# 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, 2007                                                    | 
| | 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, 2007, the aggregate market value of the common voting stock
held by non-affiliates of the issuer, based upon the closing stock price of
$29.06 per share, was approximately $919,434,861.

As of March 7, 2008, the issuer had outstanding 35,098,779 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          
|
|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

Since
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 have continued
to grow through acquisitions, we have shifted our focus to growth through development or
our existing properties. From our inception through December 31, 2007, we have increased
our proved reserves to approximately 55.4 million Boe (barrel of oil equivalent). As of
December 31, 2007, our estimated proved reserves had a pre-tax PV10 (present value of
future net revenues before income taxes discounted at 10%) of approximately $1.98 billion
and a Standardized Measure of Discounted Future Net Cash Flows of approximately $1.28
billion. 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 $302.8 million on
acquisitions and capital projects during 2005, 2006 and 2007.

---



We
have a portfolio of oil and natural gas reserves, with approximately 86% of our proved
reserves consisting of oil and approximately 14% consisting of natural gas. Of those
reserves approximately 26% of our proved reserves are classified as proved developed
producing, or PDP, approximately 6% of our proved reserves are classified as
proved developed non-producing, or PDNP, approximately 4% are classified as
proved developed behind pipe PDBP, and approximately 64% 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. The majority of our competitors possess and
employ financial, technical and personnel resources substantially greater than ours, which
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
our financial or personnel resources permit. Our ability to acquire additional prospects
and to find and develop reserves in the future will depend on our ability to 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.

Current
competitive factors in the domestic oil and gas industry are unique. The actual price
range of crude oil is largely established by major international producers. Pricing for
natural gas is more regional. To this extent we do not believe we are directly competitive
with other producers, nor is there any significant risk that we could not 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. However, more favorable prices
can usually be negotiated for larger quantities of oil and/or gas product. In this
respect, while we believe we have a price disadvantage when compared to larger producers,
we view our primary pricing risk to be related to a potential decline in international
prices to a level which could render our current production uneconomical.

We
are presently committed to use the services of the existing gathering companies in our
present areas of production. This 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).

# 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 2007, sales to two customers, Navajo Refining
Company and DCP Midstream, LP, represented 83% and 11% of oil and gas revenues. At
December 31, 2007, these customers represented 85% and 7% 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 us or our acquired properties are
involved 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, 2007, we had 86 full-time employees, including 38 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
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
64%), proved developed non-producing (approximately 6%) or proved developed behind-pipe
(approximately 4%), 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 30% of our proven
reserves depend upon secondary recovery techniques to establish production.

Approximately
thirty percent (30%) of our reserves for the year ended December 31, 2007 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.

If oil and natural gas prices
decrease, we may be required 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 (64%) 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 $100
million. As of December 31, 2007, we had $35,000,000 outstanding on our credit facility.
If in the future we further 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

Since
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 have continued
to grow through acquisitions, we have shifted our focus to growth through development or
our existing properties. From our inception through December 31, 2007, our proved reserves
have grown to 55,425,711 Boe, at an average acquisition/drilling cost of $5.78 per Boe.
Many properties contain both oil and gas reserves. In those cases, the oil and gas
reserves and the volume of oil and gas produced are converted to a common unit of measure
on the basis of their approximate relative energy content. The common unit which we use is
Barrels of oil equivalent or Boe. Acquisition and drilling costs
per Boe is calculated by dividing the net capitalized costs ($320,157,449),
computed in accordance with applicable accounting standards, as shown under
Capitalized Costs Relating to Oil and Gas Producing Activities under
Supplemental Information on Oil and Gas Producing Activities, by our reserves in Boe
(55,425,711).

As
of December 31, 2007, our estimated proved reserves had a pre-tax PV10 value of
approximately $1.98 billion and a Standardized Measure of Discounted Future Cash Flows of
approximately $1.28 billion, approximately 72% of which relate to our properties in Texas,
approximately 23% of which relate to our properties located in New Mexico, approximately
5% relate to our properties in Oklahoma and less than 1% relate to our properties in
Kansas. We spent approximately $302.8 million on capital projects during 2005, 2006 and
2007. We expect to further develop these properties through additional drilling. Our
capital budget for 2008 is approximately $218 million for development of existing
properties. Although our focus will be on development of our existing properties, we also
intend to continue seeking acquisition opportunities which compliment our current
portfolio. We intend to fund our development activity primarily through use of cash flow
from operations and cash on hand, while potential drawings on our credit facility and
proceeds from future equity transactions would also be available for development projects
or future acquisitions.

---



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, 2007.

|Geographic Area |  | Oil(Bbl) |  | Natural Gas(Mcf) | Total(Boe) | Pre-Tax PV10Value | Standardized Measure of Discounted Future Net Cash Flows
|--------------- |  | -------- |  | ---------------- | ---------- | ----------------- | --------------------------------------------------------
|                |  |          |  |                  |            |                   |                                                         
|New Mexico      |  |          |  | 10,823,296       |            |                   | 7,880,974                                               
|Texas           |  |          |  | 33,614,504       |            |                   | 37,516,042                                              
|Oklahoma        |  |          |  | 2,975,422        |            |                   | 220,454                                                 
|Kansas          |  |          |  | -                |            |                   | 2,457,492                                               
|                |  |          |  |                  |            |                   |                                                         
|Total           |  |          |  | 47,413,222       |            |                   | 48,074,962                                              
|                |  |          |  |                  |            |                   |                                                         

Proved
Reserves

Our
55,425,711 Boe of proved reserves, which consist of approximately 86% oil and 14% natural
gas, are summarized below as of December 31, 2007, 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, 2007, our Texas proved reserves had a net pre-tax PV10 value of $1.43
billion and Standardized Measure of Discounted Future Net Cash Flows of $923.15 million,
our proved reserves in New Mexico had a net pre-tax PV10 value of $447.12 million and
Standardized Measure of Discounted Future Net Cash Flows of $286.16 million, our proved
reserves in Oklahoma had a net pre-tax PV10 value of $101.54 million and a Standardized
Measure of Discounted Future Net Cash Flows of $64.58 million and our proved reserves in
Kansas had a net pre-tax PV10 value of $2.36 million and a Standardized Measure of
Discounted Future Net Cash Flows of $2.28 million.

As
of December 31, 2007, approximately 26% of the proved reserves have been classified as
proved developed producing, or PDP. Proved developed non-producing, or
PDNP reserves constitute approximately 6%, proved developed behind-pipe
PDBP reserves constitute approximately 4% and proved undeveloped, or
PUD, reserves constitute approximately 64%, of the proved reserves as of
December 31, 2007.

Approximately
thirty percent (30%) of our reserves for the year ended December 31, 2007 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.

Total
proved reserves had a net pre-tax PV10 value as of December 31, 2007 of approximately
$1.98 billion and a Standardized Measure of Discounted Future Net Cash Flows of
approximately $1.28 billion, 22.5% or $444.9 million and $287.2 million, respectively, of
which is associated with the PDP reserves. An additional $116.9 million and $75.1 million,
respectively, is associated with the PDNP reserves and $25.2 million and $16.3 million,
respectively, is associated with PDBP reserves ($587.1 million and $378.5 million,
respectively, for total proved developed reserves, or 29.6% of total proved reserves
pre-tax PV10 value). The remaining $1.39 billion and $897.6 million, respectively, is
associated with PUD reserves.

---



Our
proved reserves as of December 31, 2007 are summarized in the table below.

|              | Oil(Bbl)   |  | Gas(Mcf)  |  | Total(Boe) |  | % of TotalProved |  |   | Pre-taxPV10(In thousands) |  |   | Standardized Measure of Discounted Future Net Cash Flows |  |   | Future CapitalExpenditures(In thousands)
|------------- | ---------- |  | --------- |  | ---------- |  | ---------------- |  | - | ------------------------- |  | - | -------------------------------------------------------- |  | - | ----------------------------------------
|New Mexico:   |            |  |           |  |            |  |                  |  |   |                           |  |   |                                                          |  |   |                                         
|PDP           | 2,862,232  |  | 3,974,819 |  | 3,524,702  |  | 6%               |  | $ | 91,973                    |  | $ | 58,863                                                   |  | $ | -                                       
|PDNP          | 2,070,290  |  | 2,198,219 |  | 2,436,660  |  | 4%               |  |   | 80,875                    |  |   | 51,760                                                   |  |   | 4,519                                   
|PUD           | 5,890,774  |  | 1,707,936 |  | 6,175,430  |  | 11%              |  |   | 274,270                   |  |   | 175,533                                                  |  |   | 29,729                                  
|              |            |  |           |  |            |  |                  |  |   |                           |  |   |                                                          |  |   |                                         
|Total Proved: | 10,823,296 |  | 7,880,974 |  | 12,136,792 |  | 21%              |  | $ | 447,118                   |  | $ | 286,156                                                  |  | $ | 34,248                                  
|              |            |  |           |  |            |  |                  |  |   |                           |  |   |                                                          |  |   |                                         

|Texas:        |            |  |            |  |            |  |     |  |   |           |  |   |         |  |   |        
|------------- | ---------- |  | ---------- |  | ---------- |  | --- |  | - | --------- |  | - | ------- |  | - | -------
|PDP           | 8,941,340  |  | 7,882,171  |  | 10,255,035 |  | 19% |  | $ | 338,630   |  | $ | 218,524 |  | $ | -      
|PDNP          | 652,879    |  | 477,475    |  | 732,458    |  | 1%  |  |   | 35,710    |  |   | 23,044  |  |   | 11,500 
|PDBP          | -          |  | 13,701,830 |  | 2,283,638  |  | 4%  |  |   | 25,189    |  |   | 16,255  |  |   | 4,140  
|PUD           | 24,020,285 |  | 15,454,566 |  | 26,596,042 |  | 48% |  |   | 1,031,002 |  |   | 665,326 |  |   | 264,396
|              |            |  |            |  |            |  |     |  |   |           |  |   |         |  |   |        
|Total Proved: | 33,614,504 |  | 37,516,042 |  | 39,867,173 |  | 72% |  | $ | 1,430,531 |  | $ | 923,149 |  | $ | 280,036
|              |            |  |            |  |            |  |     |  |   |           |  |   |         |  |   |        

|Oklahoma:     |           |  |         |  |           |  |    |  |   |         |  |   |        |  |   |      
|------------- | --------- |  | ------- |  | --------- |  | -- |  | - | ------- |  | - | ------ |  | - | -----
|PDP           | 425,053   |  | 91,249  |  | 440,261   |  | 1% |  | $ | 12,269  |  | $ | 7,803  |  | $ | -    
|PUD           | 2,550,369 |  | 129,205 |  | 2,571,903 |  | 5% |  |   | 89,274  |  |   | 56,774 |  |   | 7,195
|              |           |  |         |  |           |  |    |  |   |         |  |   |        |  |   |      
|Total Proved: | 2,975,422 |  | 220,454 |  | 3,012,164 |  | 6% |  | $ | 101,543 |  | $ | 64,577 |  | $ | 7,195
|              |           |  |         |  |           |  |    |  |   |         |  |   |        |  |   |      

|Kansas:       |   |  |           |  |         |  |    |  |   |       |  |   |       |  |   |  
|------------- | - |  | --------- |  | ------- |  | -- |  | - | ----- |  | - | ----- |  | - | -
|PDP           | - |  | 1,977,114 |  | 329,519 |  | 1% |  | $ | 2,060 |  | $ | 1,989 |  | $ | -
|PDNP          | - |  | 480,378   |  | 80,063  |  | 0% |  |   | 305   |  |   | 295   |  |   | 7
|              |   |  |           |  |         |  |    |  |   |       |  |   |       |  |   |  
|Total Proved: | - |  | 2,457,492 |  | 409,582 |  | 1% |  | $ | 2,365 |  | $ | 2,284 |  | $ | 7
|              |   |  |           |  |         |  |    |  |   |       |  |   |       |  |   |  

|Total:        |            |  |            |  |            |  |      |  |   |           |  |   |           |  |   |        
|------------- | ---------- |  | ---------- |  | ---------- |  | ---- |  | - | --------- |  | - | --------- |  | - | -------
|PDP           | 12,228,625 |  | 13,925,353 |  | 14,549,517 |  | 26%  |  | $ | 444,932   |  | $ | 287,179   |  | $ | -      
|PDNP          | 2,723,169  |  | 3,156,072  |  | 3,249,181  |  | 6%   |  |   | 116,890   |  |   | 75,099    |  |   | 16,026 
|PDBP          | -          |  | 13,701,830 |  | 2,283,638  |  | 4%   |  |   | 25,189    |  |   | 16,255    |  |   | 4,140  
|PUD           | 32,461,428 |  | 17,291,707 |  | 35,343,375 |  | 64%  |  |   | 1,394,546 |  |   | 897,633   |  |   | 301,320
|              |            |  |            |  |            |  |      |  |   |           |  |   |           |  |   |        
|Total Proved: | 47,413,222 |  | 48,074,962 |  | 55,425,711 |  | 100% |  | $ | 1,981,557 |  | $ | 1,276,166 |  | $ | 321,486
|              |            |  |            |  |            |  |      |  |   |           |  |   |           |  |   |        

# 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 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
|---- | ------------------------------------- |  | ------------------------------------ |  | ---------- |  | - | --------------------------
|     |                                       |  |                                      |  |            |  |   |                           
|2008 | 11,957,045                            |  | 7,501,052                            |  | 13,207,220 |  | $ | 171,425,149               
|2009 | 8,820,906                             |  | 4,414,309                            |  | 9,556,624  |  |   | 96,174,391                
|2010 | 5,604,096                             |  | 2,419,775                            |  | 6,007,392  |  |   | 33,719,988                
|2011 | 3,759,868                             |  | 1,756,026                            |  | 4,052,539  |  |   | -                         
|2012 | 2,319,511                             |  | 1,200,545                            |  | 2,519,602  |  |   | -                         
|     |                                       |  |                                      |  |            |  |   |                           
|     | 32,461,426                            |  | 17,291,707                           |  | 35,343,377 |  | $ | 301,319,528               
|     |                                       |  |                                      |  |            |  |   |                           

---



# Production

Our
estimated average daily production for the month of December, 2007, is summarized below.
These tables indicate the percentage of our estimated December 2007 average daily
production of 5,565 Boe/d attributable to each state and to oil versus natural gas
production.

|State      |  | AverageDailyProduction |  | Oil    |  | NaturalGas
|---------- |  | ---------------------- |  | ------ |  | ----------
|Texas      |  | 83.33%                 |  | 74.03% |  | 9.30%     
|New Mexico |  | 12.70%                 |  | 10.49% |  | 2.21%     
|Oklahoma   |  | 2.56%                  |  | 2.43%  |  | 0.13%     
|Kansas     |  | 1.41%                  |  | 0.00%  |  | 1.41%     
|           |  |                        |  |        |  |           
|Total      |  | 100%                   |  | 86.95% |  | 13.05%    

# 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 67.6% 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 33 producing wells. We believe the property can support several additional wells
with two wells 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 63 producing
wells. We believe the property has remaining potential from waterflood expansion and
modification which we plan to implement in 2008.

Humphrey
Queen Unit  Lea County, New Mexico. We acquired a 100% working interest and a
75.083% net revenue interest in this mature waterflood in December, 2007. The property
contains five producing wells and approximately 761 acres, all held by production. We
believe the property can support activities to return idle wells to production and to
drill one additional PUD well, which is included in our reserve estimates.

---



Langlie
Mattix Queen Unit  Lea County, New Mexico. We acquired a 100% working interest
and a 75.086% net revenue interest in this mature waterflood property in December, 2007.
The property has 14 producing wells on approximately 1,040 acres, all held by production.
We believe the property can support activity to return idle wells to production and to
drill one additional PUD well, which is included in our reserve estimates.

South
Leonard Queen Unit  Lea County, New Mexico. We acquired a 100% working interest
and a 75.089% net revenue interest in this mature waterflood in December, 2007. The
property contains 26 producing wells on approximately 680 acres with all of the acreage
being held by production. We believe the property has additional potential in the form of
returning idle wells to production and drilling 4 PUD wells. This activity is included in
our reserve estimate.

North
Benson Queen Unit  Eddy County, New Mexico. We acquired a 100% working interest
and a 69.4383% net revenue interest in this mature waterflood property in October, 2003.
The property has 26 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 a number of additional wells, 23 of which are
included as PUD in our reserve estimate. The PUD wells will be drilled in 2008 and 2009.

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 12 producing
wells on approximately 1,090 acres, all held by production. We believe the property has
additional potential in returning idle wells to production and 3 PUD wells. This potential
is included 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 and
2007 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 22,066 acres, with 18,200 acres developed and held by production and the
remaining 3,866 acres being undeveloped. We believe the Fuhrman Mascho leases contain
considerable remaining potential for San Andres zone PUD drilling. Our reserve estimate
includes PUD wells with 220 wells scheduled to be drilled in 2008. The Fuhrman Mascho
leases also contain potential for Yates zone gas development. Our reserve estimates
includes such potential and includes development expenditures for 2008.

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
11 producing wells on approximately 1,697 acres, which is held by production. We believe
the property has potential in the form of three PUD wells and the expansion of the
waterflood across the lease. Our reserve estimate includes this potential.

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 nine producing wells on approximately 2,120 acres, which is held by
production. We believe the property can support two 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 eight 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 which are included in
our estimate of PUD. Waterflood operations will be implemented in 2008.

# Acreage

The
following table summarizes gross and net developed and undeveloped acreage at December 31,
2007 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 | 9,050             |  | 6,413               |  | -            
|           |                   |  |                     |  |              
|Texas      | 23,027            |  | 17,391              |  | 3,866        
|           |                   |  |                     |  |              
|Oklahoma   | 5,529             |  | 4,122               |  | -            
|           |                   |  |                     |  |              
|Kansas     | 13,040            |  | 10,432              |  | 15,787       
|           |                   |  |                     |  |              
|Total      | 50,646            |  | 38,358              |  | 19,653       
|           |                   |  |                     |  |              

# 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) | $                      

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, 2007, 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 | 189       |  | 129       |  | -          
|Texas      | 600       |  | 451       |  | -          
|Oklahoma   | 31        |  | 25        |  | -          
|Kansas     | -         |  | -         |  | 10         
|           |           |  |           |  |            
|Total      | 820       |  | 605       |  | 10         
|           |           |  |           |  |            

# Drilling Activity

During
2007 we completed the drilling of 134 wells. All but one of these wells were drilled on
our Fuhrman Mascho properties in Andrews County, Texas. The remaining well was drilled on
our Y-6 lease in Fischer 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 $7.54 in 2005, $6.06 in 2006 and $7.34 in 2007. These
amounts are calculated by dividing our total production costs by our total volume sold, in
Boe.

Costs
incurred for property acquisition, exploration and development activities during the years
ended December 31, 2005, 2006 and 2007 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 2005 for acquisition of unproved properties is net of           proceeds
received for partial working interests sold in wells drilled in Kansas. (2)    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 reports prepared by Lee
Keeling and Associates, Inc., independent petroleum and geological 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, 2004 | 19,550,664                    |             | 9,999,541 
|                           | Purchase of minerals in place | 882,460     |            | 377,179         
|                           | Extensions and discoveries    | 2,546,477   |            | 19,188,896      
|                           | Production                    | (441,995)   |            | (398,611)       
|                           | Revisions of estimates        | 2,329,583   |            | 2,815,074       
|                           |                               |             |            |                 
|                           |                               |             |            |                 
|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
|                           |                               |             |            |                 

---



Our
proved oil and natural gas reserves are shown below.

|                  |             |  | For the Years Ended December 31,
|----------------- | ----------- |  | --------------------------------
|                  |             |  | 2005                            
|                  |             |  |                                 
|Oil (Bbls)        |             |  |                                 
|                  | Developed   |  | 7,885,115                       
|                  | Undeveloped |  | 16,982,074                      
|                  |             |  |                                 
|                  | Total       |  | 24,867,189                      
|                  |             |  |                                 
|                  |             |  |                                 
|Natural Gas (Mcf) |             |  |                                 
|                  | Developed   |  | 22,480,279                      
|                  | Undeveloped |  | 9,501,800                       
|                  |             |  |                                 
|                  | Total       |  | 31,982,079                      
|                  |             |  |                                 
|                  |             |  |                                 
|Total (Boe)       |             |  |                                 
|                  | Developed   |  | 11,631,829                      
|                  | Undeveloped |  | 18,565,707                      
|                  |             |  |                                 
|                  | Total       |  | 30,197,536                      
|                  |             |  |                                 

# 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,                                           |   | 2007            |  |  |   | 2006          |  |  |   | 2005          | 
|------------------------------------------------------ | - | --------------- |  |  | - | ------------- |  |  | - | ------------- | 
|                                                      
|Future cash flows                                      | $ | 4,634,645,500   |  |  | $ | 2,206,997,329 |  |  | $ | 1,629,948,750 | 
|Future production costs                                |   | (790,284,047)   |  |  |   | (436,830,228) |  |  |   | (281,685,991) | 
|Future development costs                               |   | (321,485,125)   |  |  |   | (150,553,635) |  |  |   | (95,765,594)  | 
|Future income taxes                                    |   | (1,254,982,170) |  |  |   | (578,112,324) |  |  |   | (423,161,523) | 
|                                                      
|Future net cash flows                                  |   | 2,267,894,158   |  |  |   | 1,041,501,142 |  |  |   | 829,335,642   | 
|10% annual discount for estimated timing of cash flows |   | (991,727,804)   |  |  |   | (496,061,467) |  |  |   | (383,735,076) | 
|                                                      
|Standardized Measure of Discounted Cash Flows          | $ | 1,276,166,354   |  |  | $ | 545,439,675   |  |  | $ | 445,600,566   | 
|                                                      

---



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

|                                                                    |   | 2007          |  |  |   | 2006          |  |  |   | 2005          | 
|------------------------------------------------------------------- | - | ------------- |  |  | - | ------------- |  |  | - | ------------- | 
|                                                                   
|Beginning of the year                                               | $ | 545,439,675   |  |  | $ | 445,600,566   |  |  | $ | 205,240,750   | 
|Purchase of minerals in place                                       |   | 325,058,027   |  |  |   | 18,153,711    |  |  |   | 33,405,120    | 
|Extensions, discoveries and improved recovery, less   related costs |   | -             |  |  |   | -             |  |  |   | 5,962,820     | 
|Development costs incurred during the year                          |   | 362,283,025   |  |  |   | 328,401,017   |  |  |   | 189,832,736   | 
|Sales of oil and gas produced, net of production costs              |   | (82,949,751)  |  |  |   | (53,324,929)  |  |  |   | (21,991,034)  | 
|Accretion of discount                                               |   | 81,870,181    |  |  |   | 58,727,964    |  |  |   | 28,467,073    | 
|Net changes in price and production costs                           |   | 592,749,069   |  |  |   | (106,369,988) |  |  |   | 191,917,618   | 
|Net change in estimated future development costs                    |   | (111,175,136) |  |  |   | (53,640,718)  |  |  |   | (36,307,702)  | 
|Revision of previous quantity estimates                             |   | (7,424,163)   |  |  |   | (14,276,840)  |  |  |   | 87,175,031    | 
|Revision of estimated timing of cash flows                          |   | (26,688,222)  |  |  |   | (8,582,606)   |  |  |   | (111,387,288) | 
|Net change in income taxes                                          |   | (402,996,351) |  |  |   | (69,248,502)  |  |  |   | (126,714,558) | 
|                                                                   
|End of the Year                                                     | $ | 1,276,166,354 |  |  | $ | 545,439,675   |  |  | $ | 445,600,566   | 
|                                                                   

# 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 50,646 gross (38,358 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, 2007, we owned interests in approximately 19,653 gross undeveloped acres
(11,245 net). We believe that our current and future cash flow will enable us to undertake
the exploitation of our properties through additional drilling activities. Our expected
capital budget for development of existing properties in 2008 is approximately $218
million.

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 properties with both 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, 2007, our oil
and gas production costs per Boe averaged $7.34 and general and administrative costs
averaged $4.99 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. We are currently utilizing half of
this building while the remaining portion is renovated to better suit our needs. These
facilities are believed adequate for our current operations and allows for continued
growth. 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 and is believed to
be adequate for our current operations and allows for continued growth. 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. This building
is not yet being utilized as we evaluate our options regarding renovation. We believe this
office space will be adequate for our current drilling operations and allows 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 October 25, 2007. 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 2008. The shareholders
rejected 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 2,500,000 to
3,000,000. The following reflects the votes cast for each matter voted on at the annual
meeting:

|                               |  | Votes for  |  |  |  | Votes against |  |  |  | Abstain   | 
|------------------------------ |  | ---------- |  |  |  | ------------- |  |  |  | --------- | 
|                               |  |            |  |  |  |               |  |  |  |           | 
|Lloyd T. Rochford              |  | 14,314,721 |  |  |  | 488,386       |  |  |  | -         | 
|Stanley M. McCabe              |  | 12,017,553 |  |  |  | 2,785,554     |  |  |  | -         | 
|Clayton E. Woodrum             |  | 11,880,744 |  |  |  | 2,922,363     |  |  |  | -         | 
|Anthony B. Petrelli            |  | 14,597,719 |  |  |  | 205,388       |  |  |  | -         | 
|Carl H. Fiddner                |  | 14,597,819 |  |  |  | 205,288       |  |  |  | -         | 
|                               |  |            |  |  |  |               |  |  |  |           | 
|Amendment to stock option plan |  | 4,851,455  |  |  |  | 7,810,447     |  |  |  | 2,141,205 | 

---



# 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. Prior to that dating back to April 15, 2003, our common stock
traded on the American Stock Exchange, also 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 2 for 1 stock split in October 2007.

|Period                                  |   | High Sale |  |  |   | Low Sale | 
|--------------------------------------- | - | --------- |  |  | - | -------- | 
|1st Quarter 2006                        | $ | 18.50     |  |  | $ | 12.86    | 
|2nd Quarter 2006                        |   | 19.30     |  |  |   | 12.94    | 
|3rd Quarter 2006                        |   | 20.66     |  |  |   | 13.05    | 
|4th Quarter 2006                        |   | 23.85     |  |  |   | 14.80    | 
|                                        |   |           |  |  |   |          | 
|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 (throughMarch 6, 2008) | $ | 43.98     |  |  | $ | 29.25    | 

# Record Holders

As
of February 21, 2008, there are approximately 6,878 holders of record of our common stock.
As of February 21, 2008, approximately 6%, or 2,006,136 shares of the 35,098,779 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 and 2006. 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.

---



# Recent Sales of
Unregistered Securities

During
the three months ended December 31, 2007, we issued 5,000 shares of our common stock as
finders fees relating to property acquisitions. These shares were issued in a
transaction not involving a public offering and were issued in reliance upon the exemption
from registration provided by Section 4(2) of the Securities Act of 1933.  The
persons to whom the shares were issued had access to full information concerning us and
represented that they acquired the shares for their own account and not for the purpose of
distribution.  The certificates for the shares contain a restrictive legend advising
that the shares may not be offered for sale, sold or otherwise transferred without having
first been registered under the 1933 Act or pursuant to an exemption from registration
under the 1933 Act. There was no underwriter involved in this transaction.

# Issuer Repurchases

We
did not make any repurchases of our equity securities during the quarter ending December
31, 2007.

|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, 2007, 2006, 2005, 2004, and 2003. 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,
|------------------------------------------ | -------------------------------
|                                           |                                
|                                           | 2007                           
|                                           |                                
|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,
|------------------------------------------------ | ------------------
|                                                 |                   
|                                                 | 2007              
|                                                 |                   
|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 $167.2 million in
acquisitions and development in 2007, following total capital expenditures of
approximately $101.3 million in 2006 and $34.3 million in 2005.

Our
capital budget for 2008 is approximately $218 million for development of existing
properties. We also intend to continue seeking acquisition opportunities which compliment
our current portfolio. We intend to fund our development activity primarily through use of
cash flow from operations and cash on hand, while potential drawings on our credit
facility and proceeds from future equity transactions would also be available for
development projects or 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. As we have now increased our base of proven
properties, and as oil and natural gas prices have recently significantly risen, we have
initiated our development activities.

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 sharply 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,
|----------------------------- | --------------------------------------------------- | - | --------------------------------
|                              |                                                     |  
|                              |                                                     |   | 2005                            
|                              |                                                     |   |                                 
|Net production:               |                                                     |   |                                 
|                              | Oil (Bbls)                                          |   | 441,995                         
|                              | Natural gas (Mcf)                                   |   | 398,611                         
|                              |                                                     |   |                                 
|Net sales:                    |                                                     |   |                                 
|                              | Oil                                                 | $ | 23,165,109                      
|                              | Natural gas                                         |   | 2,677,968                       
|                              |                                                     |   |                                 
|Average sales price:          |                                                     |   |                                 
|                              | Oil (per Bbl)                                       | $ | 52.41                           
|                              | Natural gas (per Mcf)                               |   | 6.72                            
|                              |                                                     |   |                                 
|Production costs and expenses |                                                     |   |                                 
|                              | Oil and gas production costs                        | $ | 3,832,486                       
|                              | Production taxes                                    |   | 1,939,739                       
|                              | Realized loss on oil derivative                     |   | -                               
|                              | Depreciation, depletion and    amortization expense |   | 2,781,504                       
|                              | Accretion expense                                   |   | 102,585                         
|                              | General and administrative    expenses              |   | 1,365,590                       

---



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 loss 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 $7.54 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 the companys option plan as a result of
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.

Year Ended December 31,
2006 Compared to Year Ended December 31, 2005

Oil
and natural gas sales.    Oil and natural gas sales revenue increased approximately
$33.92 million to $59.76 million in 2006. Oil sales increased $30.20 million and natural
gas sales increased $3.72 million. The oil sales increase was caused by a sales volume
increase of 458,619 barrels in 2006, and a 13% increase in the average realized per barrel
oil price from $52.41 in 2005 to $59.26 in 2006. 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 591,380 Mcf in 2006 partially
offset by a 4% decrease in the average realized natural gas price per Mcf from $6.72 in
2005 to $6.46 in 2006. 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 2006.

Oil
and gas production costs.    Our aggregate oil and gas production costs increased from
$3,832,486 in 2005 to $6,453,831, although such expenses on a Boe basis declined from
$7.54 in 2005 to $6.06 in 2006. 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 2006 and cost increases. The decline on a per Boe basis is
attributable to an increase in volume as a result of our development and consolidation of
resources available due to our growth.

Oil
and gas production taxes.    Oil and gas production taxes as a percentage of oil and
natural gas sales were 7.51% during 2005 and decreased to 5.87% in 2006. 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.

Depreciation,
depletion and amortization.    Our depreciation, depletion and amortization expense
increased by $5,118,595 to $7,900,099 in 2006. The increase was a result of an increase in
the average depreciation, depletion and amortization rate from $5.67 per Boe during 2005
to $7.54 per Boe during 2006. 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
$2,257,719 to $3,617,309 during 2006. 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 the companys option plan as a result of
adoption of FASB 123(R).

Other
Financing expense.    Other financing expense was $785,598 in 2006, compared to
$597,773 in 2005.

Interest
income.    Interest income increased $288,604 to $288,604 in 2006. The increase was due
to higher cash balances on hand during portions of 2006.

Interest
expense.    Interest expense increased $183,813 to $413,437 in 2006. The increase was due
to higher amounts of debt being outstanding during periods of the year in 2006.

Income
tax expense.    Our effective tax rate was 38% during 2006 and 37% during 2005.

---



Net
income.    Net income increased from $9,460,683 for 2005 to $23,267,968 for 2006. The
primary reasons for this increase include higher crude oil prices between periods and an
increase in volumes sold, partially offset by lower natural gas prices between periods and
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 private equity offerings
of our stock and warrants in 2005, 2006 and 2007 and our secondary offering of common
stock and warrants which we closed in August 2004.

Credit
Facility.    In April 2005, the Company entered into an agreement that amended the credit
facility established in 2004 to increase its credit facility to $50,000,000, with an
increased borrowing base of $35,000,000. The interest rate was a floating rate equal to
the 30, 60 or 90 day LIBOR rate plus 2.25%, and is 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.
In order to obtain the revolving credit facility, loans from two officers were
subordinated to the position of the bank. The Company is required under the terms of the
credit facility to maintain a tangible net worth of $12,000,000, maintain a 5-to-1 ratio
of income before interest, taxes, depreciation, depletion and amortization to interest
expense and maintain a current asset to current liability ratio of 1-to-1.

In
April 2006, the Company entered into a new credit agreement increasing the Companys
credit facility to $150,000,000 with a $65,000,000 borrowing base. Additionally, this new
agreement adjusted the interest rate to be equal to the 30, 60 or 90 day LIBOR rate plus
2%, removed the requirement to maintain a tangible net worth but added a requirement to a
rolling four quarter basis of a maximum leverage ratio of no more than 2.5-to-1. All other
conditions of the credit facility remained the same.

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%. Additionally, the subordination of the loans
from two officers was released. All other terms and conditions remained the same. At
December 31, 2007, the Company was in compliance with all covenants and $35,000,000 was
outstanding under this credit facility, with an additional $527,500 reserved under the
revolving credit facility as collateral for standby letters of credit issued to various
states.

Cash
Flows.    Our primary sources of cash have been cash flows from operations and equity
offerings. During the three years ended December 31, 2007, we generated $126,422,165 from
operating activities, financed $155,472,691 through proceeds from the sale of stock and
warrants and exercise of warrants and options and financed a net $24,600,000 from our
outstanding credit facility. We primarily used this cash generation to fund our capital
expenditures and development aggregating $300,825,191 over the three years end December
31, 2007. At December 31, 2007, we had cash on hand of $5,213,459 and working capital of
$9,948,074, compared to December 31, 2006 when our cash was $4,919,984 with a working
capital deficit of $321,525.

We
continually evaluate our capital needs and compare them to our capital resources. Our
budgeted capital expenditures for 2008 are approximately $218,000,000 for development of
our current properties. We expect to fund these expenditures as well as any future
property acquisitions from cash on hand, internally generated cash flow during the year
2008, proceeds from future equity transactions and from borrowings under our credit
facility, if required. 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.    With the exception of the credit facility, the Company had
no future estimated principal and minimum debt and lease payments for periods subsequent
to December 31, 2007.

# Off-Balance Sheet
Financing Arrangements

As
of December 31, 2007 we had no off-balance sheet financing arrangements.

# New Accounting Policies

In September 2006,
the FASB issued SFAS No. 157, Fair Value Measurements (SFAS
No. 157). SFAS No. 157 establishes a common definition for fair value to
be applied to United States GAAP guidance requiring use of fair value, establishes a
framework for measuring fair value, and expands disclosure about such fair value
measurements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. The Company is currently assessing the impact of SFAS No. 157
on our consolidated financial position and results of operations.

In
February 2007, the FASB issued SFAS 159. SFAS 159 permits entities to measure many
financial instruments and certain other assets and liabilities at fair value on an
instrument-by-instrument basis. SFAS 159 allows entities to measure eligible items at fair
value at specified election dates, with resulting changes in fair value reported in
earnings. SFAS 159 is effective as of the beginning of an entitys first fiscal year
that begins after November 15, 2007. The Company does not expect the adoption of SFAS
159 to have a material impact on its results of operations or financial condition.

In
December 2007, the FASB issued Statements of Financial Accounting Standards No. 141
(revised 2007), Business Combinations (SFAS 141R) and No. 160,
Noncontrolling Interests in Consolidated Financial Statements  an amendment to
ARB No. 51 (SFAS 160).  Both SFAS 141R and SFAS 160 are to be
adopted effective January 1, 2009.  SFAS 141R requires the application of
several new or modified accounting concepts that, due to their complexity, could introduce
a degree of volatility in periods subsequent to a material business
combination.  SFAS 141R requires that all business combinations result in assets
and liabilities acquired being recorded at their fair value, with limited
exceptions.  Other areas related to business combinations that will require
changes from current GAAP include:  contingent consideration, acquisition costs,
contingencies, restructuring costs, in process research and development and income taxes,
among others.  SFAS 160 will primarily impact the presentation of minority or
noncontrolling interests within the Balance Sheet and Statement of Operations as well as
the accounting for transactions with noncontrolling interest holders.

# 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 is based on estimates prepared
by Lee Keeling and Associates, Inc., 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. 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.
Different pricing assumptions or discount rates could result in a different calculated
impairment. We have never recorded any property impairments.

---



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, 2007, our
derivative instruments were considered effective cash flow hedges.

# Effects of Inflation and
Pricing

As
in 2006, we did experience continued increases in costs during 2007 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 2007 as oil and
gas prices rose significantly. Costs for oilfield services and materials increased during
2007 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 the increased
business costs will continue while the commodity prices for oil and natural gas, and the
demand for services related to production and exploration, both remain high (from an
historical context) in the near term.

|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
2007 ranged from a low of $47.62 per barrel to a high of $95.93 per barrel. Natural gas
prices we received during 2007 ranged from a low of $1.37 per Mcf to a high of $16.09 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, 2007 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, 2007.

|Commodity     | Period                      | Volume  | Floor   | Ceiling
|------------- | --------------------------- | ------- | ------- | -------
|WTI Crude Oil | August 2007 - December 2008 | 458,000 | $ 65.00 | $ 80.50

The
change in fair value of the oil hedging contract in place at December 31, 2007, resulted
in a net liability of $4,446,822. The after tax impact of the change in the fair value of
the hedge of $2,801,498 is reflected in other comprehensive income. 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 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 $932,361 for 2007.

Interest Rate Risk

Our
current credit facility has a floating interest rate. Therefore, as a result of our draws
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 55.

|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, 2007, 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, 2007, 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: February 29, 2008

| | /s/ Lloyd T. Rochford
                                                                       Chief Executive Officer
| | --------------------------------------------------------------------------------------------------------------------

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

|HANSEN, BARNETT & MAXWELL, P.C.                                                                                                                                                                                                                                                                                             |                                                                       
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------
|A Professional Corporation
            CERTIFIED PUBLIC ACCOUNTANTS
                         AND
                BUSINESS CONSULTANTS
              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 Board

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited Arena Resources,
Inc.s internal control over financial reporting as of December 31, 2007, 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, 2007, 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 7, 2008 expressed an unqualified opinion thereon.

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

Salt Lake City, UtahMarch 7, 2008

Changes
in Internal Control Over Financial Reporting

We made no change in our internal
control over financial reporting during our fourth quarter of 2007 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, 2007:

|Name                  | Age | Position                                        
|--------------------- | --- | ------------------------------------------------
|Lloyd T. Rochford     | 61  | Chief Executive Officer and Director            
|Stanley M. McCabe     | 75  | Chairman of the Board of Directors              
|Phillip W. Terry      | 60  | President and Chief Operating Officer           
|William R. Broaddrick | 30  | Vice President and Chief Financial Officer      
|David D. Ricks        | 47  | Vice President of Operations                    
|William B. Parsons    | 59  | Vice President and Manager of Investor Relations
|Clayton E. Woodrum    | 67  | Director                                        
|Anthony B. Petrelli   | 55  | Director                                        
|Carl H. Fiddner       | 62  | 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 October
2007.

Messrs. Rochford
and McCabe have served as directors since our inception in August 2000.           Mr.
Woodrum was initially appointed in August 2003 by the Board of Directors to
          fill a vacancy created upon the resignation of a director. 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 
President, Chief Executive Officer and Director.

Mr.          Rochford, 61, 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.

Stanley M. McCabe  Chairman
of the Board of Directors.

Mr.          McCabe, 75, 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.

---



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

Mr.   Terry,
60, has served as President and Chief Operating Officer since February 1,           2007.
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,
30, 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,
47, 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.

# William B. Parsons
 Vice President and Manager of Investor Relations.

Mr.        Parsons,
59, has worked within the securities industry for the past 25 years.           Since
1992, he has served as President of K M Financial, Inc., a Scottsdale,           Arizona
based company which offers consulting and marketing assistance to young           public
companies, including Arena.

# Clayton E. Woodrum
 Director.

Mr.          Woodrum,
67, is a Certified Public Accountant and has, from 1984 to present,           been a
principal shareholder in the accounting firm of Woodrum, Kemendo, Tate           & Cuite,
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,
55, 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,
62, 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
2008 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 2007, the Audit Committee was initially comprised of our three
independent directors, Messrs. Kemendo, Woodrum and Crawford, with Mr. Woodrum acting as
the chairman. Our Board of Directors determined that both Messrs. Kemendo and Woodrum
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 Mr. Woodrum, infra, in this discussion of Directors and Executive
Officers). Each of Messrs. Kemendo, Woodrum and Crawford 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. Upon
the death of Mr. Kemendo in January 2007, the Board appointed Mr. Petrelli to fill the
position left vacant on the Audit Committee. Following the resignation of Mr. Crawford in
May 2007, and the election of Mr. Fiddner to fill the vacancy left in the Board, the Board
appointed Mr. Fiddner to Mr. Crawfords vacant position on the Audit Committee. The
Board of Directors determined that Mr. Fiddner qualified as an audit committee
financial expert under rules adopted by the SEC pursuant to the requirements of the
Sarbanes-Oxley Act of 2002. The Board of Directors has further determined that each of
Messrs. Petrelli and Fiddner qualifies 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 each of
Messrs. 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 2007, the Compensation
Committee was initially comprised of our three independent directors, Messrs. Kemendo,
Woodrum and Crawford, with Mr. Woodrum acting as the chairman. Upon the death of Mr.
Kemendo in January 2007, the Board appointed Mr. Petrelli to fill the position left vacant
on the Compensation Committee. Upon the resignation of Mr. Crawford in May 2007, Mr.
Fiddner was appointed to fill the position left vacant on the Compensation Committee.

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 2007, the committee was
initially comprised of Messrs. Kemendo, Woodrum and Crawford, three independent directors,
with Mr. Woodrum acting as Chairman. Upon the death of Mr. Kemendo in January 2007, the
Board appointed Mr. Petrelli to fill the position left vacant on the Nominating and
Corporate Governance Committee, and upon the resignation of Mr. Crawford in May 2007, the
Board appointed Mr. Fiddner to fill the position left vacant on the Nominating and
Corporate Governance Committee.

There
has 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.

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 December, 2007, 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:

The
Rochford Family Trust, of which Lloyd Rochford is the beneficial owner, filed a Form 4
late (one day).

The
McCabe Family Trust, of which Stanley McCabe is the beneficial owner, filed a Form 4 late
(one day).

Following
his appointment as President, Phillip Terry filed his initial ownership report on Form 3
late (four days).

Following
his appointment as Vice President, Investor Relations, William Parsons filed his initial
ownership report on Form 3 late (four days).

Following
his appointment as Vice President of Operations, David Ricks filed his initial ownership
report on Form 3 late (21 days).

Following
his election as a member of the Board of Directors, Mr. Fiddner filed his initial
ownership report on Form 3 late (six days).

Mr.   Woodrum
filed two Form 4s late (one day and 17 days).

Mr.   Broaddrick
filed two Form 4s late (both one day).

Mr.   Petrelli
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
salary and bonus of Mr. Rochford has, at his insistence, been historically lower than the
salary and bonus of comparable executives of peer companies. With respect to other
executive officers of the Company, 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. With the exception of the base salary paid to Mr. Rochford noted above,
a significant portion of the executive compensation package is through base salaries.
Effective January 1, 2007 and December 1, 2007, the Compensation Committee increased
salaries for Named Officers by an aggregate of $165,000 resulting in the following
individual base salaries for the Named Officers: Lloyd T. Rochford  $36,000, Phillip
Terry  $250,000, William R. Broaddrick  $100,000, H. D. Haston  $100,000
and William C. Gaines  $115,000. 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 2007 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 2007 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 2007 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 2007 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 2007, 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 2007 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 Directors          Clayton E. Woodrum (Chair)          Anthony
B. Petrelli          Carl 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 the
portions of 2007 previously indicated. As a result of the death of Mr. Kemendo in January
2007, and the resignation of Mr. Crawford in May 2007, these former members of the
Compensation Committee were unable to participate in the preparation of the Compensation
Committees Report on Executive Compensation. 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 2007 that follows it, provides information regarding the long-term equity
incentives awarded to Named Officers in 2007 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, 2007.

Summary Compensation
Table

|                                           |  |      |  |            |         |           |  |                       |  |                            |             |           |  |            |  |  |        
|------------------------------------------ |  | ---- |  | ---------- | ------- | --------- |  | --------------------- |  | -------------------------- | ----------- | --------- |  | ---------- |  |  | -------
|Name and Principal Position                |  | Year |  | Salary ($) |         | Bonus ($) |  | Option Awards (1) ($) |  | All Other Compensation ($) |             | Total ($)
|                                           |  |      |  |            |         |           |  |                       |  |                            |             |          
|Lloyd T. Rochford, Chief                   |  | 2006 |  |            | 36,000  |           |  | -                     |  |                            | 121,800     |           |  | 2,500 (3)  |  |  | 160,300
|Executive Officer                          |  | 2007 |  |            | 36,000  |           |  | -                     |  |                            | 596,963 (2) |           |  | 12,000 (3) |  |  | 644,963
|                                           |  |      |  |            |         |           |  |                       |  |                            |            
|Phillip W. Terry, President and            |  | 2006 |  |            | 106,583 |           |  | 12,000                |  |                            | 48,948      |           |  | 12,000 (4) |  |  | 179,531
|Chief Operating Officer                    |  | 2007 |  |            | 164,167 |           |  | 16,000                |  |                            | 802,440     |           |  | 12,000 (4) |  |  | 994,607
|                                           |  |      |  |            |         |           |  |                       |  |                            |            
|William R. Broaddrick,                     |  | 2006 |  |            | 65,666  |           |  | -                     |  |                            | 48,948      |           |  | -          |  |  | 114,614
|Vice President and ChiefFinancial Officer  |  | 2007 |  |            | 89,583  |           |  | 9,000                 |  |                            | 399,761     |           |  | -          |  |  | 498,344
|                                           |  |      |  |            |         |           |  |                       |  |                            |            
|William C. Gaines,                         |  | 2006 |  |            | -       |           |  | -                     |  |                            | -           |           |  | -          |  |  | -      
|Manager, ReservoirEngineering/Acquisitions |  | 2007 |  |            | 92,639  |           |  | 9,741                 |  |                            | 298,978     |           |  | -          |  |  | 401,358
|                                           |  |      |  |            |         |           |  |                       |  |                            |            
|H. D. Haston,                              |  | 2006 |  |            | 86,500  |           |  | 10,000                |  |                            | 272,764     |           |  | 20,400 (4) |  |  | 389,664
|General Manager,Arena Drilling Company     |  | 2007 |  |            | 100,000 |           |  | 10,550                |  |                            | 308,576     |           |  | 20,400 (4) |  |  | 439,526

(1)            See
discussion of assumptions made in valuing these awards in the notes to the
          companys financial statements.  (2)   Options awards shown for Mr.
Rochford           include options granted for his service on the Board of Directors.  (3)   All Other           Compensation
to Mr. Rochford was cash paid as directors fees.  (4)   All Other           Compensation
to Messrs. Terry and Haston was cash paid as vehicle allowances.

---



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. The 2007
grants to Named Officers are reported in the table below.

|Grants of Plan-Based Awards
|---------------------------
|                           
|Name                       
|                           
|Lloyd T. Rochford          
|Lloyd T. Rochford          
|Phillip W. Terry           
|Phillip W. Terry           
|William R. Broaddrick      
|William R. Broaddrick      
|William C. Gaines          
|H. D. Haston               

(1)  
          See discussion of assumptions made in valuing these awards in the notes to the
          companys 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, 2007.

|Outstanding Equity Awards  
|---------------------------
|                           
|                           
|Name and Principal Position
|                           
|Lloyd T. Rochford          
|                           
|                           
|                           
|                           
|Phillip W. Terry           
|                           
|                           
|                           
|William R. Broaddrick      
|                           
|                           
|                           
|William C. Gaines          
|                           
|H. D. Haston               
|                           

---



The
following table presents information regarding the exercise of stock options by Named
Officers during 2007.

|Option Exercises and Stock Vesting
|----------------------------------
|                                  
|                                  
|                                  
|Name                              
|Phillip W. Terry                  
|William R. Broaddrick             
|H. D. Haston                      

# Director Compensation

Throughout
2007, all directors were compensated with a stipend of $1,000 per month plus $500 for each
meeting of the directors attended. Effective February 1, 2008, the per month stipend has
been increased to $1,500. No director receives a salary as a director.

|Director Compensation Table (1)
|-------------------------------
|                               
|                               
|Name                           
|Stanley M. McCabe              
|Clayton E. Woodrum             
|Charles M. Crawford            
|Chris V. Kemendo, Jr.          
|Anthony B. Petrelli            
|Carl H. Fiddner                

(1)  
          Directors compensation for Mr. Lloyd Rochford is not included in this table, as
          it is presented in the Summary Compensation Table for Named Officers (2)   There
          were 675,000 options outstanding to this Director at December 31, 2007. The fair
          value of options granted to this director during the year ended December 31,
          2007 was $1,593,523. (3)   There were 110,000 options outstanding to this Director
          at December 31, 2007. The fair value of options granted to this director during
          the year ended December 31, 2007 was $377,594. (4)   There were no options
          outstanding to this Director at December 31, 2007. No warrants were issued to
          this director during the year ended December 31, 2007. (5)  
          There were no options outstanding to this Director at December 31, 2007. No
          warrants were issued to this director during the year ended December 31, 2007. (6)  
          There were 125,000 options outstanding to this Director at December 31, 2007.
          The fair value of options granted to this director during the year ended
          December 31, 2007 was $1,159,211. (7)  
          There were 125,000 options outstanding to this Director at December 31, 2007.
          The fair value of options granted to this director during the year ended
          December 31, 2007 was $1,358,723.

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     | 3,450,000                                                            |  | 13.55                                                |  | 640,000                                                                                                                                                                                                
|                                                          |                                                                      |  |                                                      |  |                                                                                                                                                                                                        
|Equity compensation plans notapproved by security holders | -                                                                    |  | -                                                    |  | -                                                                                                                                                                                                      
|                                                          |                                                                      |  |                                                      |  |                                                                                                                                                                                                        
|Total                                                     | 3,450,000                                                            |  | 13.55                                                |  | 640,000                                                                                                                                                                                                
|                                                          |                                                                      |  |                                                      |  |                                                                                                                                                                                                        

---



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

The
following table sets forth, as February 29, 2008, 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                    |  | 1,509,400 (1)                            
|Phillip W. Terry                     |  | 240,000 (2)                              
|William R. Broaddrick                |  | 329,000 (3)                              
|David D. Ricks                       |  | -                                        
|Stanley M. McCabe                    |  | 570,000 (4)                              
|Clayton E. Woodrum                   |  | 56,000 (5)                               
|Anthony B. Petrelli                  |  | 87,250 (6)                               
|Carl H. Fiddner                      |  | 74,736 (7)                               
|                                     |  |                                          
|All directors and executive officers |  | 2,866,386 (8)                            
|                                     |  |                                          

|(1) | Includes
100,000 shares issuable upon the exercise of stock options that are           currently
exercisable and 120,000 shares issuable upon the exercise of stock           options that
are exercisable within 60 days.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes
140,000 shares issuable upon the exercise of stock options that are           exercisable
within 60 days.
|--- | ------------------------------------------------------------------------------------------------------------------

|(3) | Includes
120,000 shares issuable upon the           exercise of stock options that are exercisable
within 60 days.
|--- | ------------------------------------------------------------------------------------------------------------------

|(4) | Includes
          100,000 shares issuable upon the exercise of stock options that are currently
          exercisable and 120,000 shares issuable upon the exercise of stock options that
are exercisable within 60 days.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Includes
30,000 shares issuable upon the exercise of stock options that are currently exercisable
and 25,000 shares issuable upon the exercise of stock options that are exercisable within
60 days.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Includes
65,250 shares issuable upon the exercise of warrants that are currently exercisable and
20,000  shares issuable upon exercise of stock options that are exercisable within 60
days.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Includes
20,000 shares issuable upon the exercise of stock options that are exercisable within 60
days.
|--- | -------------------------------------------------------------------------------------------------------

|(8) | Includes
 230,000  shares  issuable  upon the  exercise of stock  options that are  currently
 exercisable 65,250 shares issuable upon the exercise of warrants and 595,000 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 29, 2008, 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 Common Stock Beneficially Owned
|--------------------------------------------------------------- |  | -----------------------------------------
|                                                                |  |                                          
|
|                                                                |  |                                          
|Neuberger Berman Inc.
605 Third Avenue
New York, New York 10158 |  | 3,941,664 (4)                            

|(1) | This
share ownership information was provided by a Schedule 13G dated February           12,
2008, which discloses that Neuberger Berman LLC, possesses shared power to
          dispose or direct the disposition of 3,941,664 shares, and shared power to vote
          3,019,628 shares. The Schedule 13G discloses that Neuberger Berman Management
          Inc. possesses shared power with Neuberger Berman LLC to vote and dispose or
          direct the disposition of 3,019,628 shares. The Schedule 13G identifies
          Neuberger Berman Inc. as the owner of 100% of both Neuberger Berman LLC and
          Neuberger Berman Management Inc.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Percentage
ownership calculations for any stockholder listed above are based on 35,098,779 shares of
our common stock outstanding as of February 29, 2008.

|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 in
2007 Messrs. Kemendo and Crawford were (while they served, before Mr. Kemendos death
and Mr. Crawfords resignation), and 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, 2007, and the
Audit Committee has selected HBM to serve in the same capacity 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 $99,000 and $95,870 for professional
services rendered for the audit of the Companys financial statements for the years
ended December 31, 2007 and 2006, respectively, and its reviews of the Companys
financial statements included in its Form 10-Qs for the first three quarters of 2007
and 2006.

Audit
Related Fees.    HBM billed the Company $19,000 and $17,320 for the years ended December
31, 2007 and 2006, respectively, for its services in connection with the review of the
Companys registration statements on Form S-3.

Tax
Fees.    HBM billed the Company an aggregate of $5,000 and $5,000 for professional
services rendered for tax compliance, tax advice and tax planning for the years ended
December 31, 2007 and 2006.

All
Other Fees.    No other fees were billed by HBM to the Company during 2007 and 2006.

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 54
| | --------------------------------------------

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

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

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

|10.1 |  | First
Amendment to First Amended and Restated Credit Agreement dated June 5, 2007, among Arena
                  Resources, Inc. and MidFirst Bank, N.A., Compass Bank , Capital One,
N.A. and SunTrust Bank (ii)
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|23.2 |  | 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 June 8, 2007.

---



# 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:                    
| |                        
| |                        
| |                        
| | Date:  March 12, 2008  
| |                        
| | By:                    
| |                        
| |                        
| |                        
| | Date:    March 12, 2008
| |                        
| | By:                    
| |                        
| |                        
| |                        
| | Date:    March 12, 2008

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 12, 2008                                                                                                                                              
| |                                                                                                                                                                   
| | /s/  Stanley McCabe                                                                                                                                               
| | Mr. Stanley McCabe                                                                                                                                                
| | Director                                                                                                                                                          
| |                                                                                                                                                                   
| | Date:    March 12, 2008                                                                                                                                           
| |                                                                                                                                                                   
| | /s/  Clayton E.
                                                                      Woodrum                                                                     
| | Mr.
                                                                      Clayton E.
                                                                      Woodrum
| | Director                                                                                                                                                          
| |                                                                                                                                                                   
| | Date:    March 12, 2008                                                                                                                                           

---





| | /s/  Anthony B.
                                                                      Petrelli                                                                     
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Mr.
                                                                      Anthony B.
                                                                      Petrelli
| | Director                                                                                                                                                           
| |                                                                                                                                                                    
| | Date: March 12, 2008                                                                                                                                               
| |                                                                                                                                                                    
| | /s/ Carl
                                                                      H. Fiddner                                                                          
| | Mr. Carl
                                                                      H. Fiddner                                                                          
| | Director                                                                                                                                                           
| |                                                                                                                                                                    
| | Date: March 12, 2008                                                                                                                                               

---



# ARENA RESOURCES, INC.

# INDEX TO FINANCIAL
STATEMENTS

|                                                             | Page
|------------------------------------------------------------ | ----
|Report of Independent Registered Public Accounting Firm      | 56  
|Balance Sheets                                               | 57  
|Statements of Operations                                     | 58  
|Statements of Stockholders' Equity                           | 59  
|Statements of Cash Flows                                     | 60  
|Notes to Financial Statements                                | 61  
|Supplemental Information on Oil and Gas Producing Activities | 78  

---



|HANSEN, BARNETT & MAXWELL, P.C.                                                                                                                                                                                                                                                                                             |                                                                       
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------
|A Professional Corporation
            CERTIFIED PUBLIC ACCOUNTANTS
                         AND
                BUSINESS CONSULTANTS
              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 Board

# 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,
2007 and 2006, 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, 2007. 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, 2007 and
2006, and the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2007 in conformity with accounting
principles generally accepted in the United States of America.

As discussed in Note 1 to the
consolidated financial statements, the Company adopted Statement of Financial Accounting
Standards No. 123R, Share-Based Payment, effective January 1, 2006.

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, 2007, 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 7, 2008 expressed an unqualified opinion
thereon.

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

Salt Lake City, UtahMarch 7, 2008

---



ARENA RESOURCES, INC.
CONDENSED BALANCE SHEETS

|December 31,                                                                                                                          | 2007 |              |  | 2006
|------------------------------------------------------------------------------------------------------------------------------------- | ---- | ------------ |  | ----
|                                                                                                                                     
|                                                                                                                                      |      |              |  |     
|ASSETS                                                                                                                                |      |              |  |     
|Current Assets                                                                                                                        |      |              |  |     
|Cash                                                                                                                                  | $    | 5,213,459    |  | $   
|Accounts receivable                                                                                                                   |      | 20,462,160   |  |     
|Joint interest billing receivable                                                                                                     |      | 3,355,537    |  |     
|Prepaid expenses                                                                                                                      |      | 133,393      |  |     
|                                                                                                                                     
|Total Current Assets                                                                                                                  |      | 29,164,549   |  |     
|                                                                                                                                     
|Property and Equipment                                                                                                                |      |              |  |     
|Oil and gas properties subject to amortization                                                                                        |      | 339,887,859  |  |     
|Drilling rigs                                                                                                                         |      | 6,254,737    |  |     
|Land, buildings, equipment and leasehold improvements                                                                                 |      | 4,512,224    |  |     
|                                                                                                                                     
|Total Property and Equipment                                                                                                          |      | 350,654,820  |  |     
|Less:  Accumulated depreciation and amortization                                                                                      |      | (30,497,371) |  |     
|                                                                                                                                     
|Net Property and Equipment                                                                                                            |      | 320,157,449  |  |     
|                                                                                                                                     
|Total Assets                                                                                                                          | $    | 349,321,998  |  | $   
|                                                                                                                                     
|                                                                                                                                      |      |              |  |     
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                  |      |              |  |     
|Current Liabilities                                                                                                                   |      |              |  |     
|Accounts payable                                                                                                                      | $    | 12,525,202   |  | $   
|Income taxes payable                                                                                                                  |      | 539,793      |  |     
|Fair value of oil derivative                                                                                                          |      | 4,446,822    |  |     
|Accrued liabilities                                                                                                                   |      | 1,704,658    |  |     
|                                                                                                                                     
|Total Current Liabilities                                                                                                             |      | 19,216,475   |  |     
|                                                                                                                                     
|Long-Term Liabilities                                                                                                                 |      |              |  |     
|Notes payable                                                                                                                         |      | 35,000,000   |  |     
|Notes payable to related parties                                                                                                      |      | -            |  |     
|Asset retirement liability                                                                                                            |      | 3,397,830    |  |     
|Deferred income taxes                                                                                                                 |      | 33,896,728   |  |     
|                                                                                                                                     
|Total Long-Term Liabilities                                                                                                           |      | 72,294,558   |  |     
|                                                                                                                                     
|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;    
34,278,779 shares and 29,337,574 shares outstanding, respectively |      | 34,279       |  |     
|Additional paid-in capital                                                                                                            |      | 190,852,118  |  |     
|Retained earnings                                                                                                                     |      | 69,726,066   |  |     
|Accumulated other comprehensive loss                                                                                                  |      | (2,801,498)  |  |     
|                                                                                                                                     
|Total Stockholders' Equity                                                                                                            |      | 257,810,965  |  |     
|                                                                                                                                     
|Total Liabilities and Stockholders' Equity                                                                                            | $    | 349,321,998  |  | $   
|                                                                                                                                     

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

---



ARENA RESOURCES, INC.
CONDENSED STATEMENTS OF OPERATIONS

|For the years ended December 31,                                                                                                       |   | 2007         |  |   | 2006         |  |   | 2005       
|-------------------------------------------------------------------------------------------------------------------------------------- | - | ------------ |  | - | ------------ |  | - | -----------
|                                                                                                                                      
|Oil and Gas Revenues                                                                                                                   | $ | 100,089,698  |  | $ | 59,760,117   |  | $ | 25,843,077 
|                                                                                                                                      
|Costs and Operating Expenses                                                                                                           |   |              |  |   |              |  |   |            
|Oil and gas production costs                                                                                                           |   | 11,500,461   |  |   | 6,453,831    |  |   | 3,832,486  
|Oil and gas production taxes                                                                                                           |   | 5,655,877    |  |   | 3,506,347    |  |   | 1,939,739  
|Realized loss on oil derivative                                                                                                        |   | 932,361      |  |   | -            |  |   | -          
|Depreciation, depletion and amortization                                                                                               |   | 17,968,062   |  |   | 7,900,099    |  |   | 2,781,504  
|Accretion expense                                                                                                                      |   | 190,904      |  |   | 127,132      |  |   | 102,585    
|General and administrative expense (which includes    $4,140,747, $897,111 and $118,732, respectively, in    stock based compensation) |   | 7,815,721    |  |   | 3,617,309    |  |   | 1,365,590  
|                                                                                                                                      
|Total Costs and Operating Expenses                                                                                                     |   | 44,063,386   |  |   | 21,604,718   |  |   | 10,021,904 
|                                                                                                                                      
|Income from Operations                                                                                                                 |   | 56,026,312   |  |   | 38,155,399   |  |   | 15,821,173 
|                                                                                                                                      
|Other Income (Expense)                                                                                                                 |   |              |  |   |              |  |   |            
|Gain from change in fair value of put options                                                                                          |   | -            |  |   | -            |  |   | 95,033     
|Other financing expense                                                                                                                |   | -            |  |   | (785,598)    |  |   | (597,773)  
|Interest income                                                                                                                        |   | 884,990      |  |   | 288,604      |  |   | -          
|Interest expense                                                                                                                       |   | (1,411,520)  |  |   | (413,437)    |  |   | (229,624)  
|                                                                                                                                      
|Net Other Expense                                                                                                                      |   | (526,530)    |  |   | (910,431)    |  |   | (732,364)  
|                                                                                                                                      
|Income Before Provision for Income Taxes                                                                                               |   | 55,499,782   |  |   | 37,244,968   |  |   | 15,088,809 
|                                                                                                                                       |   |              |  |   |              |  |   |            
|Provision for Income Taxes                                                                                                             |   | (21,057,843) |  |   | (13,977,000) |  |   | (5,628,126)
|                                                                                                                                      
|Net Income                                                                                                                             | $ | 34,441,939   |  | $ | 23,267,968   |  | $ | 9,460,683  
|                                                                                                                                      
|Basic Net Income Per Common Share                                                                                                      | $ | 1.07         |  | $ | 0.83         |  | $ | 0.42       
|Diluted Net Income Per Common Share                                                                                                    |   | 1.02         |  |   | 0.77         |  |   | 0.38       
|                                                                                                                                      
|Other Comprehensive Income (Loss)                                                                                                      |   |              |  |   |              |  |   |            
|Unrealized loss on oil derivative, net of tax                                                                                          |   | (2,801,498)  |  |   | -            |  |   | -          
|                                                                                                                                       |   |              |  |   |              |  |   |            
|Total Other Comprehensive Income                                                                                                       | $ | 31,640,441   |  | $ | 23,267,968   |  | $ | 9,460,683  
|                                                                                                                                      

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, 2005, 2006 AND 2007

|                                                                                                                                                                                                                                               | Common Stock |   |        |   |                          |   |                      |   |                  |   |                                
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | - | ------ | - | ------------------------ | - | -------------------- | - | ---------------- | - | -------------------------------
|                                                                                                                                                                                                                                               |              |   |        |   |                          |   |                      |   |                  |   |                                
|                                                                                                                                                                                                                                               | Shares       |   | Amount |   | AdditionalPaid-inCapital |   | DeferredCompensation |   | RetainedEarnings |   | OtherComprehensiveIncome (Loss)
|                                                                                                                                                                                                                                              
|Balance December 31, 2004                                                                                                                                                                                                                      | 18,265,820   | $ | 18,266 | $ | 18,462,378               | $ | (234,277)            | $ | 2,555,476        | $ | -                              
|Warrants exercised for cash, net                                                                                                                                                                                                               | 5,942,546    |   | 5,942  |   | 17,868,679               |   | -                    |   | -                |   | -                              
|Expiration of warrants                                                                                                                                                                                                                         | -            |   | -      |   | -                        |   | -                    |   | -                |   | -                              
|Issuance of common stock in property acquisition                                                                                                                                                                                               | 50,000       |   | 50     |   | 340,600                  |   | -                    |   | -                |   | -                              
|Issuance for cash, net                                                                                                                                                                                                                         | 1,941,748    |   | 1,942  |   | 9,534,996                |   | -                    |   | -                |   | -                              
|Issuance of warrants for services relating to private offering                                                                                                                                                                                 | -            |   | -      |   | 597,773                  |   | -                    |   | -                |   | -                              
|Cancellation of stock issued in property acquisition                                                                                                                                                                                           | (710)        |   | -      |   | (2,485)                  |   | -                    |   | -                |   | -                              
|Amortization of deferred compensation                                                                                                                                                                                                          | -            |   | -      |   | -                        |   | 118,732              |   | -                |   | -                              
|Net income                                                                                                                                                                                                                                     | -            |   | -      |   | -                        |   | -                    |   | 9,460,683        |   | -                              
|                                                                                                                                                                                                                                              
|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)                    
|                                                                                                                                                                                                                                              

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,                                                        |   | 2007          |  |   | 2006         |  |   | 2005        
|--------------------------------------------------------------------------------------- | - | ------------- |  | - | ------------ |  | - | ------------
|                                                                                       
|Cash Flows From Operating Activities                                                    |   |               |  |   |              |  |   |             
|Net income                                                                              | $ | 34,441,939    |  | $ | 23,267,968   |  | $ | 9,460,683   
|Adjustments to reconcile net income to net cash       provided by operating activities: |   |               |  |   |              |  |   |             
|Warrants issued for financing expense                                                   |   | -             |  |   | 785,598      |  |   | 597,773     
|Depreciation, depletion and amortization                                                |   | 17,968,062    |  |   | 7,900,099    |  |   | 2,781,504   
|Provision for income taxes                                                              |   | 21,057,843    |  |   | 13,977,000   |  |   | 5,628,126   
|Gain from change in fair value of put option                                            |   | -             |  |   | -            |  |   | (95,033)    
|Gain on sale of equipment                                                               |   | (881)         |  |   | -            |  |   | -           
|Stock based compensation                                                                |   | 4,140,747     |  |   | 897,111      |  |   | 118,732     
|Accretion of asset retirement obligation                                                |   | 190,904       |  |   | 127,132      |  |   | 102,585     
|Changes in assets and liabilities:                                                      |   |               |  |   |              |  |   |             
|Accounts and joint interest receivable                                                  |   | (14,165,921)  |  |   | (6,330,466)  |  |   | (2,109,992) 
|Other changes in deferred income taxes                                                  |   | -             |  |   | (320,058)    |  |   | (82,521)    
|Prepaid expenses                                                                        |   | (30,808)      |  |   | (67,149)     |  |   | (2,300)     
|Excess tax benefits from share-based payment arrangements                               |   | (4,298,722)   |  |   | (1,851,815)  |  |   | -           
|Accounts payable and accrued liabilities                                                |   | (814,999)     |  |   | 8,729,479    |  |   | 4,419,545   
|                                                                                       
|Net Cash Provided by Operating Activities                                               |   | 58,488,164    |  |   | 47,114,899   |  |   | 20,819,102  
|                                                                                       
|Cash Flows from Investing Activities                                                    |   |               |  |   |              |  |   |             
|Proceeds from sale of property and equipment                                            |   | 7,000         |  |   | -            |  |   | 735,000     
|Proceeds from sale of oil and gas properties                                            |   | 1,915,640     |  |   | -            |  |   | -           
|Purchase and development of oil and gas properties                                      |   | (168,582,803) |  |   | (97,576,774) |  |   | (34,665,614)
|Purchase of buildings, machinery and office equipment                                   |   | (8,615,501)   |  |   | (672,130)    |  |   | (1,236,902) 
|                                                                                       
|Net Cash Used in Investing Activities                                                   |   | (175,275,664) |  |   | (98,248,904) |  |   | (35,167,516)
|                                                                                       
|Cash Flows From Financing Activities                                                    |   |               |  |   |              |  |   |             
|Proceeds from issuance of common stock and warrants, net of offering costs              |   | 95,089,458    |  |   | 29,788,879   |  |   | 9,536,938   
|Proceeds from exercise of warrants, net of offering costs                               |   | 540,295       |  |   | 150,000      |  |   | 17,874,621  
|Proceeds from exercise of options                                                       |   | 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                                                               |   | 65,700,000    |  |   | 30,300,000   |  |   | -           
|Payment of notes payable                                                                |   | (50,400,000)  |  |   | (11,000,000) |  |   | (10,000,000)
|                                                                                       
|Net Cash Provided by Financing Activities                                               |   | 117,080,975   |  |   | 51,736,875   |  |   | 17,411,559  
|                                                                                       
|Net Increase in Cash                                                                    |   | 293,475       |  |   | 602,870      |  |   | 3,063,145   
|                                                                                        |   |               |  |   |              |  |   |             
|Cash at Beginning of Period                                                             |   | 4,919,984     |  |   | 4,317,114    |  |   | 1,253,969   
|                                                                                       
|Cash at End of Period                                                                   | $ | 5,213,459     |  | $ | 4,919,984    |  | $ | 4,317,114   
|                                                                                       

|For the years ended December 31,                                                   |   | 2007      |  |   | 2006      |  |   | 2005   
|---------------------------------------------------------------------------------- | - | --------- |  | - | --------- |  | - | -------
|                                                                                  
|Supplemental Cash Flow Information                                                 |   |           |  |   |           |  |   |        
|Cash paid for income taxes                                                         | $ | -         |  | $ | 329,986   |  | $ | 82,521 
|Cash paid for interest                                                             | $ | 1,463,328 |  | $ | 240,815   |  | $ | 199,624
|                                                                                  
|Non-Cash Investing and Financing Activities                                        |   |           |  |   |           |  |   |        
|Common stock issued for properties                                                 | $ | 204,750   |  | $ | 3,933,926 |  | $ | 340,650
|Asset retirement obligation incurred in property       acquisition and development |   | 1,001,613 |  |   | 607,853   |  |   | 144,769

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.

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
accounts receivable, joint interest billings receivable, accounts payable, 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 places its cash with a high credit quality financial
institution. Substantially all of the Companys accounts receivable is 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. Investments in unproved properties and major development projects
are not amortized until proved reserves associated with the projects can be determined or
until impairment occurs. 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 amortization and depletion per
barrel-of-oil-equivalent rate, by year for the years ended December 31, 2007, 2006, and
2005.

|                                                   | 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, 2007 and 2006 the
Company had depreciation of $306,133 and $133,125, respectively, on the company owned
drilling rigs. There was no depreciation expense on the rigs for the year ended December
31, 2005 because the Company did not own any drilling rigs during 2005.

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

One building has not been placed in
service and, therefore, the Company has not recorded any depreciation on this building.
Depreciation expense was $62,921, $25,864 and $22,659 for the years ended December 31,
2007, 2006, and 2005, respectively. No depreciation was taken during 2006 or 2005 on
buildings as there were no company owned buildings during those time periods. An aggregate
value of $530,000 has been attributed to the land on which the buildings sit and is not
depreciated.

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, 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. During the year ended December 31, 2005,
sales to two customers represented 72% and 12% of total sales, respectively. At December
31, 2005, these two customers made up 77% and 8% of accounts receivable, respectively. 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. Effective January 1, 2006, the
Company adopted Statements of Financial Standards 123R, Share-Based Payment (SFAS
123R), using the modified prospective method. 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). Prior to adoption of SFAS 123R, the Company accounted for stock-based
compensation plans under Accounting Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees (APB 25). Under APB 25,
no compensation expense is recorded when the terms of the award are fixed and the exercise
price of the employee stock option equals or exceeds the fair value of the underlying
stock on the date of grant.

---



# ARENA RESOURCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock-based employee compensation
incurred for the years ended December 31, 2007, 2006, and 2005 was $4,140,747, $897,111
and $118,732, respectively.

Prior to January 1, 2006, the Company
determined the value of stock-based compensation arrangements under the provisions of APB
Opinion No. 25 Accounting for Stock Issued to Employees and made pro forma
disclosures required under SFAS No. 123, Accounting for Stock-Based
Compensation. Had compensation expense for stock option grants been determined based
on the fair value at the grant dates consistent with the method prescribed in SFAS No.
123, the Companys net income and net income per share would have been adjusted to
the pro forma amounts below for the year ended December 31, 2005:

|For the Year Ended December 31,                                                                      |   | 2005     
|---------------------------------------------------------------------------------------------------- | - | ---------
|                                                                                                    
|Net income, as reported                                                                              | $ | 9,460,683
|Add:   Stock based employee compensation expense included                                            |   |          
|in net income, net of related tax effects                                                            |   | 74,444   
|Deduct:  Total stock-based employee compensation expense                                             |   |          
|determined under the fair value
     based method for all         awards, net of related tax effects |   | (555,051)
|                                                                                                    
|Pro Forma Net Income                                                                                 | $ | 8,980,076
|                                                                                                    
|Income Per Common Share                                                                              |   |          
|Basic, as reported                                                                                   | $ | 0.42     
|Basic, pro forma                                                                                     |   | 0.40     
|                                                                                                     |   |          
|Diluted, as reported                                                                                 | $ | 0.38     
|Diluted, pro forma                                                                                   |   | 0.36     
|                                                                                                    

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.

---



# ARENA RESOURCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Recent Accounting
Pronouncements In September 2006, the FASB issued SFAS
No. 157, Fair Value Measurements (SFAS No. 157). SFAS
No. 157 establishes a common definition for fair value to be applied to United States
GAAP guidance requiring use of fair value, establishes a framework for measuring fair
value, and expands disclosure about such fair value measurements. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007. The Company is
currently assessing the impact of SFAS No. 157 on its consolidated financial position
and results of operations.

In February 2007, the FASB
issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159). SFAS 159 permits entities to measure many financial instruments and
certain other assets and liabilities at fair value on an instrument-by-instrument basis.
SFAS 159 allows entities to measure eligible items at fair value at specified election
dates, with resulting changes in fair value reported in earnings. SFAS 159 is effective as
of the beginning of an entitys first fiscal year that begins after November 15,
2007. The Company does not expect the adoption of SFAS 159 to have a material impact on
its results of operations or financial condition.

In December 2007, the FASB issued
Statements of Financial Accounting Standards No. 141 (revised 2007), Business
Combinations (SFAS 141R) and No. 160, Noncontrolling Interests in
Consolidated Financial Statements  an amendment to ARB No. 51 (SFAS
160).  Both SFAS 141R and SFAS 160 are to be adopted effective January 1,
2009.  SFAS 141R requires the application of several new or modified accounting
concepts that, due to their complexity, could introduce a degree of volatility in periods
subsequent to a material business combination.  SFAS 141R requires that all
business combinations result in assets and liabilities acquired being recorded at their
fair value, with limited exceptions.  Other areas related to business
combinations that will require changes from current GAAP include:  contingent
consideration, acquisition costs, contingencies, restructuring costs, in process research
and development and income taxes, among others.  SFAS 160 will primarily impact
the presentation of minority or noncontrolling interests within the Balance Sheet and
Statement of Operations as well as the accounting for transactions with noncontrolling
interest holders.

# NOTE 2  EARNINGS
PER SHARE INFORMATION

|For the years ended December 31,                   |   | 2007       |  |   | 2006       |  |   | 2005      
|-------------------------------------------------- | - | ---------- |  | - | ---------- |  | - | ----------
|                                                  
|Net Income                                         | $ | 34,441,939 |  | $ | 23,267,968 |  | $ | 9,460,683 
|                                                  
|Basic Weighted-Average Common Shares Outstanding   |   | 32,071,279 |  |   | 28,133,080 |  |   | 22,328,140
|Effect of dilutive securities                      |   |            |  |   |            |  |   |           
|Warrants                                           |   | 325,034    |  |   | 488,522    |  |   | 1,677,546 
|Stock options                                      |   | 1,271,616  |  |   | 1,427,906  |  |   | 1,194,526 
|                                                  
|Diluted Weighted-Average Common Shares Outstanding |   | 33,667,929 |  |   | 30,049,508 |  |   | 25,200,212
|                                                  
|Basic Income Per Common Share                      |   |            |  |   |            |  |   |           
|Net income                                         |   | 1.07       |  |   | 0.83       |  |   | 0.42      
|                                                   |   |            |  |   |            |  |   |           
|Diluted Income Per Common Share                    |   |            |  |   |            |  |   |           
|Net Income                                         |   | 1.02       |  |   | 0.77       |  |   | 0.38      
|                                                  

---



# ARENA RESOURCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

# NOTE 3  PROPERTY AND
EQUIPMENT

Acquisition of Oil and Gas
Properties During 2005, the Company acquired working interests in
leases near its Fuhrman Mascho properties. The working interests acquired ranged from
20.2% to 100%, and the net revenue interest ranged from 16.1% to 79.2%. Total acquisition
costs, included 10,000 shares of restricted common stock valued at $7.91 per share, or
$79,050, and cash of $1,327,538. The pro forma impact of these acquisitions was not
material to the Companys historical results of operations.

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.

During 2006, the Company acquired
15,573 acres of lease rights in Kansas at a total cost of $543,350 in various locations.
The pro forma impact of this acquisition was not material to the Companys historical
results of operations.

On December 11, 2007, we consummated
a transaction pursuant to which we 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 our
results of operations from that date.

We acquired the Properties for their
current production, as well as for the approximately 120 additional drilling locations
which we estimate 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:

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

---



# ARENA RESOURCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 and 2006, respectively:

|For the years ended December 31, |   | 2007        |  |   | 2006      
|-------------------------------- | - | ----------- |  | - | ----------
|                                
|Oil and Gas Revenues             | $ | 104,805,391 |  | $ | 61,813,319
|Net Income                       |   | 33,876,318  |  |   | 21,850,054
|                                
|Basic Net Income Per Share       | $ | 1.06        |  | $ | 0.78      
|Diluted Net Income Per Share     |   | 1.01        |  |   | 0.73      

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.

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.

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.

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 partially
renovated at a cost of $411,183 and placed into service during 2007. It is anticipated
that the remainder of the building will be renovated 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. It is anticipated that the building will be renovated and placed into service
during 2008. The Company will not depreciate this building until it is occupied
and in use.

---



# ARENA RESOURCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

# 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,                                              |   | 2007         |  |   | 2006         |  |   | 2005       
|--------------------------------------------------------- | - | ------------ |  | - | ------------ |  | - | -----------
|                                                         
|Unproved oil and gas properties                           | $ | 5,642,624    |  | $ | 5,099,974    |  | $ | 692,783    
|Proved oil and gas properties                             |   | 334,245,235  |  |   | 166,608,226  |  |   | 69,077,903 
|Drilling rigs                                             |   | 6,254,737    |  |   | 1,996,899    |  |   | 1,191,126  
|Land, buildings, equipment and leasehold improvements     |   | 4,512,224    |  |   | 180,261      |  |   | 132,863    
|                                                         
|Total capitalized costs                                   |   | 350,654,820  |  |   | 173,885,360  |  |   | 71,094,675 
|Less accumulated depletion, depreciation and amortization |   | (30,497,371) |  |   | (12,246,727) |  |   | (4,346,628)
|                                                         
|Net Capitalized Costs                                     | $ | 320,157,449  |  | $ | 161,638,633  |  | $ | 66,748,047 
|                                                         

# Net Costs Incurred in Oil and Gas Producing Activities

|For the Years Ended December 31,                                        |   | 2007        |  |   | 2006        |  |   | 2005      
|----------------------------------------------------------------------- | - | ----------- |  | - | ----------- |  | - | ----------
|                                                                       
|Acquisition of proved properties (net of proceeds from property sale)   |   | 53,554,064  |  |   | 7,122,176   |  |   | 1,406,588 
|Acquisition of unproved properties (net of proceeds from property sale) |   | 542,650     |  |   | 3,282,635   |  |   | (160,454) 
|Exploration costs                                                       |   | -           |  |   | 1,124,556   |  |   | 464,656   
|Development costs                                                       |   | 113,084,344 |  |   | 89,797,285  |  |   | 32,557,989
|                                                                       
|Total Net Costs Incurred                                                | $ | 167,181,058 |  | $ | 101,326,652 |  | $ | 34,268,779
|                                                                       

# NOTE 5  NOTES
PAYABLE

Notes Payable In April 2005, the Company entered into an agreement that amended the
credit facility established in 2004 to increase its credit facility to $50,000,000, with
an increased borrowing base of $35,000,000. The interest rate was a floating rate equal to
the 30, 60 or 90 day LIBOR rate plus 2.25%, and is 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
banks estimates of the future net cash flows of the Companys oil and natural
gas properties. In order to obtain the revolving credit facility, loans from two officers
were subordinated to the position of the bank. The Company is required under the terms of
the credit facility to maintain a tangible net worth of $12,000,000, maintain a 5-to-1
ratio of income before interest, taxes, depreciation, depletion and amortization to
interest expense and maintain a current asset to current liability ratio of 1-to-1.

In April 2006, the Company entered
into a new credit agreement increasing the Companys credit facility to $150,000,000
with a $65,000,000 borrowing base. Additionally, this new agreement adjusted the interest
rate to be equal to the 30, 60 or 90 day LIBOR rate plus 2%, removed the requirement to
maintain a tangible net worth but added a requirement to a rolling four quarter basis of a
maximum leverage ratio of no more than 2.5-to-1. All other conditions of the credit
facility remained the same.

---



# ARENA RESOURCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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%. Additionally, the subordination of the loans from two officers was released.
All other terms and conditions remained the same. At December 31, 2007, the Company was in
compliance with all covenants and $35,000,000 was outstanding under this credit facility,
with an additional $575,162 reserved under the revolving credit facility as collateral for
standby letters of credit issued to various states.

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 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, 2005, 2006 and 2007 is as follows:

|                                          |  
|----------------------------------------- | -
|Balance, January 1, 2005                  | $
|Liabilities incurred                      |  
|Accretion expense                         |  
|                                         
|Balance, December 31, 2005                |  
|                                         
|Liabilities incurred                      |  
|Accretion expense                         |  
|                                         
|Balance, December 31, 2006                | $
|                                         
|Liabilities incurred                      |  
|Accretion expense                         |  
|Deletion related to property divestitures |  
|Liabilities settled                       |  
|                                         
|Balance, December 31, 2007                | $
|                                         

# 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.

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.

---



# ARENA RESOURCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Common Stock Issued in
Offerings  In July 2005, the Company issued 1,941,748 shares of
common stock, valued at $10,000,000, or $5.15 per share, in a private placement. As of
December 31, 2005, the Company had paid $463,062 in related offering costs. As a part of
the private placement, the Company also assigned to certain of the investors call options
to purchase 299,316 shares of its common stock at $4.25 per share. The call options were
granted in connection with the issuance of shares of the Companys common stock, as
partial consideration for its purchase of interests in the Furhman-Mascho lease. The call
terms in the option agreements provide the Company with the right to repurchase the shares
issued in the Furhman-Mascho transaction at a price of $4.25 per share, at any time prior
to November 1, 2006. The option agreements further provide the stockholders who received
shares in that transaction the right to require the Company to repurchase its stock from
them at a price of $3.50 per share (the public trading price of the common stock at the
time of the Furhman-Mascho transaction) for a period of thirty days following November 1,
2006. The call options were exercised during 2006.

The proceeds from the offering were
allocated to the common stock issued and the call options transferred based on their
relative fair values and resulted in allocating $9,033,291 to the 1,941,748 shares of
common stock and $503,647 to the 299,316 call options. The market value of the common
stock on July 11, 2005 was $6.01 per share. The fair value of the call options was $2.175
per share determined by the Black-Scholes option pricing model using the following
assumptions: volatility of 38.3%, risk-free interest rate of 3.6%, dividend yield of 0%
and life of 1.0 years.

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 $95,085,358 million, net of offering
costs and expenses paid of $5,364,642.

Common Stock Issued from
Warrant Exercises  During the year ended December 31, 2005, warrant
holders exercised 375,600 warrants with an exercise price of $0.875 per share, 2,234,246
warrants with an exercise price of $2.50 per share, 3,330,700 warrants with an exercise
price of $3.66 per share and 2,000 warrants with an exercise price of $4.50 per share for
$18,113,627. The Company paid $239,006 in costs related to the call of a portion of those
warrants.

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.

---



# ARENA RESOURCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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 the July 2005 private placement, 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, 2007, 2006 and 2005 are summarized as
follows:

|                                     | 2007      | 2006                           | 2005    
|------------------------------------ | --------- | ------------------------------ | --------
|                                     |           |                                |         
|                                     | Warrants  | Weighted-AverageExercise Price | Warrants
|                                    
|Outstanding at beginning of the year | 536,658   | $                              | 4.25    
|Issued                               | -         |                                | -       
|Expired                              | -         |                                | -       
|Exercised                            | (277,950) |                                | 3.08    
|                                    
|Outstanding at end of year           | 258,708   | $                              | 4.50    
|                                    

---



# ARENA RESOURCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock purchase warrants outstanding
at December 31, 2007 are as follows:

|WarrantsOutstanding | Exercise Price | Weighted-AverageRemainingContractual Life
|------------------- | -------------- | -----------------------------------------
|                   
|65,904              |                | $  3.745                                 
|117,076             |                | 4.50                                     
|75,728              |                | 5.15                                     
|                   
|258,708             |                |                                          
|                   

# 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 and 2006.
The amendments effectively increased the number of shares available under the plan to
5,000,000. There are 640,000 options still available for grant at December 31, 2007.

In January 2005 and October 2005, the
Company granted nonqualified stock options to directors and employees to purchase 750,000
shares and 100,000 shares of common stock at $4.15 and $10.425, respectively.

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.

Throughout 2007 the Company issued
1,525,000 stock options to employees and directors. Following is a table reflecting these
issuances 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    |  |               
|                  |  |              |  |               

---



# ARENA RESOURCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

All granted options vest at the rate
of 20% each year over five years beginning one year from the date granted. A summary of
the status of the stock options as of December 31, 2007 and changes during the years ended
December 31, 2007, 2006 and 2005 is as follows:

|                                                                 | 2007      | 2006                           | 2005   
|---------------------------------------------------------------- | --------- | ------------------------------ | -------
|                                                                 |           |                                |        
|                                                                 | Options   | Weighted-AverageExercise Price | Options
|                                                                
|Outstanding at beginning of the year                             | 2,610,000 | $                              | 3.31   
|Issued                                                           | 1,525,000 |                                | 26.45  
|Forfeited                                                        | (115,000) |                                | 3.35   
|Exercised                                                        | (570,000) |                                | 3.25   
|                                                                
|Outstanding at end of year                                       | 3,450,000 |                                | 13.55  
|                                                                
|Exercisable at end of  year                                      | 1,050,000 | $                              | 2.33   
|                                                                
|Weighted average fair value of
  options granted during the year |           | $                              | 10.84  
|                                                                

The following are the Black-Scholes
weighted-average assumptions used for options granted during the years ended December 31,
2007, 2006 and 2005:

|                        |  | 2007       |  |  | 2006    |  |  | 2005   
|----------------------- |  | ---------- |  |  | ------- |  |  | -------
|                        |  |            |  |  |        
|Risk free interest rate |  | 4.30%      |  |  | 4.92%   |  |  | 3.73%  
|Expected life           |  | 4.25 years |  |  | 5 years |  |  | 5 years
|Dividend yield          |  | -          |  |  | -       |  |  | -      
|Volatility              |  | 47%        |  |  | 44%     |  |  | 32%    

The expected life of stock options
represents the period of time that the stock options granted are expected to be
outstanding based on historical exercise trends. The expected volatility is based on the
historical price volatility of the Companys common stock. 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.

As of December 31, 2007, there was
approximately $13,016,105 of unrecognized compensation cost related to stock options that
will be recognized over a weighted average period of 2.81 years. The aggregate intrinsic
value of options expected to vest at December 31, 2007 and 2006 was $56,442,451
$47,096,550, respectively. The aggregate intrinsic value of options exercisable at
December 31, 2007 and 2006 was $41,348,000 and $19,551,650, respectively. The year end
intrinsic values are based on a December 31, 2007 and 2006 closing price of $41.71 and
$21.36 (adjusted for the Companys stock split), respectively. The 570,000 and
340,000 options exercised during 2007 and 2006, respectively, had an intrinsic value of
$12,122,600 and $5,075,600, respectively. During the years ended December 31, 2007 and
2006, 590,000 and 570,000, respectively, options vested. The fair value of these options
was 837,021 and 661,698, respectively.

---



# ARENA RESOURCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Companys tax returns
include deductions for options exercised during the years ended December 31, 2007 and 2006
in excess of cumulative compensation costs related to those options recognized for
financial reporting purposes. Accordingly, the Company has recognized a realized tax asset
and recorded it against additional paid-in capital. The excess tax benefit recorded for
the years ended December 31, 2007 and 2006 were $4,298,722 and $1,851,813, respectively.

The following table summarizes
information related to the Companys stock options outstanding at December 31, 2007:

|               |           |                    | Options Outstanding |                                                        |          
|-------------- | --------- | ------------------ | ------------------- | ------------------------------------------------------ | ---------
|               |           |                    |                    
|Exercise price |           | Number Outstanding |                     | Weighted-Average Remaining Contractual Life (in years) |          
|              
|$              | 1.85      |                    | 1,140,000           |                                                        | 0.75     
|               | 2.40      |                    | 60,000              |                                                        | 1.03     
|               | 4.15      |                    | 585,000             |                                                        | 2.50     
|               | 10.425    |                    | 60,000              |                                                        | 3.30     
|               | 13.70     |                    | 80,000              |                                                        | 3.95     
|               | 18.675    |                    | 100,000             |                                                        | 4.53     
|               | 19.23     |                    | 600,000             |                                                        | 4.56     
|               | 23.42     |                    | 200,000             |                                                        | 4.83     
|               | 26.96     |                    | 100,000             |                                                        | 5.07     
|               | 35.53     |                    | 50,000              |                                                        | 5.33     
|               | 35.54     |                    | 50,000              |                                                        | 5.35     
|               | 37.59     |                    | 300,000             |                                                        | 5.42     
|               | 37.85     |                    | 125,000             |                                                        | 5.46     
|              
|               | 3,450,000 |                    | 3.01                |                                                        | 1,050,000
|              

# 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 $575,162 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.

---



# ARENA RESOURCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

# NOTE 11  INCOME
TAXES

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. At December 31, 2006, the Company had alternative minimum
income tax of $304,000, but had made sufficient estimated tax payments as to not have a
year end taxes payable. The provision for income taxes consisted of the following:

|Provision for income taxes |   | 2007       |  |   | 2006       |  |   | 2005     
|-------------------------- | - | ---------- |  | - | ---------- |  | - | ---------
|                           |  
|Current                    | $ | 539,793    |  | $ | 304,000    |  | $ | 365,606  
|Deferred                   |   | 20,518,050 |  |   | 13,673,000 |  |   | 5,262,520
|                           |  
|                           | $ | 21,057,843 |  | $ | 13,977,000 |  | $ | 5,628,126
|                           |  

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

|Rate Reconciliation                          |   | 2007       |  |   | 2006       |  |   | 2005     
|-------------------------------------------- | - | ---------- |  | - | ---------- |  | - | ---------
|                                             |  
|Tax at federal statutory rate (34%)          | $ | 18,869,926 |  | $ | 12,663,000 |  | $ | 5,130,195
|Non-deductible expenses (non-taxable income) |   | 13,939     |  |   | 27,000     |  |   | -        
|State tax, net of federal benefit            |   | 1,831,493  |  |   | 1,229,000  |  |   | 497,931  
|Other                                        |   | 342,485    |  |   | 58,000     |  |   | -        
|                                             |  
|                                             | $ | 21,057,843 |  | $ | 13,977,000 |  | $ | 5,628,126
|                                             |  

As of December 31, 2007, the Company
had net operating loss and IDC carry forwards for federal income tax reporting purposes of
approximately $66 million which, if unused, will expire in 2022, 2025, 2026 and 2027. The
Company also has minimum tax credits of $862,000 which do not expire.

The net deferred tax liability
consisted of the following:

|Deferred taxes:                      |   | 2007       |  |   | 2006       |  |   | 2005      
|------------------------------------ | - | ---------- |  | - | ---------- |  | - | ----------
|                                     |  
|Deferred tax liabilities             |   |            |  |   |            |  |   |           
|Property and equipment               | $ | 63,011,335 |  | $ | 37,448,700 |  | $ | 11,102,307
|                                     |  
|Total deferred tax liabilities       |   | 63,011,335 |  |   | 37,448,700 |  |   | 11,102,307
|                                     |  
|Deferred tax assets                  |   |            |  |   |            |  |   |           
|Stock-based compensation             |   | 1,808,770  |  |   | 493,775    |  |   | 203,078   
|Minimum tax credit                   |   | 862,000    |  |   | 346,744    |  |   | 401,109   
|Unrealized loss on oil derivative    |   | 1,658,665  |  |   | -          |  |   | -         
|Operating loss and IDC carryforwards |   | 24,785,172 |  |   | 17,285,457 |  |   | 3,310,511 
|                                     |  
|Total deferred tax assets            |   | 29,114,607 |  |   | 18,125,976 |  |   | 3,914,698 
|                                     |  
|Net deferred income tax liability    | $ | 33,896,728 |  | $ | 19,322,724 |  | $ | 7,187,609 
|                                     |  

---



# ARENA RESOURCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

# 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. The Company did not have any derivative instruments in 2006
or 2005. The change in fair value of the derivative instrument was recorded to other
comprehensive income for the year ended December 31, 2007. The cash settlements of cash
flow hedges are recorded as a loss on derivatives 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 in earnings as derivative expense (income).

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, 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 $932,361 for 2007.

As of December 31, 2007, the Company
had entered into the following costless collar contracts accounted for as a cash flow
hedge:

|Commodity     | Period                      | Volume  | Floor   | Ceiling
|------------- | --------------------------- | ------- | ------- | -------
|WTI Crude Oil | August 2007 - December 2008 | 458,000 | $ 65.00 | $ 80.50

At December 31, 2007, the Company
recognized a liability of $4,446,822 related to the estimated fair value of the derivative
instrument. Based on the estimated future commodity prices as of December 31, 2007, the
Company would realize a $2,801,498 loss, net of taxes, as a loss on derivative instrument
during the next 12 months. These losses are expected to be reclassified based on the
schedule of oil and gas volumes stipulated in the costless collar contracts.

# 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, 2007,
the Company made contributions to the plan totaling $109,658. The plan was established
during 2007, so there were no contributions made prior to 2007.

---



# ARENA RESOURCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

# NOTE 14 
SUBSEQUENT EVENTS (UNAUDITED)

Subsequent to December 31, 2007, the
Company has borrowed an additional $5,500,000 on its credit facility described in Note 5.

Subsequent to December 31, 2007, option
holders exercised a total of 820,000 options for net proceeds of $1,448,000.

# NOTE 15  QUARTERLY
FINANCIAL DATA (UNAUDITED)

Quarterly
financial information is presented in the following summary:

|                             | 2005              
|---------------------------- | ------------------
|                             |                   
|                             | Three Months Ended
|                             |                   
|                             |                   
|                             |                   
|Revenues                     | $                 
|Operating Income             |                   
|Net Income                   |                   
|Basic Net Income Per Share   | $                 
|Diluted Net Income Per Share |                   

|                             | 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 |                   

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,                             |   | 2007         |  |   | 2006         |  |   | 2005       
|------------------------------------------------------------ | - | ------------ |  | - | ------------ |  | - | -----------
|                                                            
|Oil and gas revenues                                         | $ | 100,089,698  |  | $ | 59,760,117   |  | $ | 25,843,077 
|Production costs                                             |   | (11,500,461) |  |   | (6,453,830)  |  |   | (3,832,487)
|Production taxes                                             |   | (5,655,877)  |  |   | (3,506,347)  |  |   | (1,939,739)
|Realized loss on oil derivative                              |   | (932,361)    |  |   | -            |  |   | -          
|Depreciation, depletion, amortization and accretion          |   | (18,158,966) |  |   | (8,027,231)  |  |   | (2,884,089)
|General and administrative (exclusive of corporate overhead) |   | (3,011,753)  |  |   | (894,499)    |  |   | (613,762)  
|                                                            
|Results of operations before income taxes                    |   | 60,830,280   |  |   | 40,878,210   |  |   | 16,573,000 
|Provision for income taxes                                   |   | (22,507,204) |  |   | (15,124,938) |  |   | (6,132,010)
|                                                            
|Results of Oil and Gas Producing Operations                  | $ | 38,323,076   |  | $ | 25,753,272   |  | $ | 10,440,990 
|                                                            

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.

|For the Years Ended December 31,          | 2007        |             | 2006 |            | 2005       
|----------------------------------------- | ----------- | ----------- | ---- | ---------- | -----------
|                                          |             |             |      |            |            
|                                          | Oil (1)     | Gas (1)     |      | Oil (1)    | Gas (1)    
|                                          |            
|Proved Developed and Undeveloped Reserves
|Beginning of year                         | 36,064,273  | 42,424,199  |      | 24,867,189 | 31,982,079 
|Purchases of minerals in place            | 7,021,972   | 4,330,246   |      | 3,644,144  | 2,605,212  
|Improved recovery and development         | 6,016,660   | 6,852,346   |      | 8,952,460  | 10,206,642 
|Production                                | (1,316,023) | (1,503,611) |      | (900,616)  | (989,991)  
|Revision of previous estimate             | (373,560)   | (4,028,218) |      | (498,904)  | (1,379,743)
|                                         
|End of year                               | 47,413,322  | 48,074,962  |      | 36,064,273 | 42,424,199 
|                                         
|Proved Developed at end of year           | 14,951,794  | 30,783,255  |      | 11,566,186 | 29,679,976 
|                                         

---



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

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

Standardized Measure of Discounted Cash Flows

|December 31,                                                         |   | 2007            |  |   | 2006          |  |   | 2005         
|-------------------------------------------------------------------- | - | --------------- |  | - | ------------- |  | - | -------------
|                                                                    
|Future cash flows                                                    | $ | 4,634,645,500   |  | $ | 2,206,997,329 |  | $ | 1,629,948,750
|Future production costs                                              |   | (790,284,047)   |  |   | (436,830,228) |  |   | (281,685,991)
|Future development costs                                             |   | (321,485,125)   |  |   | (150,553,635) |  |   | (95,765,594) 
|Future income taxes                                                  |   | (1,254,982,170) |  |   | (578,112,324) |  |   | (423,161,523)
|                                                                    
|Future net cash flows                                                |   | 2,267,894,158   |  |   | 1,041,501,142 |  |   | 829,335,642  
|10% annual discount for estimated timing of cash flows               |   | (991,727,804)   |  |   | (496,061,467) |  |   | (383,735,076)
|                                                                    
|Standardized Measure of Discounted Cash Flows                        | $ | 1,276,166,354   |  | $ | 545,439,675   |  | $ | 445,600,566  
|                                                                    
|                                                                    
|                                                                    
|Changes in Standardized Measure of Discounted Future Net Cash Flows 
|                                                                    
|                                                                     |   | 2007            |  |   | 2006          |  |   | 2005         
|                                                                    
|Beginning of the year                                                | $ | 545,439,675     |  | $ | 445,600,566   |  | $ | 205,240,750  
|Purchase of minerals in place                                        |   | 325,058,027     |  |   | 18,153,711    |  |   | 33,405,120   
|Extensions, discoveries and improved recovery,    less related costs |   | -               |  |   | -             |  |   | 5,962,820    
|Development costs incurred during the year                           |   | 362,283,025     |  |   | 328,401,017   |  |   | 189,832,736  
|Sales of oil and gas produced, net of production costs               |   | (82,949,751)    |  |   | (53,324,929)  |  |   | (21,991,034) 
|Accretion of discount                                                |   | 81,870,181      |  |   | 58,727,964    |  |   | 28,467,073   
|Net changes in price and production costs                            |   | 592,749,069     |  |   | (106,369,988) |  |   | 191,917,618  
|Net change in estimated future development costs                     |   | (111,175,136)   |  |   | (53,640,718)  |  |   | (36,307,702) 
|Revision of previous quantity estimates                              |   | (7,424,163)     |  |   | (14,276,840)  |  |   | 87,175,031   
|Revision of estimated timing of cash flows                           |   | (26,688,222)    |  |   | (8,582,606)   |  |   | (111,387,288)
|Net change in income taxes                                           |   | (402,996,351)   |  |   | (69,248,502)  |  |   | (126,714,558)
|                                                                    
|End of the Year                                                      | $ | 1,276,166,354   |  | $ | 545,439,675   |  | $ | 445,600,566  
|                                                                    

---