revenue accounting and state production tax regulatory           reporting
functions. During 2000, Mr. Broaddrick was employed by Duke Energy           Field
Services, LLC performing state production tax functions. In September           2001, Mr.
Broaddrick joined us as chief accountant, and effective February 1,           2002,
assumed responsibilities as Vice President and Chief Financial Officer.

Mr.  Broaddrick
received a Bachelors Degree in Accounting from Langston           University,
through Oklahoma State University  Tulsa, in 1999. Mr.           Broaddrick is a
Certified Public Accountant.

# David D. Ricks 
Vice President of Operations.

Mr.  Ricks,
48, is a professional petroleum engineer with over 25 years of industry
          experience. Mr. Ricks began his career in 1982 as a production engineer in
          Southeast New Mexico for Gulf Oil Co. Since then he has served in various
          engineering capacities for Chevron USA, Amerada Hess Corp., Citation Oil and
Gas           Corp., Newfield Exploration Mid-Continent, Inc., Apache Corp., and Latigo
          Petroleum, Inc. His duties ranged from maintaining production, designing
          workovers and recompletions and facility installation, to field supervision of
          both primary and secondary production, including waterfloods and CO2 floods,
          primarily in Oklahoma, North and West Texas and Southeast New Mexico.

# Stanley M. McCabe
Director.

Mr.  McCabe,
76, served from 1979 to 1989, as Chairman and CEO of Stanton Energy,           Inc., a
Tulsa, Oklahoma natural resource company specializing in contract           drilling and
operation of oil and gas wells. In 1990, Mr. McCabe also became a           co-founder
and subsequently an officer and director of Magnum Petroleum, Inc.,           along with
Mr. Rochford as previously discussed. Subsequently, Mr. McCabe served           as a
director of Magnum Hunter Resources, Inc., through December, 1996. From
          January, 1997, until he committed to participate in Arena Resources, Mr. McCabe
          had primarily devoted his time and efforts to individual oil and gas
acquisition           and development. Mr. McCabe attended college courses at the
University of           Maryland, primarily in business, in 1961 and 1962.

# Clayton E. Woodrum
 Director.

Mr. Woodrum,
68, is a Certified Public Accountant and has, from 1984 to present,           been a
principal shareholder in the accounting firm of Woodrum, Kemendo, Tate           & Westemeir,
P.L.L.C., and has been an owner of Computer Data Litigation           Services, LLC and
First Capital Management, LLC. Mr. Woodrum is currently the           Chairman of our
audit committee and compensation committee. From 1965 to 1975,           Mr. Woodrum was
employed by Peat, Marwick, Mitchell & Co., serving as           partner in charge of
the tax department during the final two years. From 1975 to           1980 he served as
CFO for BancOklahoma Corp. and Bank of Oklahoma. From 1980 to           1984 Mr. Woodrum
served as a partner in charge of the tax department at Peat,           Marwick, Mitchell
& Co.

# Anthony B. Petrelli
 Director.

Mr.  Petrelli,
56, was elected to the Board by the remaining members of the Board of           Directors
in January 2007 to fill the vacancy left by the death of Mr. Chris V.           Kemendo,
Jr. Since 1987 Mr. Petrelli has been with the firm of Neidiger Tucker           Bruner,
Inc., which firm served as one of the lead underwriters in our secondary
          registration of common stock in August of 2004. Mr. Petrelli is currently a
          Director and Senior Vice President of such firm. Mr. Petrelli also serves on
the           Board of Directors of XELR8 Holdings Inc., which company has a class of
          securities registered with the Securities and Exchange Commission. Prior to his
          resignation in March 2007, Mr. Petrelli also served on the Board of Directors
of           Whitney Information Network, Inc., which has a class of securities
registered           with the Securities and Exchange Commission.

---



# Carl H. Fiddner 
Director.

Mr.  Fiddner,
63, was elected to the Board by the remaining members of the Board of           Directors
on May 1, 2007, to fill the vacancy left by the resignation of Charles
          Crawford. Mr. Fiddner is a certified public accountant who managed his own
          public accounting firm for 25 years, prior to joining Regier, Carr & Monroe,
          in Tulsa, Oklahoma, in December 2005. Mr. Fiddner worked at Regier, Carr &          Monroe
through September 30, 2007 at which time he became an independent           financial
consultant.

Our
executive officers are elected by, and serve at the pleasure of, our Board of Directors.
Our directors serve terms of one year each, with the current directors serving until the
2009 annual meeting of stockholders, and in each case until their respective successors
are duly elected and qualified.

# Board Committees

Our
Board of Directors has established an Audit Committee, a Compensation Committee and a
Nominating and Corporate Governance Committee, the composition and responsibilities of
which are briefly described below. The charters for each of these committees can be found
on our website (www.arenaresourcesinc.com). The Company shall also provide any person
without charge, upon request, a copy of the charters for each of these committees.
Requests may be directed to Arena Resources, Inc., 6555 S. Lewis Ave., Tulsa, Oklahoma
74136, attention William R. Broaddrick, or by calling (918) 747-6060.

The
Audit Committees principal functions are to assist the Board in monitoring the
integrity of our financial statements, the independent auditors qualifications and
independence, the performance of our independent auditors and our compliance with legal
and regulatory requirements. The Audit Committee has the sole authority to retain and
terminate our independent auditors and to approve the compensation paid to our independent
auditors. The Audit Committee is also responsible for overseeing our internal audit
function. During 2008, the Audit Committee was comprised of our three independent
directors, Messrs. Woodrum, Petrelli and Fiddner, with Mr. Woodrum acting as the chairman.
Our Board of Directors determined that both Messrs. Woodrum and Fiddner qualified as
audit committee financial experts under the rules of the SEC adopted pursuant
to requirements of the Sarbanes-Oxley Act of 2002 (see the biographical information for
Messrs. Woodrum and Fiddner, infra, in this discussion of Directors and Executive
Officers). Each of Messrs. Woodrum, Petrelli and Fiddner further qualified as
independent in accordance with the applicable regulations adopted by the SEC
and Section 303A.02 of the New York Stock Exchange Corporate Governance Standards. (see
the biographical information for Messrs. Woodrum, Petrelli and Fiddner, infra, in this
discussion of Directors and Executive Officers).

The
Compensation Committees principal function is to make recommendations regarding the
compensation of the Companys officers. In accordance with the rules of the New York
Stock Exchange, the compensation of our chief executive officer is recommended to the
Board (in a proceeding in which the chief executive officer does not participate) by the
Compensation Committee. Compensation for all other officers is also recommended to the
Board for determination, by the Compensation Committee. During 2008, the Compensation
Committee was comprised of our three independent directors, Messrs. Woodrum, Petrelli and
Fiddner, with Mr. Woodrum acting as the chairman.

---



The Nominating and Corporate Governance Committees principal functions are to
(a) identify and recommend qualified candidates to the Board of Directors for nomination
as members of the Board and its committees, and (b) develop and recommend to the Board
corporate governance principles applicable to the Company. During 2008, the Compensation
Committee was comprised of our three independent directors, Messrs. Woodrum, Petrelli and
Fiddner, with Mr. Woodrum acting as the chairman.

There
have been no material changes to the procedures by which security holders may recommend
nominees to our Board of Directors.

Our
Board may establish other committees from time to time to facilitate our management.

# Certification with New
York Stock Exchange

In
accordance with the rules of the New York Stock Exchange, each year our Chief Executive
Officer must certify to the Exchange that he is not aware of any violation by us of the
New York Stock Exchange corporate governance listing standards, or qualify such
certification as necessary.

We
filed our most recent certification with the Exchange in January, 2009, and such
certification contained no qualifications.

# Code of Ethics

We
have adopted a code of ethics (our Code of Business Conduct) that applies to our principal
executive officer, principal financial officer and principal accounting officer or persons
performing similar functions (as well as our other employees and directors). The Code of
Business Conduct can be found on our website (www.arenaresourcesinc.com). The
Company shall also provide any person without charge, upon request, a copy of such Code of
Business Conduct. Requests may be directed to Arena Resources, Inc., 6555 S. Lewis Ave.,
Tulsa, Oklahoma 74136, attention William R. Broaddrick, or by calling (918) 747-6060.

# Section 16(a) Beneficial
Ownership Reporting Compliance

Based
solely upon a review of Forms 4 furnished to us during our most recent fiscal year, we
know of no director, officer or beneficial owner of more than ten percent of our common
stock who failed to file on a timely basis reports of beneficial ownership of the our
common stock as required by Section 16(a) of the Securities Exchange Act of 1934, as
amended, other than the following:

Phillip
W. Terry (President and Chief Executive Officer) filed a Form 4 late (one day).

William R.
Broaddrick (Chief Financial Officer) filed a Form 4 late (one day).

|Item 11: |  | Executive Compensation
|-------- |  | ----------------------

# Compensation Discussion
& Analysis

This
section contains a discussion of the material elements of compensation awarded to, earned
by or paid to our principal executive and principal financial officers, and our other
three most highly compensated executive officers and employees. These individuals are
referred to as the (Named Officers) in this Annual Report on Form 10-K.

---



Our
current executive compensation programs are determined and approved by our Compensation
Committee, after consideration of recommendations by our Chairman of the Board and our
Chief Executive Officer, as to the other Named Officers. None of the Named Officers are
members of the Compensation Committee. The Compensation Committee has the direct
responsibility and authority to review and approve the Companys goals and objectives
relative to the compensation of the Named Officers, and to determine and approve (either
as a committee or with the other members of the Companys Board of Directors who
qualify as independent directors under applicable guidelines adopted by the
New York Stock Exchange) the compensation levels of the Named Officers.

Our
current executive compensation programs are intended to achieve two objectives. The
primary objective is to enhance the profitability of the Company, and thus shareholder
value. The second objective is to attract, motivate, reward and retain employees,
including executive personnel, who contribute to the long-term success of the Company. As
described in more detail below, the material elements of our current executive
compensation program for Named Officers include a base salary, discretionary annual
bonuses and discretionary stock options grants.

The
Company believes that each element of the executive compensation program helps to achieve
one or both of the compensation objectives outlined above. The table below lists each
material element of our executive compensation program and the compensation objective or
objectives that it is designed to achieve.

|Compensation Element                                                                             | Compensation Objectives Attempted to be Achieved                                                                                                                                                                                                                                                                                                                                                                                                                        
|------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Base Salary                                                                                      | Attract and retain qualified executive's
                                                       Motivate and reward executives performance                                                                                                                                                                                                                                                                                                                              
|Bonus Compensation                                                                               | Motivate and reward executive's performance
                                                       Enhance  profitability  of  Company  and  shareholder
                                                       value                                                                                                                                                                                                                                                   
|Equity-Based Compensation - stock
                                                       options | Enhance
                                                       profitability of Company
                                                       and shareholder value by
                                                       aligning long-term
                                                       incentives with
                                                       shareholders' long-term
                                                       interests

As
illustrated by the table above, base salary is primarily intended to attract and retain
qualified executives. This is the element of the Companys current executive
compensation program where the value of the benefit in any given year is not wholly
dependent on performance. Base salaries are intended to attract and retain qualified
executives as well as being linked to performance by rewarding and/or motivating
executives. Base salaries are reviewed annually and take into account: experience and
retention considerations; past performance; improvement in historical performance;
anticipated future potential performance; and other issues specific to the individual
executive.

There
are specific elements of the current executive compensation program that are designed to
reward performance and enhance profitability and shareholder value, and therefore the
value of these benefits is based on performance. The Companys discretionary annual
bonus plan is primarily intended to motivate and reward Named Officers performance
to achieve specific strategies and operating objectives, as well as improved financial
performance.

The
Compensation Committee, with input from both Messrs. McCabe and Rochford, considers the
salaries of comparable executives of peer companies for which such information is publicly
available. The Compensation Committee believes that bonuses and equity compensation should
fluctuate with the Companys success in achieving financial, operating and strategic
goals. The Committees philosophy is that the Company should continue to use
long-term compensation such as stock options to align shareholder and executives
interests and should allocate a portion of long-term compensation to the entire executive
compensation package.

---



The
Company has never retained an outside consultant in establishing its compensation program
or in establishing any specific compensation for an executive officer.

# Current Executive
Compensation Program Elements

# Base Salaries

Similar
to most companies within the industry, our policy is to pay Named Officers base
salaries in cash. Effective January 1, 2008, the Compensation Committee increased salaries
for Named Officers by an aggregate of $15,000. The raises were to Messrs. Thomas W. Wahl
and William C. Gaines, raising their individual base salaries to $125,000 each. In
approving these salary increases, the Committee took into account factors including, peer
group comparisons available to the Committee, each executives individual experience
and increased responsibilities and improved performance for the Company.

# Annual Bonuses

In
the past, the Company has not had a formal policy regarding bonuses, and payment of
bonuses has been purely discretionary and is largely based on the recommendations of the
Chairman of the Board and the Chief Executive Officer (except as to themselves). In the
recent past, annual bonuses have been established as a percentage of each employees
base salary. The Compensation Committee may reduce or increase the size of the payout for
each individual Named Officer at their discretion. Cash bonuses were declared and paid out
in July and December of 2008 for four of the Named Officers. Cash bonuses are not a
significant portion of the executive compensation package. The annual discretionary bonus
is reported in the Bonus column of the Summary Compensation Table
for each Named Officer.

# Perquisites

The
Company currently provides a vehicle allowance for some of its employees, including two of
the Named Officers. Perquisites are reported in the All Other Compensation
column of the Summary Compensation Table for each Named Officer, if
applicable.

# Equity-Based Compensation

It
is our policy that the Named Officers long-term compensation should be directly
linked to enhancing profitability and value provided to shareholders of the Companys
common stock. Accordingly, the Compensation Committee, (upon the recommendation of Messrs.
McCabe and Rochford, with respect to grants of options other than to themselves) grants
equity awards under the Companys stock option plan designed to link an increase in
shareholder value to compensation. All of the Named Officers equity-based
compensation opportunity for 2008 was awarded in the form of the Companys
non-qualified stock options. Stock option grants are valued using the Black-Scholes Model
in accordance with SFAS 123 (R) and are calculated as a part of the executive compensation
package for the year based on the amount of requisite service period served. Non-qualified
stock options for Named Officers and other key employees generally vest ratably over five
years. The Compensation Committee believes that these awards encourage Named Officers to
continue to use their best professional skills and to retain Named Officers for longer
terms.

Grants
are determined for Named Officers based on his or her performance in the prior year, his
or her expected future contribution to the performance of the Company, and other
competitive data on grant values of peer companies. Awards may be granted to new key
employees or Named Officers on hire date. Other grant date determinations are made by the
Compensation Committee, which is based upon the date the Committee met and proper
communication was made to the Named Officer or key employee as defined in the definition
of grant date by SFAS 123 (R). Exercise prices are equal to the value of the
Companys stock on the close of business on the determined grant date. The Company
has no program or practice to coordinate timing of grants with release of material,
nonpublic information.

---



The
aggregate amount as determined under SFAS 123(R) recognized for purposes of our financial
statements for 2008 with respect to outstanding options granted to the Named Officers is
shown in the Summary Compensation Table below. The grant date fair value of
the option awarded to the Named Officers in 2008 as determined under SFAS 123 (R) for
purposes of our financial statements is shown in the Grants of Plan-Based
Awards table below. The Grants of Plan-Based Awards table below provides
additional detail regarding the options granted to Named Officers in 2008, including the
vesting and other terms that apply to the options.

# Compensation
Committees Report on Executive Compensation (1)

| | Among
the duties imposed on our Compensation Committee under its charter, is the direct
responsibility and authority to review and approve the Companys goals and
objectives relevant to the compensation of the Companys Chief Executive Officer and
other executive officers, to evaluate the performance of such officers in accordance with
the policies and principles established by the Compensation committee and to determine
and approve, either as a Committee, or (as directed by the Board) with the other independent Board
members (as defined by the New York Stock Exchange listing standards), the compensation
level of the Chief Executive Officer and the other executive officers. During 2008 the
Compensation Committee was composed of the three non-employee Directors named at the end
of this report each of whom is independent as defined by the New York Stock
Exchange listing standards.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Compensation Committee has reviewed and discussed with management the disclosures
contained in the Compensation Discussion and Analysis section of this Item 11. Based upon
this review and our discussions, the Arena Resources, Inc. Compensation Committee
recommended to its Board of Directors that the Compensation Discussion and Analysis
section be included in this annual report on Form 10-K.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Compensation
Committee of the Board of DirectorsClayton E. Woodrum (Chair)Anthony
B. PetrelliCarl H. Fiddner
| | ------------------------------------------------------------------------------------------------------------

---

| | (1)   SEC filings sometimes incorporate information by reference. This
          means the Company is referring you to information that has previously been filed
          with the SEC, and that this information should be considered as part of the
          filing you are reading. Unless the Company specifically states otherwise, this
          Compensation Committee Report shall not be deemed to be incorporated by
          reference and shall not constitute soliciting material or otherwise be
          considered filed under the Securities Act of 1933 as amended, or the Securities
          Exchange act of 1934, as amended.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Compensation
Committees Interlocks and Insider Participation

The
Compensation Committee members whose names appear above were committee members during
2008. No member of the Compensation Committee is or has been a former or current Named
Officer of the Company or had any relationships requiring disclosure by the Company under
the SECs rules requiring disclosure of certain relationships and related-party
transactions. None of our Named Officers identified herein served as a director or a
member of a compensation committee (or other committee serving an equivalent function) of
any other entity.

---



# Compensation of Named
Officers

The
Summary Compensation Table set forth below should be read in connection with
the tables and narrative descriptions that follow. The Grants of Plan-Based
Awards table, and the description of the material terms of the nonqualified options
granted in 2008 that follows it, provides information regarding the long-term equity
incentives awarded to Named Officers in 2008 that are also reported in the Summary
Compensation Table. The Outstanding Equity Awards at Fiscal Year End
Table and Option Exercises and Stock Vested Table provide further
information on the Named Officers potential realizable value and actual value
realized with respect to their equity awards.

The
Company does not have any pension plans, non-qualified deferred compensation plans or
severance, retirement, termination, constructive termination or change in control
arrangements for any of its Named Officers for the year ended December 31, 2008.

Summary Compensation Table

|                                          |  |      |  |            |         |           |  |                       |  |                            |         |           |  |            |  |  |          
|----------------------------------------- |  | ---- |  | ---------- | ------- | --------- |  | --------------------- |  | -------------------------- | ------- | --------- |  | ---------- |  |  | ---------
|Name and Principal Position               |  | Year |  | Salary ($) |         | Bonus ($) |  | Option Awards (1) ($) |  | All Other Compensation ($) |         | Total ($)
|                                          |  |      |  |            |         |           |  |                       |  |                            |         |          
|Phillip W. Terry, President and           |  | 2007 |  |            | 164,167 |           |  | 16,000                |  |                            | 802,440 |           |  | 12,408 (2) |  |  | 995,015  
|Chief Executive Officer                   |  | 2008 |  |            | 250,000 |           |  | 25,000                |  |                            | 946,701 |           |  | 20,750 (2) |  |  | 1,242,451
|                                          |  |      |  |            |         |           |  |                       |  |                            |        
|William R. Broaddrick,                    |  | 2007 |  |            | 89,583  |           |  | 9,000                 |  |                            | 399,761 |           |  | 1,400 (4)  |  |  | 499,744  
|Vice President and ChiefFinancial Officer |  | 2008 |  |            | 100,008 |           |  | 10,000                |  |                            | 373,368 |           |  | 4,500 (4)  |  |  | 487,876  
|                                          |  |      |  |            |         |           |  |                       |  |                            |        
|David R. Ricks, Vice President            |  | 2007 |  |            | 28,500  |           |  | 1,425                 |  |                            | 48,196  |           |  | 4,230 (3)  |  |  | 82,351   
|of Operations                             |  | 2008 |  |            | 190,072 |           |  | 19,000                |  |                            | 391,131 |           |  | 27,523 (3) |  |  | 627,726  
|                                          |  |      |  |            |         |           |  |                       |  |                            |        
|Thomas W. Wahl, Vice                      |  | 2007 |  |            | 50,000  |           |  | 2,633                 |  |                            | 224,835 |           |  | 1,800 (4)  |  |  | 279,268  
|President of Land                         |  | 2008 |  |            | 125,000 |           |  | 12,500                |  |                            | 339,788 |           |  | 5,625 (4)  |  |  | 482,913  
|                                          |  |      |  |            |         |           |  |                       |  |                            |        
|William C. Gaines,                        |  | 2007 |  |            | 92,639  |           |  | 9,741                 |  |                            | 298,978 |           |  | 575 (4)    |  |  | 401,933  
|Manager ReservoirEngineering/Acquisitions |  | 2008 |  |            | 125,000 |           |  | 12,500                |  |                            | 251,703 |           |  | 6,000 (4)  |  |  | 395,203  

(1)   See discussion of assumptions made in valuing these awards in the notes to our financial statements.
(2)   All Other Compensation to Mr. Terry included cash paid as vehicle allowances of $12,000 for each year
presented and $408 and $8,750 for the years 2007 and 2008, respectively, as company matching for contributions to
a 401k program.
(3)   All Other Compensation to Mr. Ricks included cash paid as vehicle allowances of $2,520 and $18,400 for the
years 2007 and 2008 and $1,710 and $9,123 for the years 2007 and 2008, respectively, as company matching for
contributions to a 401k program.
(4)   All Other Compensation to Messrs. Broaddrick, Wahl and Gaines consisted of company matching for contributions
to a 401k program.

The
Company awards stock incentives to key employees and the Named Officers either on the
initial date of employment or due to performance incentives throughout the year. During
2008, there was only one grant to a Named Officer, Mr. David R. Ricks. Mr. Ricks received
options to acquire 50,000 shares of stock, exercisable at $45.68 per share, on May 7,
2008. These options had a grant date fair value of $915,270. Please see the discussion of
assumptions made in valuing these awards in the notes to our financial statements.

Named
Officers are not separately entitled to receive dividend equivalent rights with respect to
each stock option. Each nonqualified stock option award described in the Grants of
Plan-Based Awards Table above expires six-months following the fifth anniversary of
its associated grant date and vests in equal installments over the course of five years.

---



The
following table provides certain information regarding unexercised stock options
outstanding for each Named Officer as of December 31, 2008.

|Outstanding Equity Awards  
|---------------------------
|                           
|                           
|Name and Principal Position
|                           
|Phillip W. Terry           
|                           
|                           
|William R. Broaddrick      
|                           
|                           
|David R. Ricks             
|                           
|                           
|Thomas W. Wahl             
|                           
|William C. Gaines          

The
following table presents information regarding the exercise of stock options by Named
Officers during 2008.

|Option Exercises and Stock Vesting
|----------------------------------
|                                  
|                                  
|                                  
|Name                              
|Phillip W. Terry                  
|William R. Broaddrick             
|Thomas W. Wahl                    
|William C. Gaines                 

# Director Compensation

During
January 2008, all directors were compensated with a stipend of $1,000 per month plus $500
for each meeting of the directors attended. Beginning February 1, 2008, all directors were
compensated with a stipend of $1,500 per month plus $1,000 for each meeting of the
directors attended. No director receives a salary as a director.

|Director Compensation Table
|---------------------------
|                           
|                           
|Name                       
|Lloyd T. Rochford          
|Stanley M. McCabe          
|Clayton E. Woodrum         
|Anthony B. Petrelli        
|Carl H. Fiddner            

---



(1)            No options were granted to any of the directors during the year ended December
          31, 2008. All amounts shown for Option Awards are the expense taken in 2008 for
          options granted in previous years. (2)   There were 425,000 options outstanding to
          each of these Directors at December 31, 2008.(3)   There were 50,000 options
          outstanding to this Director at December 31, 2008. (4)  
          There were 125,000 options outstanding to this Director at December 31, 2008.
          (5)   There were 105,000 options outstanding to this Director at December 31,
          2008.

The
following table sets forth information concerning our executive stock option plan as of
December 31, 2007.

|                                                          | Number of securitiesto be issued uponexercise of
outstanding options |  | Weighted-averageexercise price ofoutstanding options |  | Number of securities
                                        remaining available for
                                        future issuance undercompensation plans(excluding securities incolumn (a))
|--------------------------------------------------------- | -------------------------------------------------------------------- |  | ---------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                          |                                                                      |  |                                                      |  |                                                                                                                                                                                                        
|                                                          | (a)                                                                  |  | (b)                                                  |  | (c)                                                                                                                                                                                                    
|                                                          |                                                                      |  |                                                      |  |                                                                                                                                                                                                        
|Equity compensation plansapproved by security holders     | 2,252,000                                                            |  | $       22.12                                        |  | 1,005,000                                                                                                                                                                                              
|                                                          |                                                                      |  |                                                      |  |                                                                                                                                                                                                        
|Equity compensation plans notapproved by security holders | -                                                                    |  | -                                                    |  | -                                                                                                                                                                                                      
|                                                          |                                                                      |  |                                                      |  |                                                                                                                                                                                                        
|Total                                                     | 2,252,000                                                            |  | $       22.12                                        |  | 1,005,000                                                                                                                                                                                              
|                                                          |                                                                      |  |                                                      |  |                                                                                                                                                                                                        

|Item 12: |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
|-------- |  | ----------------------------------------------------------------------------------------------

The
following table sets forth, as February 26, 2009, information regarding the beneficial
ownership of our common stock: (i) by each of our directors and executive officers; and
(ii) by all directors and executive officers as a group. The mailing address for each of
the persons indicated is our corporate headquarters.

Beneficial
ownership is determined under the rules of the Securities and Exchange Commission. In
general, these rules attribute beneficial ownership of securities to persons who possess
sole or shared voting power and/or investment power with respect to those securities and
includes, among other things, securities that an individual has the right to acquire
within 60 days. Unless otherwise indicated, the stockholders identified in the following
table have sole voting and investment power with respect to all shares shown as
beneficially owned by them.

|                                     |  | Shares of Common Stock Beneficially Owned
|------------------------------------ |  | -----------------------------------------
|                                     |  |                                          
|
|                                     |  |                                          
|Lloyd T. Rochford                    |  | 1,149,150 (1)                            
|Phillip W. Terry                     |  | 260,000 (2)                              
|William R. Broaddrick                |  | 300,000 (3)                              
|David D. Ricks                       |  | 10,000 (4)                               
|Stanley M. McCabe                    |  | 515,000 (5)                              
|Clayton E. Woodrum                   |  | 27,000 (6)                               
|Anthony B. Petrelli                  |  | 112,250 (7)                              
|Carl H. Fiddner                      |  | 39,736 (8)                               
|                                     |  |                                          
|All directors and executive officers |  | 2,413,136 (9)                            
|                                     |  |                                          

---



|(1) |  | Includes
185,000 shares issuable upon the exercise of stock options that are
               currently exercisable and 80,000 shares issuable upon the exercise of
stock                options that are exercisable within 60 days.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes
30,000 shares issuable upon the exercise of stock options that are
               currently exercisable and 40,000 shares issuable upon the exercise of
stock                options that are exercisable within 60 days.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Includes
30,000 shares issuable upon the exercise of stock options that are
               currently exercisable and 20,000 shares issuable upon the exercise of
stock                options that are exercisable within 60 days.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Includes
10,000 shares issuable upon the exercise of stock options that are
               currently exercisable.
|--- |  | -----------------------------------------------------------------------------------------------------------------

|(5) |  | Includes
185,000 shares issuable upon the exercise of stock options that are
               currently exercisable and 80,000 shares issuable upon the exercise of
stock                options that are exercisable within 60 days.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Includes
20,000 shares issuable upon the exercise of stock options that are
               currently exercisable and 5,000 shares issuable upon the exercise of stock
               options that are exercisable within 60 days.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Includes
25,000 shares issuable upon the exercise of stock options that are
               currently exercisable 65,250 shares issuable upon the exercise of warrants
and                20,000 shares issuable upon the exercise of stock options that are
exercisable                within 60 days by all executive officers and directors.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | Includes
5,000 shares issuable upon the exercise of stock options that are
               currently exercisable.
|--- |  | ----------------------------------------------------------------------------------------------------------------

|(9) |  | Includes
490,000 shares issuable upon the exercise of stock options that are
               currently exercisable 65,250 shares issuable upon the exercise of warrants
and                245,000 shares issuable upon the exercise of stock options that are
exercisable                within 60 days by all executive officers and directors.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|* |  | Represents
beneficial ownership of less than 1%
|- |  | -----------------------------------------------

The
following table sets forth, as February 26, 2009, information regarding the beneficial
ownership of our common stock: by all persons known to us to own 5% or more of our
outstanding shares of common stock.

|                                                                                |  | Shares of Stock Beneficially Owned
|------------------------------------------------------------------------------- |  | ----------------------------------
|
|Neuberger Berman, Inc.
605 Third Avenue
New York, New York                      |  | 4,308,320 (1)                     
|                                                                                |  |                                   
|Wellington Management Company, LLP
75 State Street
Boston, Massachusetts 02109  |  | 2,102,505 (2)                     
|                                                                                |  |                                   
|Barclays Global Investors, NA
400 Howard Street
San Francisco, California 94105 |  | 2,005,783 (3)                     
|                                                                                |  |                                   
|                                                                                |  |                                   

|(1) |  | This
share ownership information was provided by a Schedule 13G filed February
               12, 2009, which discloses that each of Neuberger Berman Inc. and Neuberger
               Berman, LLC possesses shared power to dispose or direct the disposition of
               4,308,320 shares, and shared power to vote 3,505,128 shares. The Schedule
13G                further discloses that Neuberger Berman Management LLC possesses
shared power to                vote and dispose or direct the disposition of 3,505,128
shares, and Neuberger                Berman, Equity Funds possesses shared power to vote
and dispose or direct the                disposition of 3,486,628 shares. The Schedule
13G identifies Neuberger Berman                Inc. as the owner of 100% of both
Neuberger Berman LLC and Neuberger Berman                Management LLC.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | This
share ownership information was provided by a Schedule 13G filed February
               17, 2009, which discloses that Wellington Management Company, LLP,
possesses                beneficial ownership of the reported shares.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | This
share ownership information was provided by a Schedule 13G filed February
               5, 2009, which discloses that a group consisting of Barclays Global
Investors,                NA, Barclays Global Fund Advisors, Barclays Global Investors,
Ltd., Barclays                Global Investors Japan Limited, Barclays Global Investors
Canada Limited,                Barclays Global Investors Australia Limited and Barclays
Global Investors                (Deutschland) AG, possess sole power to dispose or direct
the disposition of                2,005,783 shares and sole power to vote or to direct
the vote of 1,825,371                shares.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---



Percentage
ownership calculations for any stockholder listed above are based on 38,210,187 shares of
our common stock outstanding as of February 26, 2009.

|Item 13: |  | Certain Relationships and Related Transactions, and Director Independence
|-------- |  | -------------------------------------------------------------------------

In
July 2002, we borrowed $200,000 from each of Messrs. Rochford and McCabe, which debts are
evidenced by notes payable which matured and were paid in January 2007. The notes bore
interest at a rate of 10% per annum, and were secured by our assets (although such notes
were subordinate to our credit facility with our primary commercial lender).

As
discussed under Item 10 of this Form 10-K, the Board of Directors has determined that
Messrs. Woodrum, Petrelli and Fiddner, are each independent directors within
the meaning of Section 303A.00 of the New York Stock Exchange Listed Company Manual. None
of our independent directors falls within any of the categories of persons who would not
be independent as described in Section 303A.00(b) of the New York Stock Exchange rules.
Because the Board of Directors believes it is not possible to anticipate or provide for
all circumstances that might give rise to conflicts of interest or that might bear on the
materiality of a relationship between a director and the Company, the Board has not
established specific objective criteria, apart from the criteria set forth in the New York
Stock Exchange rules, to determine independence. In addition to such criteria,
in making the determination of independence, the Board of Directors considers
such other matters including (i) the business and non-business relationships that each
independent director has or may have had with the Company and its other Directors and
executive officers, (ii) the stock ownership in the Company held by each such Director,
(iii) the existence of any familial relationships with any executive officer or Director
of the Company, and (iv) any other relevant factors which could cause any such Director to
not exercise his independent judgment.

|Item 14: |  | Principal Accountant Fees and Services
|-------- |  | --------------------------------------

The
firm of Hansen, Barnett & Maxwell, P.C., (HBM) has served as the
Companys independent auditors since 2000. The Audit Committee selected HBM as the
independent auditors of the Company for the fiscal year ending December 31, 2008. The
Audit Committee has adopted a policy that requires advance approval of all audit,
audit-related, tax services and other services performed by the independent auditor.

# Fees and Independence

Audit
Fees.    HBM billed the Company an aggregate of $124,062 and $99,000 for professional
services rendered for the audit of the Companys financial statements for the years
ended December 31, 2008 and 2007, respectively, and its reviews of the Companys
financial statements included in its Form 10-Qs for the first three quarters of 2008
and 2007.

Audit
Related Fees.    HBM billed the Company $37,024 and $19,000 for the years ended December
31, 2008 and 2007, respectively, for its services in connection with the review of the
Companys registration statements on Form S-3 (in each 2008 and 2007) and for the
audit of the Phoenix Petrocorp acquisition (paid in 2008).

Tax
Fees.    HBM billed the Company an aggregate of $3,750 and $5,000 for professional
services rendered for tax compliance, tax advice and tax planning for the years ended
December 31, 2008 and 2007.

All
Other Fees.    No other fees were billed by HBM to the Company during 2008 and 2007.

The
Audit Committee of the Board of Directors has determined that the provision of services by
HBM described above is compatible with maintaining HBMs independence as the
Companys principal accountant.

---



|Item 15: |  | Exhibits
|-------- |  | --------

|(a) |  | Financial
Statements
|--- |  | --------------------

| |  | See Index
to Financial Statements on page 52
| |  | --------------------------------------------

|(b) |  | Exhibits
|--- |  | --------

|3.1 |  | Articles
of Incorporation of Arena Resources, Inc. (i)
|--- |  | ------------------------------------------------------

|3.2 |  | By-Laws
of Arena Resources, Inc. (i)
|--- |  | ------------------------------------

|10.1 |  | Second
Amendment to First Amended and Restated Credit Agreement dated July 1, 2008, among Arena
Resources, Inc. and                   MidFirst Bank, N.A., Compass Bank, Bank of Scotland, Capital One,
N.A. and SunTrust Bank (ii)
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|23.1 |  | Consent
of Lee Keeling and Associates, Inc., Independent Petroleum Engineers
|---- |  | ----------------------------------------------------------------------------

|23.2 |  | Consent of Williamson Petroleum Consultants, Inc., Independent Petroleum Engineers
|---- |  | ----------------------------------------------------------------------------------

|23.3 |  | Consent
of Hansen, Barnett & Maxwell, P.C., Independent
|---- |  | -------------------------------------------------------

|31.1 |  | Certification
of CEO
|---- |  | --------------------

|31.2 |  | Certification
of CFO
|---- |  | --------------------

|32.1 |  | Section
1350 Certification - CEO
|---- |  | --------------------------------

|32.2 |  | Section
1350 Certification - CFO
|---- |  | --------------------------------

(i)            Incorporated
herein by reference to the exhibits to Arena Resources, Inc.s           Form SB-1
filed January 2, 2001 (SEC File No. 333-46164).

(ii)            Incorporated
herein by reference to the exhibit to Arena Resources, Inc.s           From 8-K
filed July 11, 2008.

---



# SIGNATURES

In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report
to be signed on behalf by the undersigned, thereunto duly authorized.

| | Arena Resources, Inc.                
| | -------------------------------------
| |                                      
| | By:                                  
| | Mr. Phillip W. Terry                 
| | President and Chief Executive Officer
| |                                      
| | Date:  March 2, 2009                 
| |                                      
| | By:                                  
| | Mr. William R. Broaddrick            
| | Chief Financial Officer              
| |                                      
| | Date:  March 2, 2009                 

In
accordance with the Exchange Act, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the date indicated.

| | /s/  Lloyd
                                                                      T.
                                                                      Rochford
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Mr. Lloyd T. Rochford                                                                                                                                             
| | Director                                                                                                                                                          
| |                                                                                                                                                                   
| | Date:  March 2, 2009                                                                                                                                              
| |                                                                                                                                                                   
| | /s/  Stanley McCabe                                                                                                                                               
| | Mr. Stanley McCabe                                                                                                                                                
| | Director                                                                                                                                                          
| |                                                                                                                                                                   
| | Date:  March 2, 2009                                                                                                                                              
| |                                                                                                                                                                   
| | /s/  Clayton E.
                                                                      Woodrum                                                                     
| | Mr. Clayton E. Woodrum                                                                                                                                            
| | Director                                                                                                                                                          
| |                                                                                                                                                                   
| | Date:  March 2, 2009                                                                                                                                              
| |                                                                                                                                                                   
| | /s/  Anthony B.
                                                                      Petrelli                                                                    
| | Mr. Anthony B. Petrelli                                                                                                                                           
| | Director                                                                                                                                                          
| |                                                                                                                                                                   
| | Date:  March 2, 2009                                                                                                                                              
| |                                                                                                                                                                   
| | /s/ Carl
                                                                      H. Fiddner                                                                         
| | Mr. Carl H. Fiddner                                                                                                                                               
| | Director                                                                                                                                                          
| |                                                                                                                                                                   
| | Date:  March 2, 2009                                                                                                                                              

---



# ARENA RESOURCES, INC.

# INDEX TO FINANCIAL
STATEMENTS

|                                                             | Page
|------------------------------------------------------------ | ----
|Report of Independent Registered Public Accounting Firm      | 54  
|Consolidated Balance Sheets                                  | 55  
|Consolidated Statements of Operations                        | 56  
|Consolidated Statements of Stockholders' Equity              | 57  
|Consolidated Statements of Cash Flows                        | 58  
|Notes to Consolidated Financial Statements                   | 59  
|Supplemental Information on Oil and Gas Producing Activities | 78  

---



|HANSEN, BARNETT & MAXWELL, P.C.                                                                                                                                                                                                                           |                                                                                            
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------
|A Professional Corporation
            CERTIFIED PUBLIC ACCOUNTANTS
              5 Triad Center, Suite 750
            Salt Lake City, UT 84180-1128
                Phone: (801) 532-2200
                 Fax: (801) 532-7944
         www.hbmcpas.com | Registered with the Public Company
Accounting Oversight BoardA Member of the Forum of Firms

# REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Stockholdersof Arena Resources, Inc.

We have audited the accompanying
consolidated balance sheets of Arena Resources, Inc. and subsidiaries as of December 31,
2008 and 2007, and the related consolidated statements of operations and comprehensive
income, stockholders equity, and cash flows for each of the three years in the
period ended December 31, 2008. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We
believe our audits provide a reasonable basis for our opinion.

In our opinion, the financial
statements referred to above present fairly, in all material respects, the consolidated
financial position of Arena Resources, Inc. and subsidiaries as of December 31, 2008 and
2007, and the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2008, in conformity with accounting
principles generally accepted in the United States of America.

We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United States), the
effectiveness of Arena Resources, Inc.s internal control over financial reporting as
of December 31, 2008, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 2, 2009 expressed an unqualified opinion
thereon.

| | /s/  HANSEN, BARNETT & MAXWELL, P.C.
| | ------------------------------------

Salt Lake City, UtahMarch 2, 2009

---



ARENA RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS

|December 31,                                                                                                                          | 2008 |              |  | 2007
|------------------------------------------------------------------------------------------------------------------------------------- | ---- | ------------ |  | ----
|                                                                                                                                     
|                                                                                                                                      |      |              |  |     
|ASSETS                                                                                                                                |      |              |  |     
|Current Assets                                                                                                                        |      |              |  |     
|Cash                                                                                                                                  | $    | 58,489,574   |  | $   
|Accounts receivable                                                                                                                   |      | 8,637,308    |  |     
|Joint interest billing receivable                                                                                                     |      | 2,836,948    |  |     
|Receivable from oil derivative                                                                                                        |      | 2,508,396    |  |     
|Fair value of oil derivative                                                                                                          |      | 16,210,478   |  |     
|Deferred income taxes                                                                                                                 |      | -            |  |     
|Prepaid expenses                                                                                                                      |      | 847,433      |  |     
|                                                                                                                                     
|Total Current Assets                                                                                                                  |      | 89,530,137   |  |     
|                                                                                                                                     
|Property and Equipment                                                                                                                |      |              |  |     
|Oil and gas properties subject to amortization                                                                                        |      | 548,714,235  |  |     
|Inventory for property development                                                                                                    |      | 1,670,067    |  |     
|Drilling rigs                                                                                                                         |      | 6,899,433    |  |     
|Land, buildings, equipment and leasehold improvements                                                                                 |      | 5,799,045    |  |     
|                                                                                                                                     
|Total Property and Equipment                                                                                                          |      | 563,082,780  |  |     
|Less:  Accumulated depreciation and amortization                                                                                      |      | (60,928,142) |  |     
|                                                                                                                                     
|Net Property and Equipment                                                                                                            |      | 502,154,638  |  |     
|                                                                                                                                     
|Total Assets                                                                                                                          | $    | 591,684,775  |  | $   
|                                                                                                                                     
|                                                                                                                                      |      |              |  |     
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                  |      |              |  |     
|Current Liabilities                                                                                                                   |      |              |  |     
|Accounts payable                                                                                                                      | $    | 12,877,084   |  | $   
|Income taxes payable                                                                                                                  |      | -            |  |     
|Fair value of oil derivative                                                                                                          |      | -            |  |     
|Deferred income taxes                                                                                                                 |      | 6,046,508    |  |     
|Accrued liabilities                                                                                                                   |      | 865,955      |  |     
|                                                                                                                                     
|Total Current Liabilities                                                                                                             |      | 19,789,547   |  |     
|                                                                                                                                     
|Long-Term Liabilities                                                                                                                 |      |              |  |     
|Notes payable                                                                                                                         |      | -            |  |     
|Asset retirement liability                                                                                                            |      | 5,066,348    |  |     
|Deferred income taxes                                                                                                                 |      | 84,533,419   |  |     
|                                                                                                                                     
|Total Long-Term Liabilities                                                                                                           |      | 89,599,767   |  |     
|                                                                                                                                     
|Stockholders' Equity                                                                                                                  |      |              |  |     
|Preferred stock - $0.001 par value; 10,000,000 shares authorized;    
no shares issued or outstanding                                 |      | -            |  |     
|Common stock - $0.001 par value; 100,000,000 shares authorized;    
38,210,187 shares and 34,278,779 shares outstanding, respectively |      | 38,210       |  |     
|Additional paid-in capital                                                                                                            |      | 318,701,383  |  |     
|Retained earnings                                                                                                                     |      | 153,343,267  |  |     
|Accumulated other comprehensive gain (loss)                                                                                           |      | 10,212,601   |  |     
|                                                                                                                                     
|Total Stockholders' Equity                                                                                                            |      | 482,295,461  |  |     
|                                                                                                                                     
|Total Liabilities and Stockholders' Equity                                                                                            | $    | 591,684,775  |  | $   
|                                                                                                                                     

The accompanying notes are an integral part of these
consolidated financial statements.

---



ARENA RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

|For the years ended December 31,                                                                                                       |   | 2008         |  |   | 2007         |  |   | 2006        
|-------------------------------------------------------------------------------------------------------------------------------------- | - | ------------ |  | - | ------------ |  | - | ------------
|                                                                                                                                      
|Oil and Gas Revenues                                                                                                                   | $ | 208,858,645  |  | $ | 100,089,698  |  | $ | 59,760,117  
|                                                                                                                                      
|Costs and Operating Expenses                                                                                                           |   |              |  |   |              |  |   |             
|Oil and gas production costs                                                                                                           |   | 17,833,144   |  |   | 11,500,461   |  |   | 6,453,831   
|Oil and gas production taxes                                                                                                           |   | 10,518,370   |  |   | 5,655,877    |  |   | 3,506,347   
|Realized loss on oil derivative                                                                                                        |   | 4,275,330    |  |   | 932,361      |  |   | -           
|Depreciation, depletion and amortization                                                                                               |   | 29,789,794   |  |   | 17,968,062   |  |   | 7,900,099   
|Accretion expense                                                                                                                      |   | 309,402      |  |   | 190,904      |  |   | 127,132     
|General and administrative (which includes    $6,586,279, $4,140,747
     and $897,111,  respectively, in    stock based compensation) |   | 13,557,202   |  |   | 7,815,721    |  |   | 3,617,309   
|                                                                                                                                      
|Total Costs and Operating Expenses                                                                                                     |   | 76,283,242   |  |   | 44,063,386   |  |   | 21,604,718  
|                                                                                                                                      
|Income from Operations                                                                                                                 |   | 132,575,403  |  |   | 56,026,312   |  |   | 38,155,399  
|                                                                                                                                      
|Other Income (Expense)                                                                                                                 |   |              |  |   |              |  |   |             
|Other financing expense                                                                                                                |   | -            |  |   | -            |  |   | (785,598)   
|Interest income                                                                                                                        |   | 1,299,939    |  |   | 884,990      |  |   | 288,604     
|Interest expense                                                                                                                       |   | (1,145,456)  |  |   | (1,411,520)  |  |   | (413,437)   
|                                                                                                                                      
|Net Other Income (Expense)                                                                                                             |   | 154,483      |  |   | (526,530)    |  |   | (910,431)   
|                                                                                                                                      
|Income Before Provision for Income Taxes                                                                                               |   | 132,729,886  |  |   | 55,499,782   |  |   | 37,244,968  
|                                                                                                                                       |   |              |  |   |              |  |   |             
|Provision for Income Taxes                                                                                                             |   | (49,112,685) |  |   | (21,057,843) |  |   | (13,977,000)
|                                                                                                                                      
|Net Income                                                                                                                             | $ | 83,617,201   |  | $ | 34,441,939   |  | $ | 23,267,968  
|                                                                                                                                      
|Basic Net Income Per Common Share                                                                                                      | $ | 2.28         |  | $ | 1.07         |  | $ | 0.83        
|Diluted Net Income Per Common Share                                                                                                    |   | 2.20         |  |   | 1.02         |  |   | 0.77        
|                                                                                                                                      
|Other Comprehensive Loss                                                                                                               |   |              |  |   |              |  |   |             
|Unrealized gain (loss) on oil derivative, net of tax                                                                                   |   | 13,014,099   |  |   | (2,801,498)  |  |   | -           
|                                                                                                                                      
|Total Other Comprehensive Income                                                                                                       | $ | 96,631,300   |  | $ | 31,640,441   |  | $ | 23,267,968  
|                                                                                                                                      

The accompanying notes are an integral part of these
consolidated financial statements.

---



ARENA RESOURCES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

|                                                                  | Common Stock |   |        |   |                          |   |                      |   |                  |   |                                           
|----------------------------------------------------------------- | ------------ | - | ------ | - | ------------------------ | - | -------------------- | - | ---------------- | - | ------------------------------------------
|                                                                  |              |   |        |   |                          |   |                      |   |                  |   |                                           
|                                                                  | Shares       |   | Amount |   | AdditionalPaid-inCapital |   | DeferredCompensation |   | RetainedEarnings |   | AccumulatedOtherComprehensiveIncome (Loss)
|                                                                 
|Balance December 31, 2005                                         | 26,199,404   | $ | 26,200 | $ | 46,801,941               | $ | (115,545)            | $ | 12,016,159       | $ | -                                         
|Issuance of common stock in property acquisition                  | 262,000      |   | 262    |   | 3,752,624                |   | -                    |   | -                |   | -                                         
|Issuance of common stock as part of
     drilling rig acquisition | 12,400       |   | 12     |   | 181,028                  |   | -                    |   | -                |   | -                                         
|Warrants exercised for cash, net                                  | 100,000      |   | 100    |   | 149,900                  |   | -                    |   | -                |   | -                                         
|Warrants exercised using cashless
     exercise provision         | 123,770      |   | 124    |   | (124)                    |   | -                    |   | -                |   | -                                         
|Option exercised for cash                                         | 340,000      |   | 340    |   | 639,660                  |   | -                    |   | -                |   | -                                         
|Issuance for cash, net                                            | 2,300,000    |   | 2,300  |   | 29,786,579               |   | -                    |   | -                |   | -                                         
|Tax impact of option exercises                                    | -            |   | -      |   | 1,851,815                |   | -                    |   | -                |   | -                                         
|Issuance of warrants for services relating to private offering    | -            |   | -      |   | 785,598                  |   | -                    |   | -                |   | -                                         
|Expense related to vesting stock
     based compensation          | -            |   | -      |   | 897,111                  |   | -                    |   | -                |   | -                                         
|Elimination of deferred compensation                              | -            |   | -      |   | (115,545)                |   | 115,545              |   | -                |   | -                                         
|Net income                                                        | -            |   | -      |   | -                        |   | -                    |   | 23,267,968       |   | -                                         
|                                                                 
|Balance December 31, 2006                                         | 29,337,574   | $ | 29,338 | $ | 84,730,586               | $ | -                    | $ | 35,284,127       | $ | -                                         
|Options exercised for cash                                        | 570,000      |   | 570    |   | 1,851,930                |   | -                    |   | -                |   | -                                         
|Warrants exercised for cash                                       | 127,126      |   | 127    |   | 540,169                  |   | -                    |   | -                |   | -                                         
|Warrants exercised using cashless
     exercise provision         | 139,079      |   | 139    |   | (139)                    |   | -                    |   | -                |   | -                                         
|Shares issued in property acquisition                             | 5,000        |   | 5      |   | 204,745                  |   | -                    |   | -                |   | -                                         
|Tax impact of option exercises                                    | -            |   | -      |   | 4,298,722                |   | -                    |   | -                |   | -                                         
|Issuance of common stock for cash, net                            | 4,100,000    |   | 4,100  |   | 95,085,358               |   | -                    |   | -                |   | -                                         
|Expense related to vesting stock based compensation               | -            |   | -      |   | 4,140,747                |   | -                    |   | -                |   | -                                         
|Loss on change in fair value of oil
     derivative, net of tax   | -            |   | -      |   | -                        |   | -                    |   | -                |   | (2,801,498)                               
|Net income                                                        | -            |   | -      |   | -                        |   | -                    |   | 34,441,939       |   | -                                         
|                                                                 
|Balance December 31, 2007                                         | 34,278,779   | $ | 34,279 | $ | 190,852,118              | $ | -                    | $ | 69,726,066       | $ | (2,801,498)                               
|Options exercised for cash                                        | 1,333,000    |   | 1,333  |   | 4,689,927                |   | -                    |   | -                |   | -                                         
|Warrants exercised for cash                                       | 97,158       |   | 97     |   | 446,099                  |   | -                    |   | -                |   | -                                         
|Issuance of common stock for cash, net                            | 2,501,250    |   | 2,501  |   | 116,126,960              |   | -                    |   | -                |   | -                                         
|Expense related to vesting stock based compensation               | -            |   | -      |   | 6,586,279                |   | -                    |   | -                |   | -                                         
|Gain on change in fair value of oil
     derivative, net of tax   | -            |   | -      |   | -                        |   | -                    |   | -                |   | 13,014,099                                
|Net income                                                        | -            |   | -      |   | -                        |   | -                    |   | 83,617,201       |   | -                                         
|                                                                 
|Balance December 31, 2008                                         | 38,210,187   | $ | 38,210 | $ | 318,701,383              | $ | -                    | $ | 153,343,267      | $ | 10,212,601                                
|                                                                 

The accompanying notes are an integral part of these
consolidated financial statements.

---



ARENA RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

|For the years ended December 31,                                                        |   | 2008          |  |   | 2007          |  |   | 2006        
|--------------------------------------------------------------------------------------- | - | ------------- |  | - | ------------- |  | - | ------------
|                                                                                       
|Cash Flows From Operating Activities                                                    |   |               |  |   |               |  |   |             
|Net income                                                                              | $ | 83,617,201    |  | $ | 34,441,939    |  | $ | 23,267,968  
|Adjustments to reconcile net income to net cash       provided by operating activities: |   |               |  |   |               |  |   |             
|Warrants issued for financing expense                                                   |   | -             |  |   | -             |  |   | 785,598     
|Depreciation, depletion and amortization                                                |   | 29,789,794    |  |   | 17,968,062    |  |   | 7,900,099   
|Provision for income taxes                                                              |   | 49,112,685    |  |   | 21,057,843    |  |   | 13,977,000  
|Gain on sale of equipment                                                               |   | -             |  |   | (881)         |  |   | -           
|Stock based compensation                                                                |   | 6,586,279     |  |   | 4,140,747     |  |   | 897,111     
|Accretion of asset retirement obligation                                                |   | 309,402       |  |   | 190,904       |  |   | 127,132     
|Changes in assets and liabilities:                                                      |   |               |  |   |               |  |   |             
|Accounts, joint interest and oil derivative receivable                                  |   | 9,835,045     |  |   | (14,165,921)  |  |   | (6,330,466) 
|Current and deferred income taxes                                                       |   | (612,480)     |  |   | -             |  |   | (320,058)   
|Prepaid expenses                                                                        |   | (714,040)     |  |   | (30,808)      |  |   | (67,149)    
|Excess tax benefits from share-based payment arrangements                               |   | -             |  |   | (4,298,722)   |  |   | (1,851,815) 
|Accounts payable and accrued liabilities                                                |   | (587,238)     |  |   | (814,999)     |  |   | 8,729,479   
|                                                                                       
|Net Cash Provided by Operating Activities                                               |   | 177,336,648   |  |   | 58,488,164    |  |   | 47,114,899  
|                                                                                       
|Cash Flows from Investing Activities                                                    |   |               |  |   |               |  |   |             
|Proceeds from sale of property and equipment                                            |   | -             |  |   | 7,000         |  |   | -           
|Proceeds from sale of oil and gas properties                                            |   | 296,800       |  |   | 1,915,640     |  |   | -           
|Purchase and development of oil and gas properties                                      |   | (207,022,666) |  |   | (168,582,803) |  |   | (97,576,774)
|Purchase of inventory for property development                                          |   | (1,670,067)   |  |   | -             |  |   | -           
|Purchase of buildings, machinery and office equipment                                   |   | (1,931,517)   |  |   | (8,615,501)   |  |   | (672,130)   
|                                                                                       
|Net Cash Used in Investing Activities                                                   |   | (210,327,450) |  |   | (175,275,664) |  |   | (98,248,904)
|                                                                                       
|Cash Flows From Financing Activities                                                    |   |               |  |   |               |  |   |             
|Proceeds from issuance of common stock and warrants, net of offering costs              |   | 116,129,461   |  |   | 95,089,458    |  |   | 29,788,879  
|Proceeds from exercise of warrants, net of offering costs                               |   | 446,196       |  |   | 540,295       |  |   | 150,000     
|Proceeds from exercise of options                                                       |   | 4,691,260     |  |   | 1,852,500     |  |   | 640,000     
|Excess tax benefits from share-based payment arrangements                               |   | -             |  |   | 4,298,722     |  |   | 1,851,815   
|Funds received and held for call options                                                |   | -             |  |   | -             |  |   | 1,272,093   
|Funds paid from funds held for call options                                             |   | -             |  |   | -             |  |   | (1,265,912) 
|Issuance of notes payable                                                               |   | 11,000,000    |  |   | 65,700,000    |  |   | 30,300,000  
|Payment of notes payable                                                                |   | (46,000,000)  |  |   | (50,400,000)  |  |   | (11,000,000)
|                                                                                       
|Net Cash Provided by Financing Activities                                               |   | 86,266,917    |  |   | 117,080,975   |  |   | 51,736,875  
|                                                                                       
|Net Increase in Cash                                                                    |   | 53,276,115    |  |   | 293,475       |  |   | 602,870     
|                                                                                        |   |               |  |   |               |  |   |             
|Cash at Beginning of Period                                                             |   | 5,213,459     |  |   | 4,919,984     |  |   | 4,317,114   
|                                                                                       
|Cash at End of Period                                                                   | $ | 58,489,574    |  | $ | 5,213,459     |  | $ | 4,919,984   
|                                                                                       

|For the years ended December 31,                                              |   | 2008      |  |   | 2007      |  |   | 2006     
|----------------------------------------------------------------------------- | - | --------- |  | - | --------- |  | - | ---------
|                                                                             
|Supplemental Cash Flow Information                                            |   |           |  |   |           |  |   |          
|Cash paid for income taxes                                                    | $ | 612,480   |  | $ | -         |  | $ | 329,986  
|Cash paid for interest                                                        |   | 1,280,122 |  |   | 1,463,328 |  |   | 240,815  
|                                                                             
|Non-Cash Investing and Financing Activities                                   |   |           |  |   |           |  |   |          
|Common stock issued for properties                                            | $ | -         |  | $ | 204,750   |  | $ | 3,933,926
|Asset retirement obligation incurred in property  acquisition and development |   | 1,459,534 |  |   | 1,001,613 |  |   | 607,853  
|Depreciation on drilling rigs capitalized as oil  and gas properties          |   | 640,977   |  |   | 306,133   |  |   | 133,125  

The accompanying notes are an integral part of these
consolidated financial statements.

---



# ARENA RESOURCES, INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

# NOTE 1 
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of
Operations Arena Resources, Inc. (the Company) is a
Nevada corporation that owns interests in oil and gas properties located in Oklahoma,
Texas, Kansas and New Mexico. The Company is engaged primarily in the acquisition,
exploration and development of oil and gas properties and the production and sale of oil
and gas. In 2006, the Company formed two wholly owned subsidiaries, Arena Drilling Co. and
ARD Production Company. The accompanying statements of operations and cash flows include
the operations of the above subsidiaries from the date of acquisition/formation.

Reclassifications
 Certain reclassifications have been made in the financial statements for the year
ended December 31, 2007 to conform to the December 31, 2008 presentation.
The reclassifications had no effect on net income.

Use of Estimates
 The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Changes in the
future estimated oil and natural gas reserves or the estimated future cash flows
attributable to the reserves that are utilized for impairment analysis could have a
significant impact on the future results of operations.

Fair Values of Financial
Instruments  The carrying amounts reported in the balance sheets for
joint interest billings receivable and accrued liabilities approximate fair value because
of the immediate or short-term maturity of these financial instruments. The carrying
amounts reported for notes payable and long-term debt approximate fair value because the
underlying instruments are at interest rates which approximate current market rates. The
fair value estimates for oil derivatives are derived from published market prices for the
underlying commodities to determine discounted expected future cash flows as of the date
of the estimate. See Note 12Derivative Instruments and Hedging Activities.

Consolidation
 The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

Concentration of Credit Risk
and Accounts Receivable  Financial instruments that potentially
subject the Company to a concentration of credit risk consist principally of cash and
accounts receivable. The Company has cash in excess of federally insured limits at
December 31, 2008. The Company places its cash with a high credit quality financial
institution.

Substantially all of the
Companys accounts receivable are from purchasers of oil and gas. Oil and gas sales
are generally unsecured. The Company has not had any significant credit losses in the past
and believes its accounts receivable are fully collectable. Accordingly, no allowance for
doubtful accounts has been provided. The Company also has a joint interest billing
receivable. Joint interest billing receivables are collateralized by the pro rata revenue
attributable to the joint interest holders and further by the interest itself.

Cash  The
Company considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.

Oil and Gas
Properties  The Company uses the full cost method of accounting for
oil and gas properties. Under this method, all costs associated with acquisition,
exploration, and development of oil and gas properties are capitalized. Costs capitalized
include acquisition costs, geological and geophysical expenditures, lease rentals on
undeveloped properties and costs of drilling and equipping productive and non-productive
wells. Drilling costs include directly related overhead costs. Capitalized costs are
categorized either as being subject to amortization or not subject to amortization.

---



# ARENA RESOURCES, INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

The Company records a liability in
the period in which an asset retirement obligation (ARO) is incurred, in an
amount equal to the discounted estimated fair value of the obligation that is capitalized.
Thereafter this liability is accreted up to the final retirement cost. The Companys
AROs relate to future plugging and abandonment expenses of its oil and gas
properties and related facilities disposal.

All capitalized costs of oil and gas
properties, including the estimated future costs to develop proved reserves and estimated
future costs to plug and abandon wells and costs of site restoration, less the estimated
salvage value of equipment associated with the oil and gas properties, are amortized on
the unit-of-production method using estimates of proved reserves as determined by
independent engineers. If the results of an assessment indicate that the properties are
impaired, the amount of the impairment is added to the capitalized costs to be amortized.
Following is a table showing total depletion and depletion per barrel-of-oil-equivalent
rate, by year for the years ended December 31, 2008, 2007, and 2006.

|                                                   | For the Years Ended December 31,
|-------------------------------------------------- | --------------------------------
|                                                   |                                 
|                                                   |                                 
|Depletion                                          | $                               
|Depletion rate, per barrel-of-oil-equivalent (BOE) | $                               

In addition, capitalized costs less
accumulated amortization and related deferred income taxes shall not exceed an amount (the
full cost ceiling) equal to the sum of:

| | 1)           the present value of estimated future net revenues computed by applying
current           prices of oil and gas reserves to estimated future production of proved
oil and           gas reserves, less estimated future expenditures (based on current
costs) to be           incurred in developing and producing the proved reserves computed
using a           discount factor of ten percent and assuming continuation of existing
economic           conditions; 2) plus the cost of properties not being amortized; 3) plus the
          lower of cost or estimated fair value of unproven properties included in the
          costs being amortized;

4) less income tax effects related to differences between
          the book and tax basis of the properties.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Drilling Rigs Drilling rigs are valued at historical cost adjusted for impairment loss
less accumulated depreciation. Historical costs include all direct costs associated with
the acquisition of drilling rigs and placing them in service. Drilling rigs are
depreciated over 10 years and the depreciation is capitalized as part of oil and gas
properties subject to amortization. For the year ended December 31, 2008, 2007 and 2006
the Company had depreciation of $640,977, $306,133 and $133,125, respectively, on the
company owned drilling rigs.

Land, Buildings, Equipment and
Leasehold Improvements  Land, Buildings, Equipment and Leasehold
Improvements are valued at historical cost adjusted for impairment loss less accumulated
depreciation. Historical costs include all direct costs associated with the acquisition of
land, buildings, equipment and leasehold improvements and placing them in service.

---



# ARENA RESOURCES, INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

Depreciation of buildings and
equipment is calculated using the straight-line method based upon the following estimated
useful lives:

|Buildings and improvements    | 30 years 
|----------------------------- | ---------
|Office equipment and software | 5-7 years
|Machinery and equipment       | 5-7 years

Depreciation expense was $235,609,
$62,921 and $25,864 for the years ended December 31, 2008, 2007 and 2006, respectively. No
depreciation was taken during 2006 on buildings as there were no company owned buildings
during that time period. An aggregate value of $530,000 has been attributed to the land on
which the buildings sit and is not depreciated.

Inventory for Property
Development  Inventories consist primarily of tubular goods used in
our development and are stated at the lower of specific cost of each inventory item or
market value.

Revenue recognition  The
Company predominantly derives its revenue from the sale of produced crude oil and natural
gas. Revenue is recorded in the month the product is delivered to the purchaser. At the
end of each month, the Company estimates the amount of production delivered to purchasers
and the price we will receive. Variances between the Companys estimated revenue and
actual payment are recorded in the month the payment is received; however, differences
have been insignificant.

Income Taxes
 Provisions for income taxes are based on taxes payable or refundable for the
current year and deferred taxes. Deferred taxes are provided on differences between the
tax bases of assets and liabilities and their reported amounts in the financial
statements, and tax carry forwards. Deferred tax assets and liabilities are included in
the financial statements at currently enacted income tax rates applicable to the period in
which the deferred tax assets and liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.

Earnings Per Share Basic earnings per share is computed by dividing net income by the
weighted-average number of common shares outstanding during the year. Diluted earnings per
share are calculated to give effect to potentially issuable dilutive common shares.

Major Customers
 During the year ended December 31, 2008, sales to three customers represented 83%
8% and 5% of total sales, respectively. At December 31, 2008, these customers made up 84%,
9% and 5% of accounts receivable, respectively. During the year ended December 31, 2007,
sales to two customers represented 83% and 11% of total sales, respectively. At December
31, 2007, these customers made up 85% and 7% of accounts receivable, respectively. During
the year ended December 31, 2006, sales to one customer represented 82% of total sales,
respectively. At December 31, 2006, this customer made up 80% of accounts receivable. The
loss of any of the foregoing customers would not have a material adverse affect on the
Company as there is an available market for its crude oil and natural gas production from
other purchasers.

Stock-Based Employee
Compensation  The Company has outstanding stock options to directors
and employees, which are described more fully in Note 8. The Company accounts for its
stock options in accordance with Statements of Financial Standards 123R, Share-Based
Payment (SFAS 123R). SFAS 123R requires the recognition of the cost of employee
services received in exchange for an award of equity instruments in the financial
statements and is measured based on the grant date fair value of the award. SFAS 123R also
requires the stock option compensation expense to be recognized over the period during
which an employee is required to provide service in exchange for the award (the vesting
period).

---



# ARENA RESOURCES, INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

Stock-based employee compensation
incurred for the years ended December 31, 2008, 2007, and 2006 was $6,586,279, $4,140,747
and $897,111, respectively.

Stock-Based Compensation to
Non-Employees  The Company accounts for its stock-based compensation
issued to non-employees using the fair value method in accordance with SFAS No. 123,
Accounting for Stock-Based Compensation. Under SFAS No. 123, stock-based
compensation is determined as either the fair value of the consideration received or the
fair value of the equity instruments issued, whichever is more reliably measurable.  The
measurement date for these issuances is the earlier of the date at which a commitment for
performance by the recipient to earn the equity instruments is reached or the date at
which the recipients performance is complete.

Derivative Instruments and
Hedging Activities  Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities establishes
accounting and reporting standards requiring that derivative instruments (including
certain derivative instruments embedded in other contracts) be recorded at fair value and
included in the consolidated balance sheet as assets or liabilities. The accounting for
changes in the fair value of a derivative instrument depends on the intended use of the
derivative and the resulting designation, which is established at the inception of a
derivative. For derivative instruments designated as cash flow hedges, changes in fair
value, to the extent the hedge is effective, are recognized in other comprehensive income
until the hedged item is recognized in earnings. Any change in the fair value resulting
from ineffectiveness, as defined by SFAS 133, is recognized immediately in oil and
natural gas sales. For derivative instruments designated as fair value hedges (in
accordance with SFAS 133), changes in fair value, as well as the offsetting changes in
the estimated fair value of the hedged item attributable to the hedged risk, are
recognized currently in earnings. Differences between the changes in the fair values of
the hedged item and the derivative instrument, if any, represent gains or losses on
ineffectiveness and are reflected currently in interest expense. Hedge effectiveness is
measured at least quarterly based on the relative changes in fair value between the
derivative contract and the hedged item over time. Changes in fair value of contracts
that do not qualify as hedges or are not designated as hedges are also recognized
currently in earnings. See Note 12Derivative Instruments and Hedging Activities.

New Accounting Policies In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurement. This
statement defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair value
measurements. SFAS No. 157 does not require any new fair value measurements but
provides guidance on how to measure fair value by providing a fair value hierarchy used
to classify the source of the information. We adopted SFAS No. 157 effective January 1,
2008 and the adoption did not have a significant effect on our consolidated results of
operations, financial position or cash flows. See Note 13 for other disclosures required
by SFAS No. 157. In February 2008, the FASB issued FSP SFAS No. 157-2
which delays the effective date of SFAS No. 157 for all non-financial assets and
non-financial liabilities except those that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually). This deferral of SFAS
No. 157 primarily applies to our asset retirement obligation (ARO), which uses fair
value measures at the date incurred to determine our liability. We are currently
evaluating the impact of the pending adoption in 2009 of SFAS No. 157 non-recurring fair
value measures.

In February 2007, the FASB issued
SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities, including an amendment of FASB Statement No. 115, effective on
January 1, 2008, and permits companies to choose, at specified dates, to measure
certain eligible financial instruments at fair value. The provisions of SFAS No. 159
apply only to entities that elect to use the fair value option and to all entities with
available-for-sale and trading securities. At the effective date, companies may elect the
fair value option for eligible items that exist at that date, and the effect of the first
remeasurement to fair value must be reported as a cumulative-effect adjustment to the
opening balance of retained earnings. The adoption of SFAS No. 159 has not had a
material impact on the Companys financial position or results of operations.

---



# ARENA RESOURCES, INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

Effective January 1, 2007, the
Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes  an interpretation of FASB Statement No. 109
(FIN 48), which clarifies the accounting and disclosure for uncertainty in tax
positions. The Company has analyzed its filing positions in all jurisdictions where it is
required to file income tax returns for the open tax years in such jurisdictions. The
Company has identified its federal income tax return and its state income tax returns in
Texas, New Mexico, Oklahoma and Kansas in which it operates as major tax
jurisdictions. The Companys federal income tax returns for the years ended
December 31, 2005 through 2007 remain subject to examination. The Companys
income tax returns in major state income tax jurisdictions remain subject to examination
for years ended December 31, 2005 through 2007, with the exception of Texas, which
would also include the year ended December 31, 2004. The Company currently believes that
all significant filing positions are highly certain and that all of its significant income
tax filing positions and deductions would be sustained upon audit. Therefore, the Company
has no significant reserves for uncertain tax positions and no adjustments to such
reserves were required upon adoption of FIN 48. No interest or penalties have been
levied against the Company and none are anticipated, therefore interest or penalty has
been included in our provision for income taxes in the consolidated statements of
operations.

Recent Accounting
Pronouncements In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB
Statement No. 133, which changes the disclosure requirements for derivative
instruments and hedging activities. Enhanced disclosures are required to provide
information about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related hedged items
affect an entitys financial position, financial performance, and cash flows. This
Statement is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application encouraged. This
Statement will require the additional disclosures described above. The Company does not
expect the adoption of SFAS 161 to have a material impact on its results of operations or
financial condition.

In April 2008, FASB issued FASB Staff
Position SFAS No. 142-3, Determination of the Useful Life of Intangible Assets
(FSP SFAS No. 142-3). FSP SFAS No. 142-3 amends the factors that
should be considered in developing renewal or extension assumptions used to determine the
useful life of a recognizable intangible asset under SFAS No. 142, Goodwill and
Other Intangible Assets (SFAS No. 142). The intent of FSP SFAS
No. 142-3 is to improve the consistency between the useful life of a recognizable
intangible asset under SFAS No. 142 and the period of expected cash flows used to
measure the fair value of the asset under SFAS 141(R), Business Combinations
and other U.S. generally accepted accounting principles. FSP SFAS No. 142-3 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early adoption is
prohibited. The Company does not anticipate that the adoption of FSP SFAS No. 142-3
will have an impact on its financial position or results of operations.

In November 2007, the FASB
issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51 (FAS 160). FAS 160 will
change the accounting and reporting for minority interests, which will be recharacterized
as noncontrolling interests and classified as a component of equity. FASB 160 is
effective for fiscal years beginning on or after December 15, 2008. FASB 160
requires retroactive adoption of the presentation and disclosure requirements for existing
minority interests.  All other requirements of FAS 160 will be applied
prospectively.  Early adoption is prohibited.  The Company does not anticipate
that the adoption of FASB 160 will have an impact on its financial position or
results of operations.

---



# ARENA RESOURCES, INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

# NOTE 2  EARNINGS
PER SHARE INFORMATION

|For the years ended December 31,                   |   | 2008       |  |   | 2007       |  |   | 2006      
|-------------------------------------------------- | - | ---------- |  | - | ---------- |  | - | ----------
|                                                  
|Net Income                                         | $ | 83,617,201 |  | $ | 34,441,939 |  | $ | 23,267,968
|                                                  
|Basic Weighted-Average Common Shares Outstanding   |   | 36,732,000 |  |   | 32,071,279 |  |   | 28,133,080
|Effect of dilutive securities                      |   |            |  |   |            |  |   |           
|Warrants                                           |   | 205,846    |  |   | 325,034    |  |   | 488,522   
|Stock options                                      |   | 986,251    |  |   | 1,271,616  |  |   | 1,427,906 
|                                                  
|Diluted Weighted-Average Common Shares Outstanding |   | 37,924,097 |  |   | 33,667,929 |  |   | 30,049,508
|                                                  
|Basic Income Per Common Share                      |   |            |  |   |            |  |   |           
|Net income                                         |   | 2.28       |  |   | 1.07       |  |   | 0.83      
|                                                   |   |            |  |   |            |  |   |           
|Diluted Income Per Common Share                    |   |            |  |   |            |  |   |           
|Net Income                                         |   | 2.20       |  |   | 1.02       |  |   | 0.77      
|                                                  

# NOTE 3  PROPERTY AND
EQUIPMENT

Acquisition of Oil and Gas
Properties During 2006, the Company acquired the lease rights to a
total of 19,840 acres in Hamilton and Greeley Counties, Kansas. Total acquisition cost was
$574,546, which included 20,000 shares of restricted common stock valued at $13.08 per
share, or $261,600, and cash of $312,946. Subsequent to the acquisition of these leases,
the Company sold a partial working interest in four wells the Company drilled and a right
of first refusal on wells drilled offsetting those wells. Total funds received for these
working interests were $735,000. These funds received were accounted for as an offset to
capitalized costs. In February 2006, the Company issued 241,600 shares of the
Companys stock, valued at $3,326,832, or $13.77 per share, to re-acquire the
interests sold. The pro forma impact of these transactions was not material to the
Companys historical results of operations.

During 2006, the Company acquired
working interests in leases near its Fuhrman Mascho properties. The working interests
acquired ranged from 72.5% to 100%, and the net revenue interests ranged from 55% to 80%.
As a part of these acquisitions, the Company acquired the entire LZS Corporation. Total
acquisition costs of $6,293,368, included 20,400 shares of restricted common stock valued
at $20.89 per share, or $426,054 and cash of $5,867,314. The pro forma impact of these
acquisitions was not material to the Companys historical results of operations.

On December 11, 2007, the Company
consummated a transaction pursuant to which it acquired a 100% working interest, 75% net
revenue interest, in the South Fuhrman Mascho Unit, a 100% working interest, 78.125% net
revenue interest, in the University Consolidated IX Unit and a 100% working interest, 75%
net revenue interest, in approximately 5,040 acres of undeveloped acreage (collectively,
the Properties), all of which are located in Andrews County, Texas. The
Properties were acquired from Phoenix PetroCorp, Inc. The effective date of the
acquisition was December 1, 2007 and the results of operations of the Properties are
included in the Companys results of operations from that date.

The Company acquired the Properties
for its current production, as well as for the approximately 120 additional drilling
locations which it estimates exist on the Properties. The Company paid $49,000,000 to the
sellers. In addition, the Company paid acquisition costs of $222,250, including the
issuance of 5,000 shares of common stock as a consulting and finders fee, valued at
$204,750, or $40.95 per share. The acquisition was funded through the use of cash on hand
and proceeds from the Companys credit facility. The acquisition cost was allocated
to the assets acquired and the liabilities assumed as follows:

---



# ARENA RESOURCES, INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

|Oil and gas properties subject to amortization | $ | 49,401,768
|---------------------------------------------- | - | ----------
|Asset retirement obligation                    |   | (179,518) 
|                                              
|Net Assets Acquired                            | $ | 49,222,250
|                                              

The following unaudited pro forma
information is presented to reflect the operations of the Company as if the acquisition
had been completed on January 1, 2007:

|For the years ended December 31, |   | 2007       
|-------------------------------- | - | -----------
|                                
|Oil and Gas Revenues             | $ | 104,805,391
|Net Income                       |   | 33,876,318 
|                                
|Basic Net Income Per Share       | $ | 1.06       
|Diluted Net Income Per Share     |   | 1.01       
|                                

During 2007, the Company acquired
working interests in leases and undeveloped acreage near its Fuhrman Mascho properties.
The Company acquired a 100% working interest, 75% net revenue interest in the new leases
and acreage. Total acquisition costs were $2,003,052, all through cash payments. The pro
forma impact of these acquisitions was not material to the Companys historical
results of operations.

During 2007, the Company acquired
working interest in leases near its North Benson property. The Company acquired a 100%
working interest, and the net revenue interests ranged from 75.08% to 80.56%. Total
acquisition costs were $4,706,157, all through cash payments. The pro forma impact of
these acquisitions was not material to the Companys historical results of
operations.

In June 2008, the Company acquired a
100% working interest in four leases in Lea County, New Mexico. These four leases have net
revenue interests ranging from 80.3125% to 82.8125%. Total consideration provided was a
cash payment of $10,265,000. The pro forma impact of this acquisition was not material to
the Companys historical results of operations.

Divestiture of Oil and Gas
Properties During 2007, the Company entered into an agreement to
sell the working interest and related rights in the West San Andres property, which the
Company had acquired for $500,000 in October 2003. Total proceeds to the Company from the
sale of this property were $1,915,640, net of related costs of the sale. Under the full
cost method of accounting, the proceeds were offset against oil and gas properties subject
to amortization.

During 2008, the Company entered into
an agreement to sell a working interest and related rights in undeveloped acreage in
Kansas, which the Company has acquired for $457,024 in Total proceeds to the Company from
the sale of this property were $296,800. Under the full cost method of accounting, the
proceeds were offset against oil and gas properties subject to amortization.

Acquisition of Drilling Rig
During 2006, the Company purchased a drilling rig, to be operated by
the wholly owned subsidiary, Arena Drilling Company. Total costs to acquire and place the
rig in service was $1,996,899, including the issuance of 12,400 shares of the
Companys restricted common stock, valued at $181,062, or $14.60 per share.

---



# ARENA RESOURCES, INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

During 2007, the Company contracted
for the construction of a second company owned drilling rig, to be operated by the wholly
owned subsidiary, Arena Drilling Company. The Company paid $4,257,839 to acquire the rig
and place it into service.

Acquisition of Office Buildings
During 2007, the Company acquired an office building, land and
adjoining parcel of real estate in Tulsa, Oklahoma to serve as its executive offices. The
building was purchased with a cash payment of $1,900,000. The building was renovated at a
cost of $710,746 and partially placed into service during 2007 with the remainder of the
building being placed into service during 2008.

During 2007, the Company acquired an
office building in Hobbs, New Mexico to serve as its primary field office for its Permian
Basin properties. The building was purchased with a cash payment of $357,500. The building
was renovated at a cost of $994,747 and placed into service during 2007.

During 2007, the Company acquired an
office building in Andrews, Texas to serve as the headquarters for its wholly owned
subsidiary, Arena Drilling Company. The building was purchased with a cash payment of
$405,301. The building was renovated at a cost of $413,534 and was placed into service
during 2008.

# NOTE 4  OIL AND
GAS PRODUCING ACTIVITIES

Set forth below is certain
information regarding the aggregate capitalized costs of oil and gas properties and costs
incurred by the Company for its oil and gas property acquisitions, development and
exploration activities:

# Capitalized Costs
Relating to Oil and Gas Producing Activities

|December 31,                                              |   | 2008         |  |   | 2007         |  |   | 2006        
|--------------------------------------------------------- | - | ------------ |  | - | ------------ |  | - | ------------
|                                                         
|Unproved oil and gas properties                           | $ | 5,642,624    |  | $ | 5,642,624    |  | $ | 5,099,974   
|Proved oil and gas properties                             |   | 549,971,044  |  |   | 334,245,235  |  |   | 166,608,226 
|Inventory for property development                        |   | 1,670,067    |  |   | -            |  |   | -           
|Drilling rigs                                             |   | -            |  |   | 6,254,737    |  |   | 1,996,899   
|Land, buildings, equipment and leasehold improvements     |   | 5,799,045    |  |   | 4,512,224    |  |   | 180,261     
|                                                         
|Total capitalized costs                                   |   | 563,082,780  |  |   | 350,654,820  |  |   | 173,885,360 
|Less accumulated depletion, depreciation and amortization |   | (60,928,142) |  |   | (30,497,371) |  |   | (12,246,727)
|                                                         
|Net Capitalized Costs                                     | $ | 502,154,638  |  | $ | 320,157,449  |  | $ | 161,638,633 
|                                                         

# Net Costs Incurred in
Oil and Gas Producing Activities

|For the Years Ended December 31,                                        |   | 2008        |  |   | 2007        |  |   | 2006       
|----------------------------------------------------------------------- | - | ----------- |  | - | ----------- |  | - | -----------
|                                                                       
|Acquisition of proved properties (net of proceeds from property sale)   |   | 16,782,225  |  |   | 53,554,064  |  |   | 7,122,176  
|Acquisition of unproved properties (net of proceeds from property sale) |   | -           |  |   | 542,650     |  |   | 3,282,635  
|Exploration costs                                                       |   | -           |  |   | -           |  |   | 1,124,556  
|Development costs                                                       |   | 190,584,617 |  |   | 113,084,344 |  |   | 89,797,285 
|                                                                       
|Total Net Costs Incurred                                                | $ | 207,366,842 |  | $ | 167,181,058 |  | $ | 101,326,652
|                                                                       

---



# ARENA RESOURCES, INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

# NOTE 5  NOTES
PAYABLE

Notes Payable In April 2006, the Company entered in to a credit agreement establishing a
credit facility at $150,000,000 with a borrowing base of $65,000,000. This agreement
replaced the previous credit agreement the Company had in place. The interest rate was a
floating rate equal to the 30, 60 or 90 day LIBOR rate plus 2%, payable monthly. Amounts
borrowed under the revolving credit facility are due in May 2009. The revolving credit
facility is secured by the Companys principal mineral interests. The bank credit
facility is subject to borrowing base availability, which is redetermined semiannually
based on the banks estimates of the future net cash flows of our oil and natural gas
properties. The Company is required under the terms of the credit facility to maintain a
5-to-1 ratio of income before interest, taxes, depreciation, depletion and amortization to
interest expense, maintain a current asset to current liability ratio of 1-to-1 and a
rolling four quarter maximum leverage ratio of no more than 2.5-to-1.

In
June 2007, the Company entered into a new agreement that increased the borrowing base
under its credit facility to $100,000,000, while leaving the credit facility at
$150,000,000. Additionally, the interest rate was changed to be a floating rate equal to
the 30, 60 or 90 day LIBOR rate plus 1.75%.

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 December 31, 2008,
the Company was in compliance with all covenants and did not have any amount outstanding
under this credit facility.

Notes Payable to Related
Parties In 2002, the Board of Directors authorized the Company to
borrow up to $500,000 from its officers. During 2002, the Company borrowed $400,000 from
two of its officers. The related notes payable bore interest at 10% per annum. The notes
were secured by all mineral interests, rights and equipment of the Company but were
subordinated to the bank revolving credit facility mentioned above. In 2007 the
subordination of these loans was released and the Company paid all principal and related
interest to the two officers. Based on the borrowing rates available to the Company for
bank loans, the fair value of the notes payable to officers was $400,000 at December 31,
2006 and the notes were eliminated prior to December 31, 2007.

# NOTE 6  ASSET
RETIREMENT OBLIGATION

A reconciliation of the asset
retirement obligation for the years ended December 31, 2006, 2007 and 2008 is as follows:

|                                          |  
|----------------------------------------- | -
|Balance, January 1, 2006                  | $
|Liabilities incurred                      |  
|Accretion expense                         |  
|                                         
|Balance, December 31, 2006                | $
|                                         
|Liabilities incurred                      |  
|Accretion expense                         |  
|Deletion related to property divestitures |  
|Liabilities settled                       |  
|                                         
|Balance, December 31, 2007                | $
|                                         
|Liabilities incurred                      |  
|Accretion expense                         |  
|Liabilities settled                       |  
|                                         
|Balance, December 31, 2008                | $
|                                         

# NOTE 7 
STOCKHOLDERS EQUITY

The Company is authorized to issue
100,000,000 common shares, with a par value of $0.001 per share, and 10,000,000 Class
A convertible preferred shares, with a par value of $0.001 per share.

---



# ARENA RESOURCES, INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

Preferred Stock
 There is no preferred stock outstanding.

Common Stock Issued in Stock
Split  In September 2007, the Companys Board of Directors
authorized a 2 for 1 stock split. The split was effective to shareholders of record at the
close of business on October 15, 2007. The split was in the form of a stock dividend, with
one additional share distributed for every share held. The additional shares were
distributed on October 26, 2007 and the Companys stock began trading at its
post-split price on October 29, 2007. Accordingly, all amounts of common stock, warrants
and options have been retroactively restated throughout these financial statements to give
effect to the 2 for 1 stock split.

Common Stock Issued in
Offerings  In May 2006, the Company issued 2,300,000 shares of common
stock in a private placement for $32,246,000. The Company paid $2,457,121 in offering
costs and underwriters fees resulting in net proceeds from the offering of
$29,788,879.

In June 2007, the Company issued
4,100,000 shares of common stock, valued at $100,450,000, or $24.50 per share, in a
private placement. Proceeds from the offering totaled $95,089,458, net of offering costs
and expenses paid of $5,360,542.

In June 2008, the Company issued
2,501,250 shares of common stock, valued at $119,434,688, or $47.75 per share, in a public
offering pursuant to a shelf registration statement. Proceeds to the Company, net of
offering costs of $3,305,227, totaled $116,129,461.

Common Stock Issued from
Warrant Exercises  During the year ended December 31, 2006, the
Company issued 100,000 shares of common stock upon the exercise of warrants for proceeds
of $150,000, or $1.50 per share. Additionally, during the year ended December 31, 2006,
the Company issued 123,770 shares of common stock in a cashless exercise of 150,924
warrants with an exercise price of $4.50 per share and 6,922 warrants with an exercise
price of $3.745 per share.

During the year ended December 31,
2007, the Company issued 127,126 shares of common stock from the exercise of warrants for
proceeds of $540,295. Of these warrants, 20,000 had an exercise price of $4.50 per share,
34,952 had an exercise price of $5.15 per share and 72,174 had an exercise price of
$3.745. Additionally, during the year ended December 31, 2007, the Company issued 134,120
shares of common stock in a cashless exercise of 145,000 warrants with an exercise price
of $3.745 per share and 4,959 shares of common stock in a cashless exercise of 5,824
warrants with an exercise price of $5.15 per share.

During the year ended December 31,
2008, the Company issued 97,158 shares of common stock from the exercise of warrants. Of
these warrants, 33,246 had an exercise price of $4.50 per share, 23,132 had an exercise
price of $3.7425 per share and 40,780 had an exercise price of $5.15 per share, for total
proceeds of $446,159.

Common Stock Issued from Option
Exercises  During the year ended December 31, 2006, the Company
issued 340,000 shares of common stock upon the exercise of options for proceeds of
$640,000, or an average of $1.88 per share. As a result of these exercises, the Company
recognized an additional tax benefit in the amount of $1,851,815, which was recorded
against additional paid-in capital.

During the year ended December 31,
2007, the Company issued 570,000 shares of common stock upon the exercise of options for
proceeds of $1,852,500, or an average of $3.25 per share. As a result of these exercises,
the Company recognized an additional tax benefit in the amount of $4,298,722, which was
recorded against additional paid-in capital.

---



# ARENA RESOURCES, INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

During the year ended December 31,
2008, the Company issued 1,333,000 shares of common stock from the exercise of options for
proceeds of $4,691,260. Of these options, 1,140,000 had an exercise price of $1.85 per
share, 60,000 had an exercise price of $2.40 per share, 20,000 had an exercise price of
$4.15 per share, 20,000 had an exercise price of $13.70 per share, 40,000 had an exercise
price of $19.23 per share, 33,000 had an exercise price of $23.42 per share and 20,000 had
an exercise price of $26.96 per share.

Other Issuances of Common
Stock  In February 2006, the Company issued 12,400 shares of
restricted common stock, valued at $181,040, or $14.60 per share, as part of the cost of a
drilling rig that the Company acquired as disclosed in Note 3.

Warrants Issued
 In connection with a July 2005 private placement of common stock, the Company
committed to use its best efforts to register the shares with the SEC. The Company was
unable to affect the registration within the allotted time and was required to issue
58,252 warrants on December 28, 2005. The exercise price of these warrants is $5.15 and
the warrants expire December 28, 2010. The Company recognized an expense for the fair
value of these warrants of $597,773. The fair value of the warrants was determined using
the Black-Scholes option pricing model with the following assumptions: 4.32% risk-free
interest rate; 43.44% expected volatility; five year expected life and 0% dividend yield.

The Company continued to be unable to
affect the registration within a month from the end of the original allotted time and was
required to issue an additional 58,252 warrants in January 2006. The exercise price of
these warrants is $5.15 and the warrants expire in January 2011. The Company recognized an
expense equal to the fair value of these warrants of $785,598. The fair value of the
warrants was determined using the Black-Scholes option pricing model with the following
assumptions: 4.44% risk-free interest rate; 43.42% expected volatility; five year expected
life and 0% dividend yield.

Stock purchase warrants issued and
exercised during the years ended December 31, 2008, 2007 and 2006 are summarized as
follows:

|                                     | 2008     | 2007                           | 2006    
|------------------------------------ | -------- | ------------------------------ | --------
|                                     |          |                                |         
|                                     | Warrants | Weighted-AverageExercise Price | Warrants
|                                    
|Outstanding at beginning of the year | 258,708  | $                              | 4.50    
|Issued                               | -        |                                | -       
|Expired                              | -        |                                | -       
|Exercised                            | (97,158) |                                | 4.59    
|                                    
|Outstanding at end of year           | 161,550  | $                              | 4.44    
|                                    

Stock purchase warrants outstanding
at December 31, 2008 are as follows:

|WarrantsOutstanding | Exercise Price | Weighted-AverageRemainingContractual Life
|------------------- | -------------- | -----------------------------------------
|                   
|42,772              |                | $      3.745                             
|83,830              |                | 4.50                                     
|34,948              |                | 5.15                                     
|                   
|161,550             |                |                                          
|                   

---



# ARENA RESOURCES, INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

# NOTE 8  EMPLOYEE
STOCK OPTIONS

In 2003, the Companys Board of
Directors and shareholders approved and adopted a non-qualified executive stock option
plan, which was amended by the shareholders at the annual meetings in 2004, 2005, 2006 and
2008. The amendments effectively increased the number of shares available under the plan
to 5,500,000. There are 1,005,000 options still available for grant at December 31, 2008.

In April 2006, the Company issued
100,000 options with an original exercise price of $17.215 per share under the
Companys stock option plan. In June 2006, the Company amended these options to have
an exercise price of $13.70.

Following is a table reflecting the
issuances during 2007 and 2008 and their related exercise prices:

|Grant date        |  | # of options |  | Exercise price
|----------------- |  | ------------ |  | --------------
|                  |  |              |  |               
|January 11, 2007  |  | 100,000      |  | $             
|January 22, 2007  |  | 600,000      |  |               
|May 1, 2007       |  | 200,000      |  |               
|July 24, 2007     |  | 100,000      |  |               
|November 1, 2007  |  | 50,000       |  |               
|November 7, 2007  |  | 50,000       |  |               
|December 1, 2007  |  | 300,000      |  |               
|December 17, 2007 |  | 125,000      |  |               
|                  |  |              |  |               
|                  |  | 1,525,000    |  |               
|                  |  |              |  |               

|Grant date        |  | # of options |  | Exercise price
|----------------- |  | ------------ |  | --------------
|                  |  |              |  |               
|May 7, 2008       |  | 50,000       |  | $             
|May 15, 2008      |  | 50,000       |  |               
|July 24, 2008     |  | 50,000       |  |               
|August 18, 2008   |  | 50,000       |  |               
|September 2, 2008 |  | 25,000       |  |               
|                  |  |              |  |               
|                  |  | 225,000      |  |               
|                  |  |              |  |               

All granted options vest at the rate
of 20% each year over five years beginning one year from the date granted and expire six
months after the date of complete vesting. A summary of the status of the stock options as
of December 31, 2008 and changes during the years ended December 31, 2008, 2007 and 2006
is as follows:

|                                                                 | 2008        | 2007                           | 2006   
|---------------------------------------------------------------- | ----------- | ------------------------------ | -------
|                                                                 |             |                                |        
|                                                                 | Options     | Weighted-AverageExercise Price | Options
|                                                                
|Outstanding at beginning of the year                             | 3,450,000   | $                              | 13.55  
|Issued                                                           | 225,000     |                                | 43.53  
|Forfeited                                                        | (90,000)    |                                | 22.73  
|Exercised                                                        | (1,333,000) |                                | 3.52   
|                                                                
|Outstanding at end of year                                       | 2,252,000   | $                              | 22.12  
|                                                                
|Exercisable at end of  year                                      | 537,000     | $                              | 13.27  
|                                                                
|Weighted average fair value of
  options granted during the year |             | $                              | 17.52  
|                                                                

---



# ARENA RESOURCES, INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

We use the Black-Scholes option
pricing model to calculate the fair-value of each option grant. The expected volatility is
based on the historical price volatility of the Companys common stock. We elected to
use the simplified method for estimating the expected term as allowed by SAB 110 for
options granted through December 31, 2008. Under the simplified method, the expected term
is equal to the midpoint between the vesting period and the contractual term of the stock
option. The risk-free interest rate represents the U.S. Treasury bill rate for the
expected life of the related stock options. The dividend yield represents the
Companys anticipated cash dividend over the expected life of the stock options. The
following are the Black-Scholes weighted-average assumptions used for options granted
during the years ended December 31, 2008, 2007 and 2006:

|                        |  | 2008       |  |  | 2007       |  |  | 2006   
|----------------------- |  | ---------- |  |  | ---------- |  |  | -------
|                        |  |            |  |  |           
|Risk free interest rate |  | 3.14%      |  |  | 4.30%      |  |  | 4.92%  
|Expected life           |  | 4.25 years |  |  | 4.25 years |  |  | 5 years
|Dividend yield          |  | -          |  |  | -          |  |  | -      
|Volatility              |  | 45%        |  |  | 47%        |  |  | 44%    

As of December 31, 2008, there was approximately $9,461,371 of unrecognized compensation cost related to stock
options that will be recognized over a weighted average period of 2.54 years.  The aggregate intrinsic value of
options vested and expected to vest at December 31, 2008 was $15,237,549.  The aggregate intrinsic value of
options exercisable at December 31, 2008 was $8,805,510.  The year end intrinsic values are based on a December
31, 2008 closing price of $28.09.

The 1,333,000, 570,000 and 340,000
options exercised during 2008, 2007 and 2006, respectively, had an aggregate intrinsic
value on the date of exercise of $44,715,770, $12,122,600 and $5,075,600, respectively.

During the years ended December 31,
2008, 2007 and 2006, 800,000, 590,000 and 570,000, respectively, options vested. The fair
value of these options was $4,865,458, $873,021 $661,698, respectively.

---



# ARENA RESOURCES, INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

The following table summarizes
information related to the Companys stock options outstanding at December 31, 2008:

|               |           |                    | Options Outstanding |                                                        |        
|-------------- | --------- | ------------------ | ------------------- | ------------------------------------------------------ | -------
|               |           |                    |                     |                                                       
|Exercise price |           | Number Outstanding |                     | Weighted-Average Remaining Contractual Life (in years) |        
|              
|$              | 4.15      |                    | 525,000             |                                                        | 1.50   
|               | 10.425    |                    | 60,000              |                                                        | 2.30   
|               | 13.70     |                    | 60,000              |                                                        | 2.95   
|               | 18.675    |                    | 100,000             |                                                        | 3.53   
|               | 19.23     |                    | 560,000             |                                                        | 3.56   
|               | 23.42     |                    | 167,000             |                                                        | 3.83   
|               | 26.96     |                    | 80,000              |                                                        | 4.07   
|               | 35.53     |                    | 50,000              |                                                        | 4.33   
|               | 35.54     |                    | 50,000              |                                                        | 4.35   
|               | 37.59     |                    | 250,000             |                                                        | 4.42   
|               | 37.85     |                    | 125,000             |                                                        | 4.46   
|               | 39.02     |                    | 50,000              |                                                        | 5.13   
|               | 40.75     |                    | 25,000              |                                                        | 5.17   
|               | 41.09     |                    | 50,000              |                                                        | 5.06   
|               | 45.68     |                    | 50,000              |                                                        | 4.84   
|               | 49.74     |                    | 50,000              |                                                        | 4.87   
|              
|               | 2,252,000 |                    | 2.75                |                                                        | 537,000
|              

Any excess tax benefits from the
exercise of stock options will not be recognized in paid-in capital until the Company is
in a current tax paying position. Presently, all of the Companys income taxes are
deferred and the Company has substantial net operating losses available to carryover to
future periods. Accordingly, no excess tax benefits have been recognized for the year
ended December 31, 2008.

# NOTE 9  RELATED
PARTY TRANSACTIONS

In July 2002, the Company borrowed
$400,000 from two of its officers under the terms of secured, 10% promissory notes. These
notes and all accrued interest were paid during 2007. The details of these notes are more
fully described in Note 5.

# NOTE 10 
COMMITMENTS

Standby Letters of Credit A commercial bank has issued standby letters of credit on behalf of
the Company to the states of Texas, Oklahoma and New Mexico totaling $686,969 to allow the
Company to do business in those states. The Company intends to renew the standby letters
of credit for as long as the Company does business in those states. No amounts have been
drawn under the standby letters of credit.

Operating leases Effective August 20, 2008, the Company entered into a lease
agreement for office space in Midland, Texas. The lease is for approximately 1,869 square
feet and is for five years commencing November 2008. The Company incurred lease expense of
$3,271 for the year ended December 31, 2008. The following table reflects the future
minimum lease payments under the operating lease as of December 31, 2008.

---



# ARENA RESOURCES, INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

|Year | Lease Obligation
|---- | ----------------
|     |                 
|2009 |                 
|2010 |                 
|2011 |                 
|2012 |                 
|2013 |                 
|     |                 
|     |                 
|     |                 

# NOTE 11  INCOME
TAXES

At December 31, 2008, the Company had
no alternative minimum income tax due and had no current tax liability. At December 31,
2007, the Company had alternative minimum income tax of $539,793 which is shown in current
liabilities on the balance sheet as of that date. The provision for income taxes consisted
of the following:

|Provision for income taxes |   | 2008       |  |   | 2007       |  |   | 2006      
|-------------------------- | - | ---------- |  | - | ---------- |  | - | ----------
|                           |  
|Current                    | $ | -          |  | $ | 539,793    |  | $ | 304,000   
|Deferred                   |   | 49,112,685 |  |   | 20,518,050 |  |   | 13,673,000
|                           |  
|                           | $ | 49,112,685 |  | $ | 21,057,843 |  | $ | 13,977,000
|                           |  

The following is a reconciliation of
income taxes computed using the U.S. federal statutory rate to the provision for income
taxes:

|Rate Reconciliation                 |   | 2008       |  |   | 2007       |  |   | 2006      
|----------------------------------- | - | ---------- |  | - | ---------- |  | - | ----------
|                                    |  
|Tax at federal statutory rate (34%) | $ | 45,128,161 |  | $ | 18,869,926 |  | $ | 12,663,000
|Non-deductible expenses             |   | 29,406     |  |   | 13,939     |  |   | 27,000    
|State tax, net of federal benefit   |   | 4,380,086  |  |   | 1,831,493  |  |   | 1,229,000 
|Other                               |   | (424,968)  |  |   | 342,485    |  |   | 58,000    
|                                    |  
|                                    | $ | 49,112,685 |  | $ | 21,057,843 |  | $ | 13,977,000
|                                    |  

As of December 31, 2008, the Company
had net operating loss and IDC carry forwards for federal income tax reporting purposes of
approximately $93 million which, if unused, will expire in 2022, 2025, 2026, 2027 and
2028. The Company has minimum tax credits of $967,000 which do not expire.

---



# ARENA RESOURCES, INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

The net deferred tax liability
consisted of the following:

|Deferred taxes:                           |   | 2008        |  |   | 2007       |  |   | 2006      
|----------------------------------------- | - | ----------- |  | - | ---------- |  | - | ----------
|                                          |  
|Deferred tax liabilities                  |   |             |  |   |            |  |   |           
|Current unrealized gain on oil derivative | $ | 6,046,508   |  | $ | -          |  | $ | -         
|Property and equipment                    |   | 107,316,108 |  |   | 63,011,335 |  |   | 37,448,700
|                                          |  
|Total deferred tax liabilities            |   | 113,362,616 |  |   | 63,011,335 |  |   | 37,448,700
|                                          |  
|Deferred tax assets                       |   |             |  |   |            |  |   |           
|Stock-based compensation                  |   | 3,953,790   |  |   | 1,808,770  |  |   | 493,775   
|Minimum tax credit                        |   | 967,084     |  |   | 862,000    |  |   | 346,744   
|Unrealized loss on oil derivative         |   | -           |  |   | 1,658,665  |  |   | -         
|Operating loss and IDC carryforwards      |   | 17,861,815  |  |   | 24,785,172 |  |   | 17,285,457
|                                          |  
|Total deferred tax assets                 |   | 22,782,689  |  |   | 29,114,607 |  |   | 18,125,976
|                                          |  
|Net deferred income tax liability         | $ | 90,579,927  |  | $ | 33,896,728 |  | $ | 19,322,724
|                                          |  

# NOTE 12 
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Under SFAS No. 133, as amended,
the nature of a derivative instrument must be evaluated to determine if it qualifies for
hedge accounting treatment. Instruments qualifying for hedge accounting treatment are
recorded as an asset or liability measured at fair value and subsequent changes in fair
value are recognized in equity through other comprehensive income, net of related taxes,
to the extent the hedge is effective. The Companys derivative instrument qualified
for hedge accounting during 2007 and 2008. The Company did not have any derivative
instruments in 2006. The change in fair value of the derivative instrument was recorded to
other comprehensive income for the years ended December 31, 2007 and 2008. The cash
settlements of cash flow hedges are recorded in the operating section of the
Companys statement of operations. Instruments not qualifying for hedge accounting
treatment are recorded in the balance sheet at fair value and changes in fair value are
recognized on the statement of operations.

The Companys hedges are
specifically referenced to NYMEX prices. The effectiveness of hedges is evaluated at the
time the contracts are entered into, as well as periodically over the life of the
contracts, by analyzing the correlation between NYMEX prices and the posted prices
received from the designated production. Through this analysis, the Company is able to
determine if a high correlation exists between the prices received for its designated
production and the NYMEX prices at which the hedges will be settled. At December 31,
2007 and 2008, the Companys hedging contracts were considered effective cash flow
hedges.

Estimating the fair value of hedging
derivatives requires complex calculations incorporating estimates of future prices,
discount rates and price movements. Our statement of operations includes a loss on
derivative instrument of $4,275,330 and $932,361 for 2008 and 2007, respectively.

As of December 31, 2008, the Company
had entered into the following costless collar contracts accounted for as a cash flow
hedge:

|Commodity     | Remaining Period             | Volume  | Floor      | Ceiling   
|------------- | ---------------------------- | ------- | ---------- | ----------
|WTI Crude Oil | January 2009 - December 2009 | 365,000 | $   100.00 | $   197.00

---



# ARENA RESOURCES, INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

At December 31, 2008, the Company
recognized an asset of $16,210,478 related to the estimated fair value of the derivative
instrument. Based on the estimated future commodity prices as of December 31, 2008, the
Company would realize a $10,212,601 gain, net of taxes, as a gain on derivative instrument
during the next 12 months. These gains are expected to be reclassified based on the
schedule of oil and gas volumes stipulated in the costless collar contracts.

# NOTE 13  FAIR
VALUE MEASUREMENTS

SFAS 157 establishes a fair value
hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the
highest priority to quoted prices in active markets for identical assets or liabilities
(Level 1 measurement) and the lowest priority to unobservable inputs (Level 3
measurement). The Companys fair value balances are based on the observability of
those inputs. The three levels of the fair value hierarchy are as follows:

| |  |  | Level
1  Quoted prices in active markets for identical assets or liabilities that the
Company has the ability to access. 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. The Company does not have any fair value balances
classified as Level 1.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Level
2  Inputs other than quoted prices in active markets included in Level 1, that are
either directly or indirectly observable. These inputs are either directly observable in
the marketplace or indirectly observable through corroboration with market data for
substantially the full contractual term of the asset or liability being measured. The
Companys Level 2 items consist of a costless collar.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Level
3  Includes inputs that are not observable for which there is little, if any,
market activity for the asset or liability being measured. These inputs reflect managements
best estimate of the assumptions market participants would use in determining fair value.
Level 3 would include instruments valued using industry standard pricing models and other
valuation methods that utilize unobservable pricing inputs that are significant to the
overall fair value. The Company does not have any fair value balances classified as Level
3.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In valuing certain contracts, the
inputs used to measure fair value may fall into different levels of the fair value
hierarchy. For disclosure purposes, assets and liabilities are classified in their
entirety in the fair value hierarchy level based on the lowest level of input that is
significant to the overall fair value measurement. Our assessment of the significance of a
particular input to the fair value measurement requires judgment and may affect the
placement within the fair value hierarchy levels.

---



# ARENA RESOURCES, INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

The following table sets forth by
level within the fair value hierarchy the Companys liabilities that are measured at
fair value on a recurring basis:

|Fair Value Measurements at December 31, 2008 Using:
|---------------------------------------------------
|                                                   
|
|Assets/(Liabilities):                              
|                                                   
|$100 - $197 Costless collar                        

# NOTE 13
 EMPLOYEES BENEFIT PLANS

The Companys employees are
eligible to participate in a 401(k) plan after attaining the age of 18. Participants may
defer up to 100% of eligible compensation. The Company matches participant contributions
dollar for dollar up to 6% of participant compensation not exceeding $15,500 per employee
($20,500 for those over 50, choosing to catch-up). For the year ended December 31, 2008
and 2007, the Company made contributions to the plan totaling $453,432 and $109,658.

# NOTE 14  QUARTERLY
FINANCIAL DATA (UNAUDITED)

Quarterly
financial information is presented in the following summary:

|                             | 2006              
|---------------------------- | ------------------
|                             |                   
|                             | Three Months Ended
|                             |                   
|                             |                   
|                             |                   
|Revenues                     | $                 
|Operating Income             |                   
|Net Income                   |                   
|Basic Net Income Per Share   | $                 
|Diluted Net Income Per Share |                   

|                             | 2007              
|---------------------------- | ------------------
|                             |                   
|                             | Three Months Ended
|                             |                   
|                             |                   
|                             |                   
|Revenues                     | $                 
|Operating Income             |                   
|Net Income                   |                   
|Basic Net Income Per Share   | $                 
|Diluted Net Income Per Share |                   

---



# ARENA RESOURCES, INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

|                             | 2008              
|---------------------------- | ------------------
|                             |                   
|                             | Three Months Ended
|                             |                   
|                             |                   
|                             |                   
|Revenues                     | $                 
|Operating Income             |                   
|Net Income                   |                   
|Basic Net Income Per Share   | $                 
|Diluted Net Income Per Share |                   

The
net income per share information above will not match the income statement due to
rounding.

# NOTE 15 
SIGNIFICANT FOURTH QUARTER ADJUSTMENTS

There were no material fourth quarter
adjustments or accounting changes.

---



# ARENA RESOURCES, INC. SUPPLEMENTAL
INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (Unaudited)

Results of Operations from Oil and
Gas Producing Activities The Companys results of operations from oil and
gas producing activities exclude interest expense, gain from change in fair value of put
options, and other financing expense. Income taxes are based on statutory tax rates,
reflecting allowable deductions.

|For the Years Ended December 31,                             |   | 2008         |  |   | 2007         |  |   | 2006        
|------------------------------------------------------------ | - | ------------ |  | - | ------------ |  | - | ------------
|                                                            
|Oil and gas revenues                                         | $ | 208,858,645  |  | $ | 100,089,698  |  | $ | 59,760,117  
|Production costs                                             |   | (17,833,144) |  |   | (11,500,461) |  |   | (6,453,830) 
|Production taxes                                             |   | (10,518,370) |  |   | (5,655,877)  |  |   | (3,506,347) 
|Realized loss on oil derivative                              |   | (4,275,330)  |  |   | (932,361)    |  |   | -           
|Depreciation, depletion, amortization and accretion          |   | (30,099,196) |  |   | (18,158,966) |  |   | (8,027,231) 
|General and administrative (exclusive of corporate overhead) |   | (3,034,525)  |  |   | (3,011,753)  |  |   | (894,499)   
|                                                            
|Results of operations before income taxes                    |   | 143,098,080  |  |   | 60,830,280   |  |   | 40,878,210  
|Provision for income taxes                                   |   | (52,946,290) |  |   | (22,507,204) |  |   | (15,124,938)
|                                                            
|Results of Oil and Gas Producing Operations                  | $ | 90,151,790   |  | $ | 38,323,076   |  | $ | 25,753,272  
|                                                            

Reserve Quantities Information
 The following estimates of proved and proved developed reserve quantities and
related standardized measure of discounted net cash flow are estimates only, and do not
purport to reflect realizable values or fair market values of the Companys reserves.
The Company emphasizes that reserve estimates are inherently imprecise and that estimates
of new discoveries are more imprecise than those of producing oil and gas properties.
Accordingly, these estimates are expected to change as future information becomes
available. All of the Companys reserves are located in the United States of America.

Proved reserves are estimated
reserves of crude oil (including condensate and natural gas liquids) and natural gas that
geological and engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating conditions.
Proved developed reserves are those expected to be recovered through existing wells,
equipment and methods.

The standardized measure of
discounted future net cash flows is computed by applying year-end prices of oil and gas to
the estimated future production of proved oil and gas reserves, less estimated future
expenditures (based on year-end costs) to be incurred in developing and producing the
proved reserves, less estimated future income tax expenses (based on year-end statutory
tax rates) to be incurred on pretax net cash flows less tax basis of the properties and
available credits, and assuming continuation of existing economic conditions. The
estimated future net cash flows are then discounted using a rate of 10 percent per year to
reflect the estimated timing of the future cash flows.

---



# ARENA RESOURCES, INC. SUPPLEMENTAL
INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (Unaudited)

|For the Years Ended December 31,          | 2008        |             | 2007 |             | 2006       
|----------------------------------------- | ----------- | ----------- | ---- | ----------- | -----------
|                                          |             |             |      |             |            
|                                          | Oil (1)     | Gas (1)     |      | Oil (1)     | Gas (1)    
|                                          |            
|Proved Developed and Undeveloped Reserves
|Beginning of year                         | 47,413,322  | 48,074,962  |      | 36,064,273  | 42,424,199 
|Purchases of minerals in place            | 3,638,095   | 2,364,908   |      | 7,021,972   | 4,330,246  
|Improved recovery and extensions          | 9,547,981   | 11,391,853  |      | 6,016,660   | 6,852,346  
|Production                                | (2,018,335) | (1,911,713) |      | (1,316,023) | (1,503,611)
|Revision of previous estimate             | (2,735,806) | (1,115,348) |      | (373,560)   | (4,028,218)
|                                         
|End of year                               | 55,845,257  | 58,804,662  |      | 47,413,322  | 48,074,962 
|                                         
|Proved Developed at end of year           | 20,231,477  | 28,659,033  |      | 14,951,794  | 30,783,255 
|                                         

1Oil reserves are stated in barrels; gas reserves are stated in
thousand cubic feet.

Standardized Measure of Discounted Cash Flows

|December 31,                                                        |   | 2008            |  |   | 2007            |  |   | 2006         
|------------------------------------------------------------------- | - | --------------- |  | - | --------------- |  | - | -------------
|                                                                   
|Future cash flows                                                   | $ | 2,391,888,946   |  | $ | 4,634,645,500   |  | $ | 2,206,997,329
|Future production costs                                             |   | (716,121,604)   |  |   | (790,284,047)   |  |   | (436,830,228)
|Future development costs                                            |   | (330,672,457)   |  |   | (321,485,125)   |  |   | (150,553,635)
|Future income taxes                                                 |   | (394,800,287)   |  |   | (1,254,982,170) |  |   | (578,112,324)
|                                                                   
|Future net cash flows                                               |   | 950,294,598     |  |   | 2,267,894,158   |  |   | 1,041,501,142
|10% annual discount for estimated timing of cash flows              |   | (489,607,688)   |  |   | (991,727,804)   |  |   | (496,061,467)
|                                                                   
|Standardized Measure of Discounted Cash Flows                       | $ | 460,686,910     |  | $ | 1,276,166,354   |  | $ | 545,439,675  
|                                                                   
|                                                                   
|                                                                   
|Changes in Standardized Measure of Discounted Future Net Cash Flows
|                                                                   
|                                                                    |   | 2008            |  |   | 2007            |  |   | 2006         
|                                                                   
|Beginning of the year                                               | $ | 1,276,166,354   |  | $ | 545,439,675     |  | $ | 445,600,566  
|Purchase of minerals in place                                       |   | 41,597,736      |  |   | 325,058,027     |  |   | 18,153,711   
|Extensions, discoveries and improved recovery,   less related costs |   | 129,110,323     |  |   | 297,610,301     |  |   | 279,407,782  
|Development costs incurred during the year                          |   | 190,631,820     |  |   | 113,109,335     |  |   | 90,848,604   
|Sales of oil and gas produced, net of production costs              |   | (190,374,853)   |  |   | (82,949,751)    |  |   | (53,324,929) 
|Accretion of discount                                               |   | 131,684,244     |  |   | 69,291,660      |  |   | 47,117,073   
|Net changes in price and production costs                           |   | (1,526,963,575) |  |   | 592,749,069     |  |   | (106,369,988)
|Net change in estimated future development costs                    |   | (22,637,628)    |  |   | (111,175,136)   |  |   | (53,640,718) 
|Revision of previous quantity estimates                             |   | 293,723,576     |  |   | (7,424,163)     |  |   | (14,276,840) 
|Revision of estimated timing of cash flows                          |   | (409,158,356)   |  |   | (62,546,312)    |  |   | (38,827,084) 
|Net change in income taxes                                          |   | 546,907,269     |  |   | (402,996,351)   |  |   | (69,248,502) 
|                                                                   
|End of the Year                                                     | $ | 460,686,910     |  | $ | 1,276,166,354   |  | $ | 545,439,675  
|                                                                   

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