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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

[ x ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2009

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________to________________

Commission file number 000-51612

(Exact name of registrant as specified in its charter)

Nevada	68-0542002
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2441 High Timbers Dr, Suite 120 The Woodlands, Texas	77380
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code 281.298.9555

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

None	N/A
Title of each class	Name of each exchange on which registered

Securities registered under Section 12(g) of the Act:

Common Stock, $0.001 par value
(Title of class)

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

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 has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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[ ]

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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes[ ] No[ ] (Not applicable)

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer [ ]	(Do not check if a smaller reporting	Accelerated filer [ ]
Non-accelerated filer [ ]	company)	Smaller reporting company [ x ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes[ ] No[ x ]

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $6,111,118 based on a price of $0.17 per share, being the closing price of the registrant’s stock as of March 31, 2009.

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 37,700,250 shares of common stock as of December 15, 2009.

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980). Not Applicable

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PART I

Forward Looking Statements.

This report contains forward-looking statements. Forward-looking statements are projections in respect of future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “intends”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in Item 1A “Risk Factors” commencing on page 4 of this report, which may cause our or our industry’s actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance expressed or implied by these forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or performance. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

In this report, unless otherwise specified, all dollar amounts are expressed in United States dollars and all references to “common shares” refer to the common shares in our capital stock.

As used in this annual report, the terms “we”, “us”, “our”, and “Arkanova” mean Arkanova Energy Corporation, unless otherwise indicated.

ITEM 1. BUSINESS.

We were incorporated in the State of Nevada on September 6, 2001 under the name Talon Ventures, Inc. and on January 15, 2003, we changed our name to Alton Ventures, Inc. On October 20, 2006, we entered into an agreement and plan of merger with Arkanova Acquisition Corp., our wholly-owned subsidiary, and Arkanova Energy, Inc., a private Delaware corporation. The agreement and plan of merger contemplated the merger of Arkanova Energy, Inc. with and into Arkanova Acquisition Corp., with Arkanova Acquisition Corp. surviving as our wholly-owned subsidiary. Effective November 1, 2006, we changed our name from Alton Ventures Inc. to Arkanova Energy Corporation. The closing of the agreement and plan of merger occurred on March 1, 2007. As of that date, we acquired all of the property interests formerly held by Arkanova Energy, Inc.

We are a junior producing oil and gas company and are also engaged in the acquisition, exploration and development of prospective oil and gas properties. We hold property interests located in three counties in the State of Arkansas, United States, mineral leases in Delores County, Lone Mesa State Park, Colorado and leasehold interests located in Pondera and Glacier Counties, Montana. Please see the information under the heading “Item 2. Properties” on page 10 of this annual report for a detailed description of our property interests, including disclosure of our oil and gas operations with respect to our Montana property.

In addition to our existing property interests, we intend to acquire additional oil and gas property interests in the future. Management believes that future growth of our company will primarily occur through the exploration and development of our existing properties and through the acquisition of additional oil and gas properties following extensive due diligence by our company. However, we may elect to proceed through collaborative agreements and joint ventures in order to share expertise and reduce operating costs with other experts in the oil and gas industry. We anticipate that the analysis of new property interests will be undertaken by or under the supervision of our management and board of directors.

Competition

We are a junior producing oil and gas company and are also engaged in the acquisition of prospective oil and gas properties for exploration and development. We compete with other junior producing companies in addition to significantly larger producers. As we are also engaged in the exploration and development of prospective properties, we also complete with companies for the identification of such properties and the financing necessary to develop such properties.

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We conduct our business in an environment that is highly competitive and unpredictable. In seeking out prospective properties, we have encountered intense competition in all aspects of our business as we compete directly with other development stage companies as well as established international producing companies. Many of our competitors are national or international companies with far greater resources, capital and access to information than us. Accordingly, these competitors may be able to spend greater amounts on the acquisition of prospective properties and on the exploration and development of such properties. In addition, they may be able to afford greater geological expertise in the exploration and exploitation of mineral and oil and gas properties. This competition could result in our competitors having resource properties of greater quality and attracting prospective investors to finance the development of such properties on more favorable terms. As a result of this competition, we may become involved in an acquisition with more risk or obtain financing on less favorable terms.

Customers

There are no contracts obligating our company to provide a fixed quantity of oil and gas to any party. We have a contract with CHS Inc., that provides for their taking all of our oil and/or condensate production from the unit unless either party give 30 days advance written notice to terminate the agreement. In the event our contact with CHS Inc. is terminated for any reason, our company has determined that there are numerous other purchasers available to enter into a similar arrangement without a material adverse effect on our company.

Government Regulation

The exploration and development of oil and gas properties is subject to various United States federal, state and local governmental regulations. Our company may, from time to time, be required to obtain licenses and permits from various governmental authorities in regards to the exploration of our property interests.

We are a company that has only recently started to produce oil and gas during the year ended September 30, 2009. As such, we are subject to increased governmental regulation. Matters subject to regulation include discharge permits for drilling operations, drilling and abandonment bonds, reports concerning operations, the spacing of wells, and pooling of properties and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and gas wells below actual production capacity in order to conserve supplies of oil and gas. The production, handling, storage, transportation and disposal of oil and gas, by-products thereof, and other substances and materials produced or used in connection with oil and gas operations are also subject to regulation under federal, state, provincial and local laws and regulations relating primarily to the protection of human health and the environment. Additionally, we have recently commenced incurring expenditures related to compliance with such laws, and may incur costs in connection with the remediation of any environmental contamination. The requirements imposed by such laws and regulations are frequently changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these requirements or their effect on our operations.

As of December 15, 2009, we have not filed for any permits. However, in the second quarter of fiscal 2010, we intend to make an application and file the necessary permits with the various regulatory agencies in order to drill a well on our Montana lease to explore the Bakken type shale.

Employees

Our company is currently operated by Pierre Mulacek as our president, secretary, treasurer and chief executive officer and Reginald Denny as our chief financial officer. We intend to periodically hire independent contractors to execute our exploration and development activities. Our company may hire employees when circumstances warrant. At present, however, our company does not anticipate hiring employees in the near future.

Environmental Liabilities

Our business is governed by numerous laws and regulations at various levels of government. These laws and regulations govern the operation and maintenance of our facilities, the discharge of materials into the environment and other environmental protection issues. Such laws and regulations may, among other potential consequences, require that we acquire permits before commencing drilling and restrict the substances that can be released into the environment with drilling and production activities. Under these laws and regulations, we could be liable for personal injury, clean-up costs and other environmental and property damages, as well as administrative, civil and

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criminal penalties. We have paid $97,000 in security deposits in relation to our Montana property to secure the bonding requirements of the Montana Board of Oil & Gas, the Bureau of Indian Affairs and the U.S. Environmental Protection Agency. We do not expect any material changes for these requirements in the next 12 month period.

ITEM 1A. RISK FACTORS

Risks Relating To Our Business And The Oil And Gas Industry

We have a history of losses and this trend may continue and may negatively impact our ability to achieve our business objectives.

We have experienced net losses since inception, and expect to continue to incur substantial losses for the foreseeable future. Our accumulated deficit was $13.3 million as at September 30, 2009. We may not be able to generate significant revenues in the future and our company has incurred increased operating expenses following the recent commencement of production. As a result, our management expects our business to continue to experience negative cash flow for the foreseeable future and cannot predict when, if ever, our business might become profitable. We will need to raise additional funds, and such funds may not be available on commercially acceptable terms, if at all. If we are unable to raise funds on acceptable terms, we may not be able to execute our business plan, take advantage of future opportunities, or respond to competitive pressures or unanticipated requirements. This may seriously harm our business, financial condition and results of operations.

We have a limited operating history, which may hinder our ability to successfully meet our objectives.

We have a limited operating history upon which to base an evaluation of our current business and future prospects. We have only recently commenced production and we do not have an established history of operating producing properties or locating and developing properties that have oil and gas reserves. As a result, the revenue and income potential of our business is unproven. In addition, because of our limited operating history, we have limited insight into trends that may emerge and affect our business. Errors may be made in predicting and reacting to relevant business trends and we will be subject to the risks, uncertainties and difficulties frequently encountered by early-stage companies in evolving markets. We may not be able to successfully address any or all of these risks and uncertainties. Failure to adequately do so could cause our business, results of operations and financial condition to suffer.

Our operations and proposed exploration activities will require significant capital expenditures for which we may not have sufficient funding and if we do obtain additional financing, our existing shareholders may suffer substantial dilution.

We intend to make capital expenditures far in excess of our existing capital resources to develop, acquire and explore oil and gas properties. We intend to rely on funds from operations and external sources of financing to meet our capital requirements to continue acquiring, exploring and developing oil and gas properties and to otherwise implement our business plan. We plan to obtain additional funding through the debt and equity markets, but we can offer no assurance that we will be able to obtain additional funding when it is required or that it will be available to us on commercially acceptable terms, if at all. In addition, any additional equity financing may involve substantial dilution to our then existing shareholders.

The successful implementation of our business plan is subject to risks inherent in the oil and gas business, which if not adequately managed could result in additional losses.

Our oil and gas operations are subject to the economic risks typically associated with exploration and development activities, including the necessity of making significant expenditures to locate and acquire properties and to drill exploratory wells. In addition, the availability of drilling rigs and the cost and timing of drilling, completing and, if warranted, operating wells is often uncertain. In conducting exploration and development activities, the presence of unanticipated pressure or irregularities in formations, miscalculations or accidents may cause our exploration, development and, if warranted, production activities to be unsuccessful. This could result in a total loss of our investment in a particular well. If exploration efforts are unsuccessful in establishing proved reserves and exploration activities cease, the amounts accumulated as unproved costs will be charged against earnings as impairments.

In addition, market conditions or the unavailability of satisfactory oil and gas transportation arrangements may hinder our access to oil and gas markets and delay our production. The availability of a ready market for our prospective oil

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and gas production depends on a number of factors, including the demand for and supply of oil and gas and the proximity of reserves to pipelines and other facilities. Our ability to market such production depends in substantial part on the availability and capacity of gathering systems, pipelines and processing facilities, in most cases owned and operated by third parties. Our failure to obtain such services on acceptable terms could materially harm our business. We may be required to shut in wells for lack of a market or a significant reduction in the price of oil or gas or because of inadequacy or unavailability of pipelines or gathering system capacity. If that occurs, we would be unable to realize revenue from those wells until arrangements are made to deliver such production to market.

Our future performance is dependent upon our ability to identify, acquire and develop oil and gas properties, the failure of which could result in under use of capital and losses.

Our future performance depends upon our ability to identify, acquire and develop additional oil and gas reserves that are economically recoverable. Our success will depend upon our ability to acquire working and revenue interests in properties upon which oil and gas reserves are ultimately discovered in commercial quantities, and our ability to develop prospects that contain proven oil and gas reserves to the point of production. Without successful acquisition and exploration activities, we will not be able to develop additional oil and gas reserves or generate revenues. We cannot provide you with any assurance that we will be able to identify and acquire additional oil and gas reserves on acceptable terms, or that oil and gas deposits will be discovered in sufficient quantities to enable us to recover our exploration and development costs or sustain our business.

The successful acquisition and development of oil and gas properties requires an assessment of recoverable reserves, future oil and gas prices and operating costs, potential environmental and other liabilities, and other factors. Such assessments are necessarily inexact and their accuracy inherently uncertain. In addition, no assurance can be given that our exploration and development activities will result in the discovery of additional reserves. Our operations may be curtailed, delayed or canceled as a result of lack of adequate capital and other factors, such as lack of availability of rigs and other equipment, title problems, weather, compliance with governmental regulations or price controls, mechanical difficulties, or unusual or unexpected formations, pressures and or work interruptions. In addition, the costs of exploitation and development may materially exceed our initial estimates.

We have a very small management team and the loss of any member of our team may prevent us from implementing our business plan in a timely manner.

We have two executive officers and a limited number of additional consultants upon whom our success largely depends. We do not maintain key person life insurance policies on our executive officers or consultants, the loss of which could seriously harm our business, financial condition and results of operations. In such an event, we may not be able to recruit personnel to replace our executive officers or consultants in a timely manner, or at all, on acceptable terms.

Future growth could strain our personnel and infrastructure resources, and if we are unable to implement appropriate controls and procedures to manage our growth, we may not be able to successfully implement our business plan.

We expect to experience rapid growth in our operations, which will place a significant strain on our management, administrative, operational and financial infrastructure. Our future success will depend in part upon the ability of our management to manage growth effectively. This may require us to hire and train additional personnel to manage our expanding operations. In addition, we must continue to improve our operational, financial and management controls and our reporting systems and procedures. If we fail to successfully manage our growth, we may be unable to execute upon our business plan.

Market conditions or operation impediments may hinder our access to natural gas and oil markets or delay our production.

The marketability of production from our properties depends in part upon the availability, proximity and capacity of pipelines, natural gas gathering systems and processing facilities. This dependence is heightened where this infrastructure is less developed. Therefore, if drilling results are positive in certain areas of our oil and gas properties, a new gathering system would need to be built to handle the potential volume of gas produced. We might be required to shut in wells, at least temporarily, for lack of a market or because of the inadequacy or unavailability of

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transportation facilities. If that were to occur, we would be unable to realize revenue from those wells until arrangements were made to deliver production to market.

Our ability to produce and market natural gas and oil is affected and also may be harmed by:

• the lack of pipeline transmission facilities or carrying capacity;

• government regulation of natural gas and oil production;

• government transportation, tax and energy policies;

• changes in supply and demand; and

• general economic conditions.

We might incur additional debt in order to fund our exploration and development activities, which would continue to reduce our financial flexibility and could have a material adverse effect on our business, financial condition or results of operations.

If we incur indebtedness, the ability to meet our debt obligations and reduce our level of indebtedness depends on future performance. General economic conditions, oil and gas prices and financial, business and other factors affect our operations and future performance. Many of these factors are beyond our control. We cannot assure you that we will be able to generate sufficient cash flow to pay the interest on our current or future debt or that future working capital, borrowings or equity financing will be available to pay or refinance such debt. Factors that will affect our ability to raise cash through an offering of our capital stock or a refinancing of our debt include financial market conditions, the value of our assets and performance at the time we need capital. We cannot assure you that we will have sufficient funds to make such payments. If we do not have sufficient funds and are otherwise unable to negotiate renewals of our borrowings or arrange new financing, we might have to sell significant assets. Any such sale could have a material adverse effect on our business and financial results.

Our properties in Arkansas and Colorado and/or future properties might not produce, and we might not be able to determine reserve potential, identify liabilities associated with the properties or obtain protection from sellers against them, which could cause us to incur losses.

Although we have reviewed and evaluated our properties in Arkansas, Colorado and Montana in a manner consistent with industry practices, such review and evaluation might not necessarily reveal all existing or potential problems. This is also true for any future acquisitions made by us. Inspections may not always be performed on every well, and environmental problems, such as groundwater contamination, are not necessarily observable even when an inspection is undertaken. Even when problems are identified, a seller may be unwilling or unable to provide effective contractual protection against all or part of those problems, and we may assume environmental and other risks and liabilities in connection with the acquired properties.

We are subject to ongoing obligations under our Acquisition and Development Agreement.

Under the terms of our Acquisition and Development Agreement, as modified by an agreement dated May 21, 2007, we will have to pay approximately an additional $5,600,000 to acquire the remainder of the acreage which we have committed to acquire, unless we elect to pay a majority of the costs with shares of our common stock at $1.25 per share. In addition, we are required to drill five additional wells within 24 months, from the date upon which Arkanova Delaware makes the last of the lease bonus payments as required in the agreement. We do not anticipate paying the final lease payment until the balance of the leases are delivered which is expected to occur in the next 12 month period. We expect that the total cost of these wells, together with a seismic program, will require approximately $5,600,000 in additional capital. We will need to obtain additional equity funding, and possibly additional debt funding as well, in order to be able to obtain these funds. Alternatively, we may be required to farmout a working interest in some of our acreage to a third party. There is no guarantee that we will be able to raise sufficient additional capital or alternatively that we will be able to negotiate a farmout arrangement on terms acceptable to us. In addition, while we anticipate that David Griffin will be able to deliver the mineral rights for all 50,000 acres which we have contracted for, we have no guarantee that he will be able to do so.

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If we or our operators fail to maintain adequate insurance, our business could be materially and adversely affected.

Our operations are subject to risks inherent in the oil and gas industry, such as blowouts, cratering, explosions, uncontrollable flows of oil, gas or well fluids, fires, pollution, earthquakes and other environmental risks. These risks could result in substantial losses due to injury and loss of life, severe damage to and destruction of property and equipment, pollution and other environmental damage, and suspension of operations. We could be liable for environmental damages caused by previous property owners. As a result, substantial liabilities to third parties or governmental entities may be incurred, the payment of which could have a material adverse effect on our financial condition and results of operations.

Any prospective drilling contractor or operator which we hire will be required to maintain insurance of various types to cover our operations with policy limits and retention liability customary in the industry. We will also plan to acquire our own insurance coverage for such prospects. The occurrence of a significant adverse event on such prospects that is not fully covered by insurance could result in the loss of all or part of our investment in a particular prospect which could have a material adverse effect on our financial condition and results of operations.

The oil and gas industry is highly competitive, and we may not have sufficient resources to compete effectively.

The oil and gas industry is highly competitive. We compete with oil and natural gas companies and other individual producers and operators, many of which have longer operating histories and substantially greater financial and other resources than we do, as well as companies in other industries supplying energy, fuel and other needs to consumers. Our larger competitors, by reason of their size and relative financial strength, can more easily access capital markets than we can and may enjoy a competitive advantage in the recruitment of qualified personnel. They may be able to absorb the burden of any changes in laws and regulation in the jurisdictions in which we do business and handle longer periods of reduced prices for oil and gas more easily than we can. Our competitors may be able to pay more for oil and gas leases and properties and may be able to define, evaluate, bid for and purchase a greater number of leases and properties than we can. Further, these companies may enjoy technological advantages and may be able to implement new technologies more rapidly than we can. Our ability to acquire additional properties in the future will depend upon our ability to conduct efficient operations, evaluate and select suitable properties, implement advanced technologies and consummate transactions in a highly competitive environment.

Complying with environmental and other government regulations could be costly and could negatively impact our production.

Our business is governed by numerous laws and regulations at various levels of government. These laws and regulations govern the operation and maintenance of our facilities, the discharge of materials into the environment and other environmental protection issues. Such laws and regulations may, among other potential consequences, require that we acquire permits before commencing drilling and restrict the substances that can be released into the environment with drilling and production activities.

Under these laws and regulations, we could be liable for personal injury, clean-up costs and other environmental and property damages, as well as administrative, civil and criminal penalties. Prior to commencement of drilling operations, we may secure limited insurance coverage for sudden and accidental environmental damages as well as environmental damage that occurs over time. However, we do not believe that insurance coverage for the full potential liability of environmental damages is available at a reasonable cost. Accordingly, we could be liable, or could be required to cease production on properties, if environmental damage occurs.

The costs of complying with environmental laws and regulations in the future may harm our business. Furthermore, future changes in environmental laws and regulations could result in stricter standards and enforcement, larger fines and liability, and increased capital expenditures and operating costs, any of which could have a material adverse effect on our financial condition or results of operations.

Shortages of rigs, equipment, supplies and personnel could delay or otherwise adversely affect our cost of operations or our ability to operate according to our business plans.

If drilling activity increases in eastern Arkansas, Colorado, Montana or the southern United States generally, a shortage of drilling and completion rigs, field equipment and qualified personnel could develop. The demand for and wage rates of qualified drilling rig crews generally rise in response to the increasing number of active rigs in service

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and could increase sharply in the event of a shortage. Shortages of drilling and completion rigs, field equipment or qualified personnel could delay, restrict or curtail our exploration and development operations, which could in turn harm our operating results.

We will be required to replace, maintain or expand our reserves in order to prevent our reserves and production from declining, which would adversely affect cash flows and income.

In general, production from natural gas and oil properties declines over time as reserves are depleted, with the rate of decline depending on reservoir characteristics. If we are not successful in our exploration and development activities, our proved reserves will decline as reserves are produced. Our future natural gas and oil production is highly dependent upon our ability to economically find, develop or acquire reserves in commercial quantities.

To the extent cash flow from operations is reduced, either by a decrease in prevailing prices for natural gas and oil or an increase in exploration and development costs, and external sources of capital become limited or unavailable, our ability to make the necessary capital investment to maintain or expand our asset base of natural gas and oil reserves would be impaired. Even with sufficient available capital, our future exploration and development activities may not result in additional proved reserves, and we might not be able to drill productive wells at acceptable costs.

The geographic concentration of all of our other properties in eastern Arkansas, Colorado and Montana subjects us to an increased risk of loss of revenue or curtailment of production from factors affecting those areas.

The geographic concentration of all of our leasehold interests in Phillips, Monroe and Deshea Counties, Arkansas, Lone Mesa State Park, Colorado and Pondera and Glacier Counties, Montana means that our properties could be affected by the same event should the region experience:

• severe weather;

• delays or decreases in production, the availability of equipment, facilities or services;

• delays or decreases in the availability of capacity to transport, gather or process production; or

• changes in the regulatory environment.

The oil and gas exploration and production industry historically is a cyclical industry and market fluctuations in the prices of oil and gas could adversely affect our business.

Prices for oil and gas tend to fluctuate significantly in response to factors beyond our control. These factors include:

• weather conditions in the United States and wherever our property interests are located;

• economic conditions, including demand for petroleum-based products, in the United States wherever our property interests are located;

• actions by OPEC, the Organization of Petroleum Exporting Countries;

• political instability in the Middle East and other major oil and gas producing regions;

• governmental regulations, both domestic and foreign;

• domestic and foreign tax policy;

• the pace adopted by foreign governments for the exploration, development, and production of their national reserves;

• the price of foreign imports of oil and gas;

• the cost of exploring for, producing and delivering oil and gas;

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• the discovery rate of new oil and gas reserves;

• the rate of decline of existing and new oil and gas reserves;

• available pipeline and other oil and gas transportation capacity;

• the ability of oil and gas companies to raise capital;

• the overall supply and demand for oil and gas; and

• the availability of alternate fuel sources.

Changes in commodity prices may significantly affect our capital resources, liquidity and expected operating results. Price changes will directly affect revenues and can indirectly impact expected production by changing the amount of funds available to reinvest in exploration and development activities. Reductions in oil and gas prices not only reduce revenues and profits, but could also reduce the quantities of reserves that are commercially recoverable. Significant declines in prices could result in non-cash charges to earnings due to impairment.

Changes in commodity prices may also significantly affect our ability to estimate the value of producing properties for acquisition and divestiture and often cause disruption in the market for oil and gas producing properties, as buyers and sellers have difficulty agreeing on the value of the properties. Price volatility also makes it difficult to budget for and project the return on acquisitions and the exploration and development of projects. We expect that commodity prices will continue to fluctuate significantly in the future.

Our ability to produce oil and gas from our properties may be adversely affected by a number of factors outside of our control which may result in a material adverse effect on our business, financial condition or results of operations.

The business of exploring for and producing oil and gas involves a substantial risk of investment loss. Drilling oil and gas wells involves the risk that the wells may be unproductive or that, although productive, the wells may not produce oil or gas in economic quantities. Other hazards, such as unusual or unexpected geological formations, pressures, fires, blowouts, loss of circulation of drilling fluids or other conditions may substantially delay or prevent completion of any well. Adverse weather conditions can also hinder drilling operations. A productive well may become uneconomic if water or other deleterious substances are encountered that impair or prevent the production of oil or gas from the well. In addition, production from any well may be unmarketable if it is impregnated with water or other deleterious substances. There can be no assurance that oil and gas will be produced from the properties in which we have interests. In addition, the marketability of oil and gas that may be acquired or discovered may be influenced by numerous factors beyond our control. These factors include the proximity and capacity of oil and gas, gathering systems, pipelines and processing equipment, market fluctuations in oil and gas prices, taxes, royalties, land tenure, allowable production and environmental protection. We cannot predict how these factors may affect our business.

We may be unable to retain our leases and working interests in our leases, which would result in significant financial losses to our company.

Our properties are held under oil and gas leases. If we fail to meet the specific requirements of each lease, such lease may terminate or expire. We cannot assure you that any of the obligations required to maintain each lease will be met. The termination or expiration of our leases may harm our business. Our property interests will terminate unless we fulfill certain obligations under the terms of our leases and other agreements related to such properties. If we are unable to satisfy these conditions on a timely basis, we may lose our rights in these properties. The termination of our interests in these properties may harm our business. In addition, we will need significant funds to meet capital requirements for the exploration activities that we intend to conduct on our properties.

Title deficiencies could render our leases worthless which could have adverse effects on our financial condition or results of operations.

The existence of a material title deficiency can render a lease worthless and can result in a large expense to our business. It is our practice in acquiring oil and gas leases or undivided interests in oil and gas leases to forego the expense of retaining lawyers to examine the title to the oil or gas interest to be placed under lease or already placed

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under lease. Instead, we rely upon the judgment of oil and gas landmen who perform the field work in examining records in the appropriate governmental office before attempting to place under lease a specific oil or gas interest. This is customary practice in the oil and gas industry. However, we do not anticipate that we, or the person or company acting as operator of the wells located on the properties that we currently lease or may lease in the future, will obtain counsel to examine title to the lease until the well is about to be drilled. As a result, we may be unaware of deficiencies in the marketability of the title to the lease. Such deficiencies may render the lease worthless.

Risks Relating To Our Common Stock

A decline in the price of our common stock could affect our ability to raise further working capital and adversely impact our ability to continue operations.

A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital. Because a significant portion of our operations have been and will be financed through the sale of equity securities, a decline in the price of our common stock could be especially detrimental to our liquidity and our operations. Such reductions may force us to reallocate funds from other planned uses and may have a significant negative effect on our business plan and operations, including our ability to develop new properties and continue our current operations. If our stock price declines, we can offer no assurance that we will be able to raise additional capital or generate funds from operations sufficient to meet our obligations. If we are unable to raise sufficient capital in the future, we may not be able to have the resources to continue our normal operations.

The market price for our common stock may also be affected by our ability to meet or exceed expectations of analysts or investors. Any failure to meet these expectations, even if minor, may have a material adverse effect on the market price of our common stock.

If we issue additional shares in the future, it will result in the dilution of our existing shareholders.

Our articles of incorporation, as amended, authorizes the issuance of up to 1,000,000,000 shares of common stock with a par value of $0.001. Our board of directors may choose to issue some or all of such shares to acquire one or more businesses or to provide additional financing in the future. The issuance of any such shares will result in a reduction of the book value and market price of the outstanding shares of our common stock. If we issue any such additional shares, such issuance will cause a reduction in the proportionate ownership and voting power of all current shareholders. Further, such issuance may result in a change of control of our corporation.

Trading of our stock may be restricted by the Securities Exchange Commission’s penny stock regulations, which may limit a stockholder’s ability to buy and sell our stock.

The Securities and Exchange Commission has adopted regulations which generally define “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the Securities and Exchange Commission, which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.

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The Financial Industry Regulatory Authority, or FINRA, has adopted sales practice requirements which may also limit a stockholder’s ability to buy and sell our stock.

In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

Our common stock is illiquid and the price of our common stock may be negatively impacted by factors which are unrelated to our operations.

Our common stock currently trades on a limited basis on the OTC Bulletin Board. Trading of our stock through the OTC Bulletin Board is frequently thin and highly volatile. There is no assurance that a sufficient market will develop in our stock, in which case it could be difficult for shareholders to sell their stock. The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of our competitors, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common stock.

ITEM 2.

PROPERTIES.

Executive Offices

Our executive and head offices are located at 2441 High Timbers Dr, Suite 120, The Woodlands, Texas 77380. We lease the office on a month-to-month basis at a cost of $4,950 per month. Our current premises are adequate for our current operations and we do not anticipate that we will require any additional premises in the foreseeable future.

We currently hold property interests in three counties in the State of Arkansas, United States, one county in the State of Colorado and two counties in the State of Montana as summarized below.

Montana Properties

On August 21, 2008, our wholly-owned subsidiary, Arkanova Acquisition Corporation, entered into a stock purchase agreement with Billie J. Eustice and the Gary L. Little Trust to acquire all of the issued and outstanding capital stock of Prism Corporation, an Oklahoma corporation, for a purchase price of $6,000,000.

Following the closing, we acquired all of the membership interests of Provident Energy Associates of Montana, LLC, which holds all of the leasehold interests comprising the Two Medicine Cut Bank Sand Unit in Pondera and Glacier Counties, Montana, and the equipment, parts, machinery, fixtures and improvements located on, or used in connection with, the Two Medicine Cut Bank Sand Unit. The Unit, which covers approximately 9,900 acres, is located at the far southern end of the Cut Bank Field and is part of the Blackfeet Indian Reservation. Since the establishment of the Unit in 1959, there have been 82 wells drilled on the Unit and there are currently 21 wells producing oil from the Unit. Ownership of these leasehold interests granted us the right to develop and produce all of the oil and gas reserves under the Unit.

The funds used to make the acquisition were provided by an unaffiliated lender and, as part of the loan transaction, our subsidiary pledged the shares of Prism it acquired to secure the loan. The terms of the $9,000,000 loan stated that the proceeds were to be used for the acquisition of the Two Medicine Cut Bank Sand Unit, the oil and gas leases comprising same, the fixtures and equipment therewith, all the capital stock of Prism Corporation and for general working capital purposes.

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Reserves

The following estimates of proved reserve 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 our company’s reserves. We emphasize 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.

Future cash flows are computed by applying fiscal year end prices of oil to period end quantities of proved oil reserves. Year-end market prices used for the standardized measures below were $61.00/barrel for liquids. Future operating expenses and development costs are computed primarily by our company’s petroleum engineers by estimating the expenditures to be incurred in developing and producing our company’s proved natural gas and oil reserves at the end of the period, based on period end costs and assuming continuation of existing economic conditions.

Future income taxes are based on period end statutory rates, adjusted for tax basis and applicable tax credits. A discount factor of ten percent was used to reflect the timing of future net cash flows. The standardized measure of discounted future net cash flows is not intended to represent the replacement cost of fair value of our company’s natural gas and oil properties. An estimate of fair value would also take into account, among other things, the recovery of reserves not presently classified as proved, anticipated future changes in prices and costs, and a discount factor more representative of the time value of money and the risks inherent in reserve estimate of natural gas and oil producing operations.

Proved Oil and Gas Reserve Quantities

			September 30,			September 30,
			2009			2008
			Oil			Oil
			(Mbbl)			(Mbbl)
	Balance beginning of the year		–			–
	Acquired from Prism Acquisition		290,787			–
	Revisions of previous estimates		–			–
	Production		(12,901	)		–
	Balance end of the year		277,886			–

Standardized Measure of Discounted Future Net Cash Flow

			September 30,
			2009
	Future cash inflows	$	16,951,046
	Future production and development costs		(15,985,475	)
	Future income tax expenses		(337,950	)
	Future net cash flows		627,621
	10% annual discount for estimated timing of cash flows		265,354
	Standardized measure of discounted future net cash flows	$	892,975

Production

During the year ended September 30, 2009, the average net sales price per barrel of oil was $38.62. The average net production cost was $61.44 per barrel. The high cost of production was due to upgrading flow lines, facilities, batterys, and well bores as the property was not maintained for several years. We are currently producing approximately 2,000 barrels per month and intend to increase this production to over 5,000 barrels per month assuming satisfactory drill results for our scheduled 2010 drill program.

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Productive Wells and Acreage

As of December 15, 2009, there were 82 wells on the lease of which 21 are oil producing. This has increased from 12 wells that were producing in October 2008 at the time we acquired the property interests.

Undeveloped Acreage

All of the 9,900 acres on the Montana unit are considered to be developed and developmental acreage. Provident Energy, our wholly owned subsidiary, is currently working with Schlumberger to develop infield vertical and horizontal drilling locations. The property has 80 acre spacing with the potential for 40 acre to 20 acre spacing allowing for a minimum of 80 infield drilling locations. The property also has the potential for 30 Bakken type horizontal wells based on 320 acre spacing.

Drilling Activity

There has not been any drilling activity in the last several years. We plan to put together a program in the coming year to drill some horizontal wells using enhanced recovery techniques. We have contracted with a third party to provide data to determine possible drill locations with respect to our Montana property.

Present Activities

As of December 18, 2009, we are continuing our efforts to bring more wells on line through recompletion and reactivation of existing wells.

Delivery Commitments

There are no contracts obligating our company to provide a fixed quantity of oil and gas to any party. We have a contract with CHS Inc., that provides for their taking all of our oil and/or condensate production from the unit unless either party give 30 days advance written notice to terminate the agreement.

Arkansas Properties

Pursuant to the terms of an oil and gas lease acquisition and development agreement dated July 24, 2006, we acquired or are in the process of acquiring, leases of mineral rights in approximately 50,000 acres of prospective oil and gas lands located in Phillips and Monroe Counties, Arkansas.

Leases for the leased lands have a term of five years which will run from the date on which we make the last of the lease bonus payments under the acquisition and development agreement. Upon filing of the leases, we will own a 100% working interest in the leased lands. We are paying acquisition costs of $300 per acre. As of September 30, 2009, the vendor had presented us with leases covering approximately 45,482 acres and we had cleared title on and accepted leases covering approximately 17,936 acres. We are required under the acquisition and development agreement to drill and complete at least six wells over a period of two years, beginning within six months of the date of acceptance by us of the last of the oil and gas leases. After we have purchased 38,400 acres and drilled the required wells, the royalty percentage in the oil and gas leases for all of the acreage in excess of the 38,400 acres, will decrease to 15%, giving us an 85% net revenue interest. On May 21, 2007, we entered into an agreement pursuant to which we can, at our option, issue shares of our common stock at a price of $1.25 per share to settle remaining lease payments due under this agreement.

The acquisition and development agreement provides for an area of mutual interest covering all lands situated within Phillips, Monroe and Desha Counties, Arkansas and within 50 miles of the boundary of these counties.

In addition, our wholly-owned subsidiary acquired all rights under an option to purchase and royalty agreement dated July 24, 2006, that was entered into between our wholly-owned subsidiary and David Griffin, pursuant to which our subsidiary acquired a one year option to acquire leases on an additional 14,172 gross acres (approximately 12,375 net acres), more or less, of prospective oil and gas lands located in Desha County, Arkansas. We can acquire the leases for an additional $275 per net mineral acre acquired. On May 21, 2007, we entered into an agreement pursuant to which we can, at our option, issue shares of our common stock at a price of $1.25 per share to settle remaining lease payments due under this agreement.

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Undeveloped Acreage

All of the Arkansas 45,482 acres are undeveloped. All leases have terms of 5 years, the oldest being November 2006.

Drilling Activity

Management also plans to focus on the exploration and development of our property interests in the Phillips and Monroe Counties, Arkansas and Lone Mesa State Park in Colorado. The first well, the DB Griffin #1-33, was drilled to a total depth of 7,732 feet on November 29, 2007 and has been evaluated. It is our intent to re-enter and drill the Griffin 1-33 to the Devonian in 2010, if it warrants re-entry.

Colorado Property

Effective February 15, 2008, Arkanova Acquisition Corporation, our wholly-owned subsidiary leased a total of 1,320 gross mineral acres in Delores County, Colorado from The Curtis Jones Family Trust, Vera Lee Redd Family Trust and Redd Royalties Ltd. for an aggregate price of $93,500. The initial term of the leases is for seven years, and continues thereafter so long as oil or gas is being produced from the lease areas in paying quantities. We anticipate we will have a 100% working interest in the property and an approximate combined net royalty of 83.25%, with the remaining royalty interest to the lessors. In connection with the acquisition of the lease from The Curtis Jones Family Trust, we agreed to pay a third-party a 3.5% overriding royalty on 220 net mineral acres. The exploration targets on this prospect include a series of fractured black shales of the Pennsylvanian age Paradox Formation with drilling depths of 8,000 feet to 9,500 feet. The target intervals were already encountered in a well located on the leasehold, which was drilled for deeper oil targets and then was plugged in a time when gas was uneconomic due to price. In the 100 foot thick main target interval, the gas show while drilling was reported to be 14,000 units of C1 (28,000+ units by chromatograph) and pressure was calculated at approximately 4,600 psi. We plan to request permission from the State of Colorado to re-enter and complete this bypassed gas pay.

Undeveloped Acreage

Management is planning to farm out this prospect in 2010 if commercially productive. We are also considering the sale of this property.

Drilling Activity

There has not been any drilling activity on the leases in the last three years.

ITEM 3. LEGAL PROCEEDINGS.

We know of no material, active or pending legal proceedings against our company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market for Securities

Our common shares are quoted for trading on the OTC Bulletin Board under the symbol “AKVA”. The following quotations obtained from the OTC Bulletin Board reflect the highs and low bids for our common stock based on inter-dealer prices, without retail mark-up, mark-down or commission an may not represent actual transactions. The high and low bid prices of our common stock for the periods indicated below are as follows:

On December 15, 2009, the closing price of our common stock as reported by the quotation service operated by the OTC Bulletin Board was $0.30.

Our transfer agent and registrar for our common stock is Pacific Stock Transfer Company, located at 500 East Warm Springs Road, Las Vegas, Nevada (Telephone: (702) 361-3033; Facsimile: (702) 433-1979.

On December 15, 2009, there were 118 registered shareholders of our common stock and 37,700,250 common shares issued and outstanding.

Dividend Policy

We have not declared or paid any cash dividends since inception. Although there are no restrictions that limit our ability to pay dividends on our common shares, we intend to retain future earnings, if any, for use in the operation and expansion of our business and do not intend to pay any cash dividends in the foreseeable future.

Equity Compensation Plan Information

On April 25, 2007, our compensation committee and board of directors adopted a stock option plan named the 2007 Stock Option Plan, the purpose of which is to attract and retain the best available personnel and to provide incentives to employees, officers, directors and consultants, all in an effort to promote the success of our company. The 2007 Stock Option Plan initially authorized our company to issue 2,500,000 shares of common stock. On November 14, 2008, we amended the 2007 Stock Option Plan, renamed the plan the 2008 Amended Stock Option Plan and increased the number of shares available for issuance from 2,500,000 to 5,000,000.

The following table provides a summary of the number of stock options granted under the 2008 Amended Stock Option Plan, the weighted average exercise price and the number of stock options remaining available for issuance under the 2008 Amended Stock Option Plan, all as at September 30, 2009:

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Recent Sales of Unregistered Securities

The following information sets forth certain information concerning securities which were sold or issued by us during the last fiscal year ended September 30, 2009 without the registration of these securities under the Securities Act of 1933 in reliance on exemptions from such registration requirements.

On November 19, 2008, we granted 100,000 stock options to our chief financial officer. Each option is exercisable at a price of $0.12 per share until expiry on November 19, 2013. We issued the stock options relying on exemptions from registration provided by Section 4(2) and/or Regulation D of the Securities Act of 1933.

On July 28, 2009, we issued 650,000 shares to one accredited investor. We issued the shares relying on exemptions from registration provided by Section 4(2) and/or Regulation D of the Securities Act of 1933.

Effective October 14, 2009, and subsequent to our year ended September 30, 2009, we granted an aggregate of 1,500,000 stock options to five individuals who are either directors, executive officers and/or key employees of our company. We issued the stock options relying on exemptions from registration provided by Section 4(2) and/or Regulation D of the Securities Act of 1933.

On October 29, 2009, we issued 150,000 shares to one of our employees upon the exercise of stock options. We issued the shares relying on exemptions from registration provided by Section 4(2) and/or Regulation D of the Securities Act of 1933.

On October 29, 2009, we issued 450,000 shares to two of our officers upon the exercise of stock options. We issued the shares relying on exemptions from registration provided by Section 4(2) and/or Regulation D of the Securities Act of 1933.

ITEM 6. SELECTED FINANCIAL DATA.

Not Applicable.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion should be read in conjunction with our audited consolidated financial statements and the related notes that appear elsewhere in this annual report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this annual report.

Our audited consolidated financial statements are stated in United States dollars and are prepared in accordance with United States generally accepted accounting principles.

Results of Operations for the Year Ended September 30, 2009

Year Ended September 30, 2009 Summary

The following summary of our results of operations should be read in conjunction with our audited consolidated financial statements for the year ended September 30, 2009 which are included herein:

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Revenues

During the year ended September 30, 2009, we generated $620,854 in oil and gas sales and nil in the year ended September 30, 2008. We did not generate any revenues in the year ended September 30, 2008 because we acquired our producing oil and gas properties on October 3, 2008. As a result, readers should not place undue reliance on the change between the two periods due to the fact that we have only recently become a junior producing oil company.

Expenses

Total expenses increased during the year ended September 30, 2009 to $9,344,721 as compared to $1,490,329 during the year ended September 30, 2008. General and administrative expenses increased from $1,490,329 to $2,923,043 for the years ended September 30, 2008 and 2009, respectively, largely as a result of increased professional fees associated with the acquisition of our Montana properties. In addition, we incurred $972,098 for oil and gas production costs, $66,537 for depletion expenses and $5,533,043 in impairment of oil and gas properties during the year ended September 30, 2009, none of which costs were incurred in the year ended September 30, 2009. Please see the information set out in the table below for a detailed list of estimated expenses of our company for the next 12 month period.

Liquidity and Capital Resources

Working Capital

We had cash and cash equivalents of $11,022 and a working capital deficit of $12,010,775 as of September 30, 2009 compared to cash and cash equivalents of $464 and working capital deficit of $10,850,942 for the year ended September 30, 2009. We anticipate that we will require approximately $23,300,000 for operating expenses during the next twelve months as set out below.

Our company’s principal cash requirements are for exploration expenses which we anticipate will rise as we proceed to determine the feasibility of developing our current or future property interests.

Our company’s cash and cash equivalents will not be sufficient to meet our working capital requirements for the next twelve month period. We estimate that we will require approximately $23,300,000 over the next twelve month period to fund our plan of operations and approximately $12 million to eliminate our working capital deficiency. Our company plans to raise the capital required to satisfy our immediate short-term needs and additional capital required to meet our estimated funding requirements for the next twelve months primarily through the private placement of our equity securities. There is no assurance that our company will be able to obtain further funds required for our continued working capital requirements. The ability of our company to meet our financial liabilities and commitments

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is primarily dependent upon the continued financial support of our directors and shareholders, the continued issuance of equity to new shareholders, and our ability to achieve and maintain profitable operations.

There is substantial doubt about our ability to continue as a going concern as the continuation of our business is dependent upon obtaining further long-term financing, successful exploration of our property interests, the identification of reserves sufficient enough to warrant development, successful development of our property interests and, finally, achieving a profitable level of operations. The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.

Due to the uncertainty of our ability to meet our current operating and capital expenses, in their report on our audited consolidated financial statements for the period ended September 30, 2009, our independent auditors included an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. Our statements contain additional note disclosures describing the circumstances that lead to this disclosure by our independent auditors.

Outstanding Promissory Notes

On April 17, 2008, we received $300,000 from Global Project Finance AG and issued a promissory note. Under the terms of the promissory note, the amount was unsecured, accrued interest at 10% per annum, and was due on April 16, 2009. At April 16, 2009, accrued interest of $30,000 was recorded. On April 17, 2009, this note was modified whereby the maturity date was extended to April 17, 2010 and the accrued interest on the note at the date of modification was added to the principal balance for a modified principal amount outstanding of $330,000. The promissory note bears interest at 10% per annum, is due on demand at any time after April 17, 2010 and may be secured by Global Project Finance against our oil, gas and mineral leases in Phillips and Monroe County, Arkansas and any wells located on those leases that are owned and operated by us, right-of-ways and easements and our share of production obtained from such wells. We may prepay the promissory note in whole or in part at any time prior to April 17, 2010 without penalty. In the event that we default on the promissory note, and unless such default is waived in writing by Global Project Finance, Global Project Finance may consider the promissory note immediately due and payable without presentment, demand, protest or notice of any kind. Under such circumstances, interest shall accrue on the total amount due on the date that we default at the rate of 16% per annum, or the maximum rate allowed by applicable law, whichever is lower, from the date that we default until the date payment is made.

On May 29, 2008, we received $300,000 through the issuance of a promissory note. Under the terms of the promissory note, the amount is unsecured, accrues interest at 10% per annum, and was due on May 28, 2009. On May 29, 2009, the note was modified whereby the maturity date was extended to May 29, 2010 and the accrued interest on the note at the date of modification was added to the principal balance for a modified amount outstanding of $330,000. The promissory note bears interest at 10% per annum, is due on demand at any time after May 29, 2010 and may be secured against our oil, gas and mineral leases in Phillips and Monroe County, Arkansas, and any wells located on acreage covered by such leases that are owned and operated by our company, right-of-ways and easements and our share of production obtained from such wells, if any. The promissory note may be prepaid in whole or in part at any time prior to May 29, 2010 without penalty. In the event that our company defaults on the promissory note, and unless such default is waived in writing by the holder, the holder may consider the promissory note immediately due and payable without presentment, demand, protest or notice of any kind. Under such circumstances, interest shall accrue on the principal amount from the date of default at the rate of 16% per annum, or the maximum rate allowed by applicable law, whichever is lower.

On October 5, 2009, and subsequent to our year ended September 30, 2009, our wholly-owned subsidiary, Arkanova Acquisition Corporation, entered into a Loan Consolidation Agreement and a Note Purchase Agreement with Aton Select Funds Limited which were effective as of October 1, 2009, and pursuant to which Arkanova Acquisition issued a $12,000,000 promissory note in exchange for the loan by Aton to it of an additional $1,168,729, plus the cancellation of the following Promissory Notes:

	(i)	Promissory Note to Aton Select dated September 3, 2008, in the original principal amount of $9,000,000.00;
	(ii)	Promissory Note to Aton Select dated April 29, 2009, in the original principal amount of $600,000; and

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(iii)

Promissory Note to Aton Select dated July 14, 2009, in the original principal amount of $412,500.

The promissory note bears interest at the rate of 6% per annum, is due and payable on September 30, 2011, and is secured by a pledge of all of Arkanova Acquisition’s interest in its wholly-owned subsidiary, Provident Energy Associates of Montana, LLC. Provident Energy Associates is the owner of all of our oil and gas assets located in Montana. Interest on the promissory note is payable 10 days after maturity in shares of our common stock. The number of shares of our common stock payable as interest on the promissory note will be determined by dividing $720,000 by the average stock price for our common stock over the 15 business day period immediately preceding the date on which the promissory note matures.

As additional inducement to Aton Select to make the additional loan of $1,168,729 and to consolidate the existing loans under a new promissory note, Arkanova Acquisition will be delivering 821,918 shares of our common stock to Aton Select in payment of half of the unpaid interest due under the existing loans and agreed to deliver to Aton Select on the first anniversary of the execution of Note Purchase Agreement by Aton Select such number of shares of our unregistered common stock as shall be determined by dividing $240,000 (i.e., the remaining amount of unpaid interest due under the existing loans) by the average stock price for our common stock over the 15 business day period immediately preceding such first anniversary date. Arkanova Acquisition also will be delivering to Aton Select an additional 900,000 shares of our common stock in order to honor its obligation under the Note Purchase Agreement relating to the $9 Million Note to deliver such number of shares to Aton Select or making the original loan of $9,000,000 evidenced by the $9 Million Note.

Lease Acquisition Costs

We have recorded 31,258 oil and gas lease acreage of the approximately 50,000 acres in the Phillips, Monroe and Desha counties in Arkansas that we intend to acquire. We anticipate approximately $5,600,000 to be the amount to acquire the balance of this acreage during the next twelve month period.

Drilling and Seismic Costs

We estimate that our exploration costs on our property interests will be approximately $16,200,000 during the next twelve months, which will include drilling and, if warranted, completion costs for three vertical or horizontal exploratory wells. We expect that the total cost of the additional wells which we plan to drill in the next 12 months will be $15,000,000 exclusive of completion and hook-up costs. The increased per well cost reflects a horizontal component. We may require additional capital in the event we complete some or all of these wells. We will need to obtain additional equity funding, and possibly additional debt funding as well, in order to be able to obtain these funds. Alternatively, we may be required to farmout a working interest in some of our acreage to a third party. There is no guarantee that we will be able to raise sufficient additional capital or alternatively that we will be able to negotiate a farmout arrangement on terms acceptable to us.

Estimated Timeline of Exploration Activity on Property

Date	Objective
June, 2010	Commence drilling Montana well and complete in the CutBank or Bakken type formation, if warranted.
July, 2010	Commence drilling second Bakken well if warranted.
August, 2010	Commence drilling third Bakken well if warranted.

Employee and Consultant Compensation

Given the early stage of our development and exploration properties, we intend to continue to outsource our professional and personnel requirements by retaining consultants on an as needed basis. We estimate that our consultant and related professional compensation expenses for the next twelve month period will be approximately $900,000. As of September 30, 2009, Pierre Mulacek and Reginald Denny were our employees. Following the acquisition of the Montana oil & gas property, pay Mr. Mulacek an annual salary of $240,000 and Mr. Denny an annual salary of $170,000. On October 20, 2008, we entered into an executive employment agreement with Garrett A. Cook to appoint Mr. Cook as chief operations officer of our company. Pursuant to the terms of the agreement, we agreed to pay Mr. Cook an annual salary of $120,000 plus a discretionary performance based bonus as determined by

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our board of directors. Mr. Cook resigned as our chief operations officer on October 20, 2009 and his executive employment agreement terminated.

Professional Fees

We expect to incur on-going legal, accounting and audit expenses to comply with our reporting responsibilities as a public company under the United States Securities Exchange Act of 1934, as amended, in addition to general legal fees for oil and gas and general corporate matters. We estimate our legal and accounting expenses for the next twelve months to be approximately $250,000.

General and Administrative Expenses

We anticipate spending $350,000 on general and administrative costs in the next twelve month period. These costs primarily consist of expenses such as lease payments, office supplies, insurance, travel, office expenses, etc.

Cash Used In Operating Activities

Cash was used in operating activities in the amount of $3,120,819 and $875,700 during the years ended September 30, 2009 and 2008, respectively.

Cash From Investing Activities

Investing activities provided cash of $3,031,377 during the year ended September 30, 2009 and used cash of $12,358,473 during the year ended September 30, 2008.

Cash from Financing Activities

We received cash from financing activities in the amount of $100,000 and $10,575,768 during the years ended September 30, 2009 and 2008, respectively.

Capital Expenditures

Other than as set out below, and as of September 30, 2009, our company did not have any material commitments for capital expenditures.

Off-Balance Sheet Arrangements

We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting policies. Certain of these critical accounting policies affect working capital account balances, including the policies for revenue recognition, allowance for doubtful accounts, inventory reserves and income taxes. These policies require that we make estimates in the preparation of our financial statements as of a given date.

Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.

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22

Going Concern

Due to the uncertainty of our ability to meet our current operating and capital expenses, in their report on the annual financial statements for the year ended September 30, 2009, our independent auditors included an explanatory paragraph regarding concerns about our ability to continue as a going concern. Our financial statements contain additional note disclosures describing the circumstances that lead to this disclosure by our independent auditors.

There is substantial doubt about our ability to continue as a going concern as the continuation of our business is dependent upon obtaining further financing. The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current stockholders. Commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.

There are no assurances that we will be able to obtain further funds required for our continued operations or for our entry into the petroleum exploration and development industry. We are pursuing various financing alternatives to meet our immediate and long-term financial requirements. There can be no assurance that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain the additional financing on a timely basis, we will not be able to meet our other obligations as they become due.

Oil and Gas Properties

Our company utilizes the full-cost method of accounting for petroleum and natural gas properties. Under this method, our company capitalizes all costs associated with acquisition, exploration and development of oil and natural gas reserves, including leasehold acquisition costs, geological and geophysical expenditures, lease rentals on undeveloped properties and costs of drilling of productive and non-productive wells into the full cost pool on a country by country basis. As of September 30, 2009, we had properties with proven reserves. When our company obtains proven oil and gas reserves, capitalized costs, including estimated future costs to develop the reserves proved and estimated abandonment costs, net of salvage, will be depleted on the units-of-production method using estimates of proved reserves. The costs of unproved properties are not amortized until it is determined whether or not proved reserves can be assigned to the properties. Our company assesses the property at least annually to ascertain whether impairment has occurred. In assessing impairment our company considers factors such as historical experience and other data such as primary lease terms of the property, average holding periods of unproved property, and geographic and geologic data. As of September 30, 2009, an impairment in the amount of $5,533,043 (2008 - $nil) was recorded.

Revenue Recognition

The Company uses the sales method of accounting for natural gas and oil revenues. Under this method, revenues are recognized based on the actual volumes of gas and oil sold to purchasers. The volume sold may differ from the volumes to which the Company is entitled based on its interest in the properties. Costs associated with production are expensed in the period incurred.

Recent Accounting Pronouncements

On December 31, 2008, the SEC published the final rules and interpretations updating its oil and gas reporting requirements. Many of the revisions are updates to definitions in the existing oil and gas rules to make them consistent with the petroleum resource management system, which is a widely accepted standard for the management of petroleum resources that was developed by several industry organizations. Key revisions include changes to the pricing used to estimate reserves utilizing a 12-month average price rather than a single day spot price which eliminates the ability to utilize subsequent prices to the end of a reporting period when the full cost ceiling was exceeded and subsequent pricing exceeds pricing at the end of a reporting period, the ability to include nontraditional resources in reserves, the use of new technology for determining reserves, and permitting disclosure of probable and possible reserves. The SEC will require companies to comply with the amended disclosure requirements for registration statements filed after January 1, 2010, and for annual reports on Form 10-K for fiscal years ending on or after December 15, 2009. Early adoption is not permitted. The Company is currently assessing the impact that the adoption will have on the Company’s disclosures, operating results, financial position and cash flows.

In June 2009, the FASB issued guidance now codified as ASC 105, Generally Accepted Accounting Principles as the single source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP, aside from those issued by the SEC.

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23

ASC 105 does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all authoritative literature related to a particular topic in one place. The adoption of ASC 105 did not have a material impact on our company’s consolidated financial statements, but did eliminate all references to pre-codification standards.

In May 2009, FASB issued ASC 855, Subsequent Events which establishes general standards of for the evaluation, recognition and disclosure of events and transactions that occur after the balance sheet date. Although there is new terminology, the standard is based on the same principles as those that currently exist in the auditing standards. The standard, which includes a new required disclosure of the date through which an entity has evaluated subsequent events, is effective for interim or annual periods ending after June 15, 2009. The adoption of ASC 855 did not have a material effect on our company’s consolidated financial statements.

Our company has implemented all new accounting pronouncements that are in effect and that may impact our financial statements and we do not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on our financial position or results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Arkanova Energy Corporation
The Woodlands, Texas

We have audited the accompanying consolidated balance sheets of Arkanova Energy Corporation (the “Company”) as of September 30, 2009 and 2008, and the related consolidated statements of expenses, stockholders’ equity (deficit), and cash flows for the years then ended. 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 an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that 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 financial position of the Company as of September 30, 2009 and 2008 and the results of its operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that Arkanova Energy Corporation will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred losses since inception, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ MaloneBailey, LLP

www.malonebailey.com
Houston, Texas

December 22, 2009

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F-2

Arkanova Energy Corporation

Consolidated Balance Sheets

		September 30,			September 30,
		2009			2008
ASSETS
Cash and cash equivalents	$	11,022		$	464
Oil and gas receivables, net of allowance of $0		84,829			–
Prepaid expenses and other		299,277			187,018
Other receivables, net of allowance of $79,020 and $0		83,929			–
Total current assets		479,057			187,482
Restricted cash		–			9,000,000
Property and equipment, net of accumulated depreciation of
$30,046 and $813		88,822			1,945
Oil and gas properties, full cost method, net of accumulated
depletion of $5,599,580 and $0		14,124,765			13,977,441
Pipeline		106,948			–
Total assets	$	14,799,592		$	23,166,868
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	410,641		$	357,347
Accrued liabilities		847,041			161,680
Due to related party		109,650			9,140
Debenture payable		–			500,000
Notes payable		11,122,500			10,010,257
Total current liabilities and liabilities		12,489,832			11,038,424
Contingencies and commitments
Stockholders’ Equity
Common Stock, $0.001 par value, 1,000,000,000 shares authorized,
37,100,250 shares issued and outstanding (2008 – 36,450,250)		37,100			36,450
Additional paid-in capital		15,533,238			15,377,173
Deficit		(13,260,578	)		(3,285,179	)
Total stockholders’ equity		2,309,760			12,128,444
Total liabilities and stockholders’ equity	$	14,799,592		$	23,166,868

See accompanying notes to consolidated financial statements

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F-3

Arkanova Energy Corporation

Consolidated Statements of Operations

		Year Ended			Year Ended
		September 30,			September 30,
		2009			2008
Revenue
Oil and gas sales	$	620,854		$	–
Total revenue		620,854			–
Expenses
General and administrative expenses		2,923,043			1,490,329
Oil and gas production costs		972,098			–
Gain on write-off of account payable		(150,000	)		–
Depletion		66,537			–
Impairment of oil and gas properties		5,533,043			–
Operating loss		(8,723,867	)		(1,490,329	)
Other income (expenses)
Interest expense		(1,261,532	)		(261,327	)
Gain on forgiveness of debt		10,000			–
Net loss	$	(9,975,399	)	$	(1,751,656	)
Loss per share – basic and diluted	$	(0.27	)	$	(0.05	)
Weighted average common shares outstanding		36,564,000			36,155,000

See accompanying notes to consolidated financial statements

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F-4

Arkanova Energy Corporation

Consolidated Statements of Cash Flows

		Year Ended			Year Ended
		September 30,			September 30,
		2009			2008
Operating Activities
Net loss	$	(9,975,399	)	$	(1,751,656	)
Adjustment to reconcile net loss to net cash used in operating activities:
Amortization of discount on debenture		414,743			120,718
Amortization of deferred financing costs		–			45,000
Bad debt expense		79,020			–
Depreciation		22,609			679
Depletion		66,537			–
Gain on write-off of account payable		(150,000	)		–
Gain on forgiveness of debt		(10,000	)		–
Impairment of oil and gas properties		5,533,043			–
Loss on write-off of equipment		–			1,613
Stock-based compensation		85,215			552,037
Changes in operating assets and liabilities:
Prepaid expenses		(112,260	)		(152,128	)
Oil and gas receivables		(84,829	)		–
Other receivables		(84,957	)		–
Accounts payable and accrued liabilities		516,668			201,232
Accrued interest		478,281			112,123
Due to related parties		100,510			(5,318	)
Net Cash Used in Operating Activities		(3,120,819	)		(875,700	)
Investing Activities
Restricted cash		9,000,000			(9,000,000	)
Net cash paid on acquisition of Prism		(5,676,586	)		–
Purchase of equipment		(216,433	)		(2,758	)
Oil and gas property expenditures		(75,604	)		(3,355,715	)
Net Cash Provided by (Used in) Investing Activities		3,031,377			(12,358,473	)
Financing Activities
Proceeds from issuance of promissory notes		–			9,975,000
Proceeds from issuance of common stock, net		–			320,000
Proceeds from issuance of debenture		600,000			500,000
Share issue costs		–			(174,232	)
Repayment of debenture		(500,000	)		–
Deferred financing costs		–			(45,000	)
Net Cash Provided by Financing Activities		100,000			10,575,768
Net Change in Cash		10,558			(2,658,405	)
Cash and cash equivalents – beginning of year		464			2,658,869
Cash and cash equivalents – end of year	$	11,022		$	464
Supplemental Disclosures:
Interest paid	$	–		$	–
Income taxes paid	$	–		$	–
Noncash Financing and Investing Activities
Stock for common stock subscribed	$	–		$	2,432,400
Discount on debenture	$	–		$	85,461
Shares issued for purchase of ORRI interest	$	71,500		$	-
Accounts payable related to capital expenditures	$	1,206		$	142,935

See accompanying notes to consolidated financial statements

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F-5

Arkanova Energy Corporation

Consolidated Statement of Stockholders’ Equity

Period from October 1, 2007 through September 30, 2009

		Common Stock						Additional			Common
					Par			Paid-in			Stock
		Shares			Value			Capital			Subscribed			Deficit			Totals
Balance – September 30, 2007		33,009,750		$	33,010		$	12,164,947		$	2,432,400		$	(1,533,523	)	$	13,096,834
Proceeds from issuance of stock		3,440,500			3,440			2,748,960			(2,432,400	)		–			320,000
Less share issue costs		–			–			(174,232	)		–			–			(174,232	)
Stock-based compensation		–			–			552,037			–			–			552,037
Discount on debenture issued		–			–			85,461			–			–			85,461
Net loss for the year		–			–			–			–			(1,751,656	)		(1,751,656	)
Balance – September 30, 2008		36,450,250		$	36,450		$	15,377,173			–			(3,285,179	)		12,128,444
Stock-based compensation		–			–			85,215			–			–			85,215
Fair value of shares issued in connection
with purchase of ORRI interest		650,000			650			70,850			–			–			71,500
Net loss for the year														(9,975,399	)		(9,975,399	)
Balance – September 30, 2009		37,100,250		$	37,100		$	15,533,238		$	–		$	(13,260,578	)	$	(2,309,760	)

See accompanying notes to consolidated financial statements

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F-6

Arkanova Energy Corporation

Notes to Consolidated Financial Statements

NOTE 1: BASIS OF PRESENTATION

Arkanova Energy Corporation (formerly Alton Ventures, Inc.) (“Arkanova”) was incorporated in the state of Nevada on September 6, 2001 to engage in the acquisition, exploration and development of mineral properties. Effective on November 1, 2006, the Company changed its name from Alton Ventures, Inc. to Arkanova Energy Corporation.

On October 3, 2008, Arkanova acquired all of the issued and outstanding capital stock of Prism Corporation, an Oklahoma corporation (“Prism”), and Provident Energy Associates of Montana, LLC, a Montana limited liability company (“Provident”) owned by Prism through ownership of 100% of Provident’s membership interests (Note 4).

NOTE 2: GOING CONCERN

Arkanova is primarily engaged in the acquisition, exploration and development of oil and gas resource properties. Arkanova has incurred losses of $13,260,578 since inception and has a negative working capital of $12,010,775 at September 30, 2009. Management plans to raise additional capital through equity and/or debt financings. These factors raise substantial doubt regarding Arkanova’s ability to continue as a going concern.

NOTE 3: SUMMARY OF SIGNFICANT ACCOUNTING POLICIES

a)	Use of Estimates
	The preparation of consolidated financial statements in accordance with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses in the reporting period. The Company regularly evaluates estimates and assumptions related to stock-based compensation expense, deferred income tax asset valuations and loss contingencies. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
b)	Cash and Cash Equivalents
	For purposes of the statement of cash flows, Arkanova considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents.
c)	Foreign Currency Transactions
	Arkanova's functional and reporting currency is the United States dollar. Monetary assets and liabilities denominated in foreign currencies are translated into United States dollars at rates of exchange in effect at the balance sheet date in accordance with ASC 830, Foreign Currency Translation Matters. Non-monetary assets, liabilities and items recorded in income arising from transactions denominated in foreign currencies are translated at rates of exchange in effect at the date of the transaction. Foreign currency transactions are primarily undertaken in Canadian dollars. Arkanova has not, to the date of these financials statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.
d)	Basic and Diluted Net Income (Loss) Per Share
	Arkanova computes net income (loss) per share in accordance with ASC 260, Earnings per Share which requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including convertible debt, stock options, and warrants, using the treasury stock method, and convertible securities, using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. Arkanova had net losses as of September 30, 2009 and 2008, so the diluted EPS excluded all dilutive potential shares in the diluted EPS because there effect is anti-dilutive.

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F-7

e)	Financial Instruments
	The Company’s financial instruments consist of cash and cash equivalents, oil and gas receivables, other receivables, accounts payable and accrued liabilities, due to related party, debenture payable and notes payable Pursuant to ASC 820, Fair Value Measurements and Disclosures and ASC 825, Financial Instruments, fair value of assets and liabilities measured on a recurring basis include cash equivalents determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. Debenture payable and notes payable are valued based on “Level 2” inputs, consisting of quoted prices in less active markets. The Company believes that the recorded values of all of the other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations.
f)	Revenue Recognition
	The Company uses the sales method of accounting for natural gas and oil revenues. Under this method, revenues are recognized based on the actual volumes of gas and oil sold to purchasers. The volume sold may differ from the volumes to which the Company is entitled based on its interest in the properties. Costs associated with production are expensed in the period incurred.
g)	Oil and Gas Properties
	Arkanova utilizes the full-cost method of accounting for petroleum and natural gas properties. Under this method, Arkanova capitalizes all costs associated with acquisition, exploration and development of oil and natural gas reserves, including leasehold acquisition costs, geological and geophysical expenditures, lease rentals on undeveloped properties and costs of drilling of productive and non-productive wells into the full cost pool on a country by country basis. As of September 30, 2009, Arkanova had properties with proven reserves. When Arkanova obtains proven oil and gas reserves, capitalized costs, including estimated future costs to develop the reserves proved and estimated abandonment costs, net of salvage, will be depleted on the units-of-production method using estimates of proved reserves. The costs of unproved properties are not amortized until it is determined whether or not proved reserves can be assigned to the properties. Arkanova assesses the property at least annually to ascertain whether impairment has occurred. In assessing impairment Arkanova considers factors such as historical experience and other data such as primary lease terms of the property, average holding periods of unproved property, and geographic and geologic data. As of September 30, 2009, an impairment in the amount of $5,533,043 (2008 - $nil) was recorded.
h)	Long-lived Assets
	In accordance with ASC 360, Property Plant and Equipment, the carrying value of intangible assets and other long-lived assets is reviewed on a regular basis for the existence of facts or circumstances that may suggest impairment. Arkanova recognizes impairment when the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Impairment losses, if any, are measured as the excess of the carrying amount of the asset over its estimated fair value.
i)	Concentration of Risk
	Arkanova maintains its cash accounts in a commercial bank located in Texas, United States. Arkanova's cash accounts are uninsured and insured business checking accounts and deposits maintained in U.S. dollars. As at September 30, 2009, Arkanova has not engaged in any transactions that would be considered derivative instruments on hedging activities.
j)	Income Taxes
	Potential benefits of income tax losses are not recognized in the accounts until realization is more likely than not. Arkanova has adopted ASC 740, Income Taxes as of its inception. Pursuant to ASC 740, Arkanova is required to compute tax asset benefits for net operating losses carried forward. The potential benefits of net operating losses have not been recognized in these financial statements because Arkanova cannot be assured it is more likely than not it will utilize the net operating losses carried forward in future years.
k)	Stock-based Compensation
	The Company records stock-based compensation in accordance with ASC 718, Compensation – Stock Based Compensation using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees and the cost of the services received as consideration are measured and recognized based on the fair value of the equity instruments issued.

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F-8

l)	Recent Accounting Pronouncements
	On December 31, 2008, the SEC published the final rules and interpretations updating its oil and gas reporting requirements. Many of the revisions are updates to definitions in the existing oil and gas rules to make them consistent with the petroleum resource management system, which is a widely accepted standard for the management of petroleum resources that was developed by several industry organizations. Key revisions include changes to the pricing used to estimate reserves utilizing a 12-month average price rather than a single day spot price which eliminates the ability to utilize subsequent prices to the end of a reporting period when the full cost ceiling was exceeded and subsequent pricing exceeds pricing at the end of a reporting period, the ability to include nontraditional resources in reserves, the use of new technology for determining reserves, and permitting disclosure of probable and possible reserves. The SEC will require companies to comply with the amended disclosure requirements for registration statements filed after January 1, 2010, and for annual reports on Form 10- K for fiscal years ending on or after December 15, 2009. Early adoption is not permitted. The Company is currently assessing the impact that the adoption will have on the Company’s disclosures, operating results, financial position and cash flows.
	In June 2009, the FASB issued guidance now codified as ASC 105, Generally Accepted Accounting Principles as the single source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP, aside from those issued by the SEC. ASC 105 does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all authoritative literature related to a particular topic in one place. The adoption of ASC 105 did not have a material impact on the Company’s consolidated financial statements, but did eliminate all references to pre-codification standards.
	In May 2009, FASB issued ASC 855, Subsequent Events which establishes general standards of for the evaluation, recognition and disclosure of events and transactions that occur after the balance sheet date. Although there is new terminology, the standard is based on the same principles as those that currently exist in the auditing standards. The standard, which includes a new required disclosure of the date through which an entity has evaluated subsequent events, is effective for interim or annual periods ending after June 15, 2009. The adoption of ASC 855 did not have a material effect on the Company’s consolidated financial statements. Refer to Note 12.
	The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

NOTE 4: ACQUISITION AND DISPOSITION OF PRISM CORPORATION

On August 21, 2008, Arkanova Acquisition Corporation (“Acquisition Corp.”), a Delaware corporation and wholly-owned subsidiary of the Company entered into a Stock Purchase Agreement to acquire all of the issued and outstanding capital stock of Prism Corporation, an Oklahoma corporation (“Prism”), and Provident Energy Associates of Montana, LLC, a Montana limited liability company (“Provident”) owned by Prism through ownership of 100% of Provident’s membership interests. The purchase prices was $6,000,000 plus the amount of the expenditures that Provident had made pursuant to its agreement with the Blackfoot Tribal Council with respect to the wells in the Two Medicine Cut Bank Sand Unit in Pondera and Glacier counties, Montana (the “Unit”) from August 1, 2008 to October 3, 2008. In addition, Arkanova will deliver the gross proceeds received from the sale of the mineral inventory of Provident or Prism, produced by the Unit and held in storage tanks or in transit, as of October 3, 2008. The former owner of Prism was responsible for any expenditures relating to the clean up of an oil spill that occurred in September 2008. The amount paid by the former owner was accounted for as a reduction to the purchase price of $6,000,000. The closing of the purchase and sale occurred on October 3, 2008. Arkanova paid finder’s fee of $100,000 and legal fees of $20,058 related to the acquisition.

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F-9

The purchase price was allocated to the following assets and liabilities:

On May 26, 2009, Acquisition Corp. entered into a Purchase and Sale agreement to acquire a 2.5% overriding royalty interest (the “ORRI Interest”) in the Unit located in Montana. Refer to Note 5(b). As part of the consideration for the ORRI Interest, Arkanova delivered 1,000 shares of capital stock of Prism, which represent 100% of the shares owned by Acquisition Corp. Pursuant to the agreement, Acquisition Corp. retained all the assets of Prism and did not transfer any of the liabilities of Prism. The agreement closed on July 28, 2009.

The following table reflects pro forma revenues, net income and net income as if the acquisition of Prism completed on October 3, 2008 had taken place at the beginning of the period presented. These unaudited pro forma amounts do not purport to be indicative of the results that would have actually been obtained during the periods presented or that may be obtained in the future.

		Year Ended			Year Ended
		September 30,			September 30,
		2009			2008
Revenues	$	620,854		$	1,000,724
Net (loss) income		(9,975,399	)		(1,773,454	)
(Loss) earnings per share:
Basic		(0.27	)		(0.05	)
Diluted		(0.27	)		(0.05	)

NOTE 5: OIL AND GAS INTERESTS

Arkanova is currently participating in oil and gas exploration activities in Arkansas, Colorado and Montana. Arkanova’s oil and gas properties in Arkansas and Colorado are unproven. Arkanova’s oil and gas properties in Montana are proven. All of Arkanova’s oil and gas properties are located in the United States.

Unproven Properties, Arkansas and Colorado

The total costs incurred and excluded from amortization are summarized as follows:

Proven and Developed Properties, Montana

(a)	On October 3, 2008, Acquisition Corp. acquired all of the issued and outstanding capital stock of Prism Corporation, an Oklahoma corporation (“Prism”), and Provident Energy Associates of Montana, LLC, a Montana limited liability company (“Provident”) owned by Prism through ownership of 100% of Provident’s membership interests. Provident holds all of the leasehold interests comprising the Two Medicine Cut Bank Sand Unit (the “Unit’) in Pondera and Glacier Counties, Montana, and the equipment, parts, machinery, fixtures and improvements located on, or used in connection with the Unit, which covers approximately 9,900 acres. There are currently 15 wells producing oil from the Unit. Ownership of these leasehold interests gives Arkanova the right to develop and produce all of the oil and gas reserves under the Unit.
	The Company applies a ceiling test to the capitalized cost in the full cost pool. The ceiling test limits such cost to the estimated present value, using a ten percent discount rate, of the future net revenue from proved reserves, based on current economic and operating conditions. Specifically, the Company computes the ceiling test so that capitalized cost, less accumulated depletion and related deferred income tax, do not exceed an amount (the ceiling) equal to the sum of: (A) The present value of estimated future net revenue computed by applying current

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F-10

	prices of oil and gas reserves (with consideration of price changes only to the extent provided by contractual arrangements) to estimated future production of proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on current cost) 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; plus (B) the cost of property not being amortized; plus (C) the lower of cost or estimated fair value of unproven properties included in the costs being amortized; less (D) income tax effects related to differences between the book and tax basis of the property. The Company assesses the property at least annually to ascertain whether impairment has occurred.
	At December 31, 2008, the carrying value of Arkanova’s proven oil and gas properties that were subject to impairment was $5,533,043 ($5,598,594 less accumulated depletion of $65,551). The present value of the estimated future net revenue of the oil and gas properties is $nil at December 31, 2008. Therefore, on December 31 2008, Arkanova recognized an impairment charge of $5,533,043 related to these properties.
(b)	On May 26, 2009, Arkanova Acquisition Corporation entered into a Purchase and Sale Agreement to purchase a 2.5% overriding royalty interest (the “ORRI interest”) in the Unit located in Pondera and Glacier Counties, Montana. Pursuant to the agreement, as consideration of the 2.5% ORRI interest, Arkanova will pay (a) cash of $20,000 (paid) (b) 1,000 shares of Prism Corporation (refer to Note 4), and (c) 650,000 shares of common stock of Arkanova. Acquisition was also granted an exclusive option to acquire an additional 0.5% ORRI interest, for a term of 6 months from the date the existing lien against the ORRI interest is released, for consideration of $20,000. The agreement closed on July 28, 2009 and Arkanova Acquisition Corporation assigned the 2.5% ORRI interest to its subsidiary, Provident.

NOTE 6: RELATED PARTY TRANSACTIONS

On November 14, 2008, Arkanova re-priced the exercise price of 300,000 stock options with an exercise price of $1.35 per share to $0.10 per share. These stock options were granted to a Director of the Company on April 23, 2007 and expire on April 23, 2012. In accordance with ASC 718, modifications to the terms of an award are treated as an exchange of the original award for a new award. Incremental compensation expense is measured as the excess, if any, of the fair value of the original award immediately before its terms are modified, measured based on the share price and other pertinent factors at that date. Arkanova recognized an incremental compensation cost of $8,917 for these modified stock options.

NOTE 7: DEBENTURE PAYABLE

The Company repaid the $500,000 debenture and accrued interest in October 2008.

NOTE 8: NOTES PAYABLE

(a)	On April 17, 2008, Arkanova received $300,000 and issued a promissory note. Under the terms of the promissory note, the amount was unsecured, accrued interest at 10% per annum, and was due on April 16, 2009. At April 16, 2009, accrued interest of $30,000 was recorded. On April 17, 2009, this note was modified whereby the maturity date was extended to April 17, 2010 and the accrued interest on the note at the date of modification was added to the principal balance for a modified principal amount outstanding of $330,000. Arkanova evaluated the application of ASC 470-50, Modifications and Extinguishments and ASC 470-60, Troubled Debt Restructurings by Debtors and concluded that the revised terms constituted a debt modification, rather than a debt extinguishment or troubled debt restructuring. The promissory note bears interest at 10% per annum, is due on demand at any time after April 17, 2010 and may be secured against Arkanova’s oil, gas and mineral leases in Phillips and Monroe County, Arkansas, and any wells located on acreage covered by such leases that are owned and operated by Arkanova, right-of-ways and easements and Arkanova’s share of production obtained from such wells, if any. The promissory note may be prepaid in whole or in part at any time prior to April 17, 2010 without penalty. In the event that Arkanova completes a subsequent debt or equity financing of $5,000,000 or more prior to April 17, 2010, Arkanova is obligated to repay the promissory note, plus accrued interest, from the proceeds of the financing. In the event that Arkanova defaults on the promissory note, and unless such default is waived in writing by the holder, the holder may consider the promissory note immediately due and payable without presentment, demand, protest or notice of any kind. Under such circumstances, interest shall accrue on the principal amount from the date of default at the rate of 16% per annum, or the maximum rate allowed by applicable law, whichever is lower.
(b)	On May 29, 2008, Arkanova received $300,000 and issued a promissory note. Under the terms of the promissory note, the amount was unsecured, accrued interest at 10% per annum, and was due on May 28, 2009. At May 28, 2009, accrued interest of $30,000 was recorded. On May 29, 2009, this note was modified whereby the maturity date was extended to May 29, 2010 and the accrued interest on the note at the date of modification was added to the principal balance for a modified principal amount outstanding of $330,000. Arkanova evaluated the application of ASC 470-50 and ASC 470-60 and concluded that the revised terms

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	constituted a debt modification, rather than a debt extinguishment or troubled debt restructuring. The promissory note bears interest at 10% per annum, is due on demand at any time after May 29, 2010 and may be secured against Arkanova’s oil, gas and mineral leases in Phillips and Monroe County, Arkansas, and any wells located on acreage covered by such leases that are owned and operated by Arkanova, right-of-ways and easements and Arkanova’s share of production obtained from such wells, if any. The promissory note may be prepaid in whole or in part at any time prior to May 29, 2010 without penalty. In the event that Arkanova defaults on the promissory note, and unless such default is waived in writing by the holder, the holder may consider the promissory note immediately due and payable without presentment, demand, protest or notice of any kind. Under such circumstances, interest shall accrue on the principal amount from the date of default at the rate of 16% per annum, or the maximum rate allowed by applicable law, whichever is lower.
(c)	On July 14, 2008, Arkanova received $375,000 and issued a promissory note. Under the terms of the promissory note, the amount is unsecured, accrues interest at 10% per annum, and is due on July 13, 2009. At July 13, 2009, accrued interest of $37,500 has been recorded. On July 14, 2009, this note was modified whereby the maturity date was extended to July 14, 2010 and the accrued interest on the note at the date of modification was added to the principal balance for a modified principal amount outstanding of $412,500. Arkanova evaluated the application of ASC 470-50 and ASC 470-60 and concluded that the revised terms constituted a debt modification, rather than a debt extinguishment or troubled debt restructuring. The promissory note bears interest at 10% per annum, is due on demand at any time after July 14, 2010 and may be secured against Arkanova’s oil, gas and mineral leases in Phillips and Monroe County, Arkansas, and any wells located on acreage covered by such leases that are owned and operated by Arkanova, right-of-ways and easements and Arkanova’s share of production obtained from such wells, if any. The promissory note may be prepaid in whole or in part at any time prior to July 14, 2010 without penalty. In the event that Arkanova defaults on the promissory note, and unless such default is waived in writing by the holder, the holder may consider the promissory note immediately due and payable without presentment, demand, protest or notice of any kind. Under such circumstances, interest shall accrue on the principal amount from the date of default at the rate of 16% per annum, or the maximum rate allowed by applicable law, whichever is lower.
(d)	On September 3, 2008, Acquisition Corp. entered into a Note Purchase Agreement for $9,000,000. Under the terms of the agreement, the amount is secured, accrued interest at 8% per annum and is due on September 3, 2009. At September 30, 2009, accrued interest of $773,260 has been recorded. As further security for payment of the indebtedness evidenced by the promissory note, Arkanova agreed to guarantee the payment of the promissory note and the performance of obligations of Acquisition Corp under the agreement. In addition, the Company will deliver at the time of payment in full of the outstanding principal and interest on the promissory note and at the election of the investor, either (i) cash in an amount equal to five percent (5%) of then principal balance of the promissory note; or (ii) such number of shares of the common stock of Acquisition Corp. as will be determined by dividing an amount equal to five percent (5%) of the then principal balance of the promissory note by $0.50. Arkanova recorded a debt discount of $450,000 associated with the 5% inducement on the $9,000,000 note payable. This debt discount will be amortized over the maturity term of 1 year using the effective interest method. During the year ended September 30, 2009, Arkanova recognized $414,743 of interest expense associated with this debt discount.
(e)	On April 29, 2009, Arkanova entered into a Note Purchase Agreement pursuant to which Arkanova issued a $600,000 promissory note. The promissory note bears interest at 10% per annum, is due on demand at any time after April 29, 2010 and may be secured against Arkanova’s oil, gas and mineral leases in Phillips and Monroe County, Arkansas, and any wells located on acreage covered by such leases that are owned and operated by Arkanova, right-of-ways and easements and Arkanova’s share of production obtained from such wells, if any. The promissory note may be prepaid in whole or in part at any time prior to April 29, 2010 without penalty. In the event that Arkanova defaults on the promissory note, and unless such default is waived in writing by the holder, the holder may consider the promissory note immediately due and payable without presentment, demand, protest or notice of any kind. Under such circumstances, interest shall accrue on the principal amount from the date of default at the rate of 16% per annum, or the maximum rate allowed by applicable law, whichever is lower.

NOTE 9: COMMON STOCK

Stock Options

On April 25, 2007, Arkanova adopted a stock option plan named the 2007 Stock Option Plan (the “Plan”), the purpose of which is to attract and retain the best available personnel and to provide incentives to employees, officers, directors and consultants, all in an effort to promote the success of Arkanova. Prior to the grant of options under the 2007 Stock Option Plan, there were 2,500,000 shares of Arkanova’s common stock available for issuance under the plan.

During the year ended September 30, 2009, Arkanova granted 300,000 stock options, of which 100,000 stock options are exercisable at $0.13 per share between October 20, 2008 and October 20, 2013, 100,000 stock options are exercisable at $0.12 per share between November 19, 2008 and November 19, 2013 and 100,000 stock options are exercisable at $0.17 per share between April 20, 2009 and April 20, 2014. The weighted average grant date fair value of stock options granted during the nine months ended September 30, 2009 was $0.12. No stock options were

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exercised during the year ended September 30, 2009. During the year ended September 30, 2009, Arkanova recorded stock-based compensation on these stock options of $26,368, as general and administrative expense.

On November 14, 2008, Arkanova re-priced the exercise price of 300,000 stock options with an exercise price of $1.30 per share to $0.10 per share. These stock options were granted to the Chief Executive Officer on April 23, 2007 and expire on April 23, 2012. In fiscal 2009, Arkanova recognized an incremental compensation cost of $8,764 for these modified stock options.

On November 14, 2008, Arkanova re-priced the exercise price of 300,000 stock options with an exercise price of $1.35 per share to $0.10 per share. These stock options were granted to a Director of the Company on April 23, 2007 and expire on April 23, 2012. In fiscal 2009, Arkanova recognized an incremental compensation cost of $8,917 for these modified stock options.

On November 14, 2008, Arkanova entered into an Amended and Restated Stock Option Agreement with its Chief Financial Officer to alter the vesting provisions of the 200,000 stock options previously granted to its chief financial officer on October 18, 2007. The Amended and Restated Stock Option Agreement altered the vesting of the stock options such that all remaining options vest immediately and Arkanova recorded stock-based compensation of $30,123, as general and administrative expense. Arkanova also re-priced the exercise price of 200,000 stock options with an exercise price of $1.70 per share to $0.10 per share. These stock options were granted to the Chief Financial Officer on October 18, 2007 and expire on October 18, 2012. In fiscal 2009, Arkanova recognized an incremental compensation cost of $5,785 for these modified stock options.

On November 14, 2008, Arkanova re-priced the exercise price of 80,000 stock options with an exercise price of $1.55 per share to $0.10 per share. These stock options were granted to an employee of the Company on November 6, 2007 and expire on November 6, 2012. On November 14, 2008, Arkanova recognized an incremental compensation cost of $1,099 for these modified stock options. The employee was terminated on November 30, 2008 and Arkanova recognized stock-based compensation of $4,157 for the period from October 1, 2008 to November 30, 2008. Upon termination of the employee, 26,667 unvested stock options were forfeited.

A summary of Arkanova’s stock option activity is as follows:

					Weighted Average			Weighted Average			Aggregate
		Number of			Exercise Price			Remaining			Intrinsic Value
		Options						Contractual Term
Outstanding, September 30, 2008		2,380,000		$	0.90
Granted		300,000			0.14
Forfeited/Cancelled		(26,667	)		0.10
Outstanding, September 30, 2009		2,653,333		$	0.38			3.33		$	195,133
Exercisable, September 30, 2009		2,519,999		$	0.39			3.27		$	184,467

The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions:

		Year ended			Year ended
		September 30,			September 30,
		2009			2008
Expected dividend yield		0.00%			0.00%
Expected volatility		168%			131%
Expected life (in years)		2.83			2.60
Risk-free interest rate		1.50%			3.40%

A summary of the status of the Company’s non-vested stock options as of September 30, 2009, and changes during the year ended September 30, 2009, is presented below:

					Weighted Average
		Number of			Grant Date
Non-vested options		options			Fair Value
				$
Non-vested at September 30, 2008		186,667			0.70
Granted		300,000			0.12
Forfeited/Cancelled		(26,667	)		0.64
Vested		(326,666	)		0.42
Non-vested at September 30, 2009		133,334			0.13

At September 30, 2009, there was $9,235 of unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the Plan, which is expected to be recognized over a weighted average

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period of 0.80 years. There was $195,133 intrinsic value associated with the outstanding options at September 30, 2009.

NOTE 10: COMMITMENTS

(a)	See Note 8.
(b)	On October 20, 2008, Arkanova entered into an Executive Employment Agreement with its Chief Operations Officer. Pursuant to the agreement, Arkanova agreed to pay an annual salary of $120,000 and the executive may be eligible to receive an annual bonus determined by the Board of Directors based on the performance of the Company. In addition, Arkanova has agreed to grant options to purchase 100,000 shares of common stock with an exercise price equal to the lower of (i) $1.25 or (ii) the minimum price per share allowable pursuant to Arkanova’s stock option plan. An additional incentive stock option to acquire up to an additional 100,000 shares of common stock under the same terms was granted on April 20, 2009.
(c)	On October 3, 2008, Arkanova entered into a consulting agreement with the former owner of Prism Corporation to provide consulting services for a period of 15 months. Pursuant to the agreement, Arkanova agreed to pay $1,500,000 of which $179,165 is included in prepaid expenses at September 30, 2009.

NOTE 11: INCOME TAXES

Potential benefits of income tax losses are not recognized in the accounts until realization is more likely than not. The Company has incurred non-capital losses as scheduled below:

Pursuant to ASC 740, the Company is required to compute tax asset benefits for non-capital losses carried forward. Potential benefit of non-capital losses have not been recognized in these financial statements because the Company cannot be assured it is more likely than not it will utilize the losses carried forward in future years.

Significant components of the Company’s deferred tax assets and liabilities, after applying enacted corporate income tax rates, are as follows:

The valuation allowance reflects the Company’s estimate that the tax assets, more likely than not, will not be realized and consequently have not been recorded in these financial statements.

NOTE 12: SUBSEQUENT EVENTS

Pursuant to ASC 855, we have evaluated all events or transactions that occurred from September 30, 2009 through December 22, 2009, the date of issuance of the audited consolidated financial statements. During this period we did not have any material recognizable subsequent events, except as disclosed below.

(a)

On October 1, 2009, Acquisition entered into a Loan Consolidation Agreement to consolidate its outstanding promissory note balances as disclosed on Notes 8c, 8d and 8e (“Existing Notes”). The Company requested an additional loan in the amount of $1,168,729 to be consolidated into one new promissory note in the principal amount of $12,000,000. Pursuant to the terms and conditions of the agreement, the new loan provides for the consolidation and cancellation of the Existing Notes and the additional loan amount. Interest of $818,771 on the Existing Notes is consolidated to the new principal amount of $12,000,000.

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	As inducement to the note holder to provide the additional loan of $1,168,729, Acquisition will be delivering to the note holder 821,918 shares of common stock. In addition, the Company will issue $240,000 worth of shares of common stock to the note holder on the first anniversary of the execution of the Note Purchase Agreement. The new note will be secured by a pledge of all the membership interest of Acquisition’s wholly-owned subsidiary, Provident Energy Associates of Montana and a guarantee of indebtedness by the parent company.
	Acquisition will also deliver to the Investor as soon as reasonably practical following the execution of this Agreement by the Investor an additional 900,000 shares of the AEC’s common stock in accordance with the Company’s heretofore unfulfilled obligation under Section 3 of the Note Purchase Agreement relating to the $9 Million Note.
(b)	On October 14, 2009, the Company entered into a Stock Option Agreement with its Chief Financial Officer, two directors and two employees. Pursuant to the terms of the agreement, the Company agreed to grant 1,500,000 stock options exercisable at a price of $0.20 until expiry on October 14, 2014.
(c)	On December 8, 2009, the Company issued 300,000 shares of common stock to the President of the Company upon the exercise of 300,000 options at $0.10 per share for proceeds of $30,000.
(d)	On December 8 2009, the Company issued 150,000 shares of common stock to the Chief Financial Officer of the Company upon the exercise of 150,000 options at $0.10 per share for proceeds of $15,000.
(e)	On November 10, 2009, the Company issued 150,000 shares of common stock to an employee of the Company upon the exercise of 150,000 options at $0.10 per share for proceeds of $30,000.

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NOTE 13: SUPPLEMENTAL OIL AND GAS INFORMATION

Capitalized Costs Related to Oil and Gas Producing Activities

			September 30,			September 30,
			2009			2008
	Proven oil and gas properties	$	5,690,094		$	–
	Less accumulated depletion and impairment		(5,599,580	)		–
	Net carrying cost for proven oil and gas properties	$	90,514		$	–
	Unproven oil and gas properties		14,034,251			13,977,441
	Net capitalized costs	$	14,124,765		$	13,977,441

Costs incurred in Oil and Gas Property Acquisition, Exploration and Development Activities

			September 30,			September 30,
			2009			2008
		$			$
	Property Acquisition Costs:
	Proved costs	$	5,690,094		$	-
	Unproved costs		37,500			93,500
		$	5,727,594		$	93,500
	Exploration Costs:
	Proved costs	$	-		$	-
	Unproved costs		19,311			3,440,738
		$	19,311		$	3,440,738

Results of Operations from Oil and Gas Producing Activities

			September 30,			September 30,
			2009			2008
	Revenue	$	620,854		$	–
	Production costs		(972,098	)		–
	Depletion, depreciation and amortization		(66,537	)		–
	Impairment of oil and gas property		(5,533,043	)		–
	Income (loss) from oil and gas operations	$	(5,950,824	)	$	–

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Reserve Information

The following estimates of proved reserve 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 did not hire a third party reserve engineer to conduct an independent reserve evaluation at September 30, 2009 and chose to evaluate these properties internally. 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.

Future cash flows are computed by applying fiscal year end prices of oil to period end quantities of proved oil reserves. Year-end market prices used for the standardized measures below were $61.00/barrel for liquids. Future operating expenses and development costs are computed primarily by the Company’s petroleum engineers by estimating the expenditures to be incurred in developing and producing the Company’s proved natural gas and oil reserves at the end of the period, based on period end costs and assuming continuation of existing economic conditions.

Future income taxes are based on period end statutory rates, adjusted for tax basis and applicable tax credits. A discount factor of ten percent was used to reflect the timing of future net cash flows. The standardized measure of discounted future net cash flows is not intended to represent the replacement cost of fair value of the Company’s natural gas and oil properties. An estimate of fair value would also take into account, among other things, the recovery of reserves not presently classified as proved, anticipated future changes in prices and costs, and a discount factor more representative of the time value of money and the risks inherent in reserve estimate of natural gas and oil producing operations.

Proved Oil and Gas Reserve Quantities

			September 30,			September 30,
			2009			2008
			Oil			Oil
			(Mbbl)			(Mbbl)
	Balance beginning of the year		–			–
	Acquired from Prism Acquisition		290,787			–
	Revisions of previous estimates		–			–
	Production		(12,901	)		–
	Balance end of the year		277,886			–

Standardized Measure of Discounted Future Net Cash Flow

			September 30,
			2009
	Future cash inflows	$	16,951,046
	Future production and development costs		(15,985,475	)
	Future income tax expenses		(337,950	)
	Future net cash flows		627,621
	10% annual discount for estimated timing of cash flows		265,354
	Standardized measure of discounted future net cash flows	$	892,975

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Sources of Changes in Discounted Future Net Cash Flows

			September 30,			September 30,
			2009			2008
	Standardized measure of discounted future net cash flows at the
	beginning of the year	$	–		$	–
	Purchases of oil and gas properties		1,022,563			–
	Sales of oil and gas produced, net of production costs		351,244			–
	Net Change in income taxes		(480,832	)		–
	Standardized measure of discounted future net cash flows at the
	end of the year	$	892,975		$	–

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

As required by paragraph (b) of Rules 13a-15 or 15d-15 under the Exchange Act, our principal executive officer and principal financial officer evaluated our company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this annual report on Form 10-K. Based on this evaluation, these officers concluded that as of the end of the period covered by this annual report on Form 10-K, these disclosure controls and procedures were adequate to ensure that the information required to be disclosed by our company in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and include controls and procedures designed to ensure that such information is accumulated and communicated to our company’s management, including our company’s principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over our financial reporting. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment, including testing, using the criteria in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Our system of internal control over financial reporting is 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. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Based on our evaluation under the framework in Internal Control-Integrated Framework, our chief executive officer and our chief financial officer concluded that our internal control over financial reporting were effective as of September 30, 2009.

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

This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Our internal control over financial reporting was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

Changes in Internal Control Over Financial Reporting.

There were no changes in our company’s internal control over financial reporting during the quarter ended September 30, 2009 that have materially affected, or are reasonably likely to materially affect, our company’s internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION.

None.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors and Executive Officers, Promoters and Control Persons

As at December 15, 2009, our directors and executive officers, their ages, positions held, and duration of such, are as follows:

⁽¹⁾ Member of our audit committee and compensation committee.

Business Experience

The following is a brief account of the education and business experience of our directors and executive officers during at least the past five years, indicating their respective principal occupations during the period, and the name and principal business of the organization by which they were employed.

Pierre Mulacek – President, Chief Executive Officer, Secretary, Treasurer and Director

Mr. Mulacek has over twenty years’ experience in all facets of the oil and gas industry. Mr. Mulacek attended Texas Tech University from 1979 to 1983 with a focus on Petroleum Land Management until he joined Petroleum Independent and Exploration Corporation as Vice President. Mr. Mulacek was also a founding shareholder of Interoil Corp., an integrated oil and gas company listed on the American Stock Exchange where he has served as corporate development consultant since 1995.

Erich Hofer – Director

Mr. Hofer is a director of our company. Mr. Hofer leads business development for our company and has been instrumental in securing our company’s largest project acquisition to date. Mr. Hofer brings over fifteen years of international financial and management expertise to our company. He served from January 2005 to September 2007 as Group CFO for Argo-Hytos Ltd., a mobile hydraulic application manufacturer, headquartered in Baar, Switzerland. Prior to this, Mr. Hofer served from September 2001 to March 2004 as chief of staff and deputy of the group CEO at Schneeberger Ltd, a linear technology manufacturer, located in Roggwil, Switzerland. Prior to this time, Mr. Hofer served in various executive management leadership roles in several industrial and financial service companies in Switzerland. Mr. Hofer holds an MBA from the University of Chicago (2004) and a B.S. in Economics and Management from the University for Applied Science for Business and Administration in Zurich (1993). Mr. Hofer is also a Certified Management Accountant in Switzerland.

Reginald Denny – CPA Texas, Chief Financial Officer

Mr. Denny has extensive experience in the controller and senior management functions of companies in the oil and gas, manufacturing, services, retail and wholesale industries. Mr. Denny has managed the accounting, finance, audit, tax, human resources, banking relations, insurance, legal, planning, treasury, credit, forecasting and budgeting functions; reporting to federal and state regulatory agencies. From January 2006 to 2007, Mr. Denny was an independent consultant performing the duties of a controller with several companies. From 1993 to 2005, Mr. Denny

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was the Chief Financial Officer and controller of Tesmec USA, Inc., an international company in the manufacture, service, assembly and sales of trenching machines for the oil and gas industry.

Mr. Denny received his BBA in Accounting, minor in Finance from the University of Houston and is a registered Certified Public Accountant in Texas.

Significant Employees

We have no significant employees beyond the officers of the company.

Family Relationships

There are no family relationships among our directors or officers.

Involvement in Certain Legal Proceedings

Our directors, executive officers and control persons have not been involved in any of the following events during the past five years:

	1.	any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
	2.	any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
	3.	being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
	4.	being found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.

Audit Committee

Our audit committee consists of Erich Hofer. Our audit committee was established in accordance with Section 3(c)(5)(A) of the Securities Exchange Act of 1934. Our board of directors has determined that Erich Hofer is the only member of our board of directors that is “independent” as the term is defined by Rule 4200(a)(15) of the Rules of Nasdaq Marketplace Rules. Our audit committee undertakes an independent review of our company’s financial statements, and meets with management to determine the adequacy of internal controls and other financial reporting matters.

Audit Committee Financial Expert

Our board of directors has determined that it does not have a member that qualifies as an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K. We believe that our board of directors is capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. In addition, we believe that retaining an independent director who would qualify as an “audit committee financial expert” would be overly costly and burdensome and is not warranted in our circumstances given the early stages of our development and the fact that we have not generated revenues to date.

Code of Ethics

Effective December 18, 2007, our company’s board of directors adopted a Code of Business Conduct and Ethics that applies to, among other persons, our company’s president (being our principal executive officer) and our company’s chief financial officer (being our principal financial and accounting officer), as well as persons performing similar

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functions. As adopted, our Code of Business Conduct and Ethics sets forth written standards that are designed to deter wrongdoing and to promote:

	(1)	honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
	(2)	full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with, or submit to, the Securities and Exchange Commission and in other public communications made by us;
	(3)	compliance with applicable governmental laws, rules and regulations;
	(4)	the prompt internal reporting of violations of the Code of Business Conduct and Ethics to an appropriate person or persons identified in the Code of Business Conduct and Ethics; and
	(5)	accountability for adherence to the Code of Business Conduct and Ethics.

Our Code of Business Conduct and Ethics requires, among other things, that all of our company’s personnel shall be accorded full access to our president and secretary with respect to any matter which may arise relating to the Code of Business Conduct and Ethics. Further, all of our company’s personnel are to be accorded full access to our company’s board of directors if any such matter involves an alleged breach of the Code of Business Conduct and Ethics by our president or secretary.

In addition, our Code of Business Conduct and Ethics emphasizes that all employees, and particularly managers and/or supervisors, have a responsibility for maintaining financial integrity within our company, consistent with generally accepted accounting principles, and federal, provincial and state securities laws. Any employee who becomes aware of any incidents involving financial or accounting manipulation or other irregularities, whether by witnessing the incident or being told of it, must report it to his or her immediate supervisor or to our company’s president or secretary. If the incident involves an alleged breach of the Code of Business Conduct and Ethics by the president or secretary, the incident must be reported to any member of our board of directors. Any failure to report such inappropriate or irregular conduct of others is to be treated as a severe disciplinary matter. It is against our company policy to retaliate against any individual who reports in good faith the violation or potential violation of our company’s Code of Business Conduct and Ethics by another.

We will provide a copy of the Code of Business Conduct and Ethics to any person without charge, upon request. Requests can be sent to: Arkanova Energy Corp., 2441 High Timbers Dr, Suite 120, The Woodlands, Texas 77380.

Nomination Process

As of December 15, 2009, we did not effect any material changes to the procedures by which our shareholders may recommend nominees to our board of directors. Our board of directors does not have a policy with regards to the consideration of any director candidates recommended by our shareholders. Our board of directors has determined that it is in the best position to evaluate our company’s requirements as well as the qualifications of each candidate when the board considers a nominee for a position on our board of directors. If shareholders wish to recommend candidates directly to our board, they may do so by sending communications to the president of our company at the address on the cover of this annual report.

Section 16(a) Beneficial Ownership Compliance

Section 16(a) of the Exchange Act requires our executive officers and directors, and persons who own more than 10% of our common stock, to file reports regarding ownership of, and transactions in, our securities with the Securities and Exchange Commission and to provide us with copies of those filings. Based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons, we believe that during fiscal year ended September 30, 2009, all filing requirements applicable to its officers, directors and greater than 10% percent beneficial owners were complied with, with the exception of the following:

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⁽¹⁾ The named officer filed two late Form 4’s – Statement of Changes in Beneficial Ownership of Securities.

ITEM 11. EXECUTIVE COMPENSATION.

Summary Compensation

The following table sets forth all compensation received during the two years ended September 30, 2009 by our chief executive officer, chief financial officer and each of the other most highly compensated executive officers whose total compensation exceeded $100,000 in such fiscal years. These officers are referred to as the named executive officers in this annual report.

(1)	Mr. Mulacek was appointed our president, secretary and treasurer on April 23, 2007. Following the repricing of the options on November 14, 2008, the 300,000 options are exercisable at $0.10 per share until expiry on April 23, 2012. Subsequent to the year ended September 30, 2009, our company issued 600,000 stock options to Mr. Mulacek, each option of which entitles Mr. Mulacek to acquire one common share at the exercise price of $0.20 until expiry on October 14, 2014. All of the 600,000 stock options vested immediately.
(2)	Mr. Denny was appointed our chief financial officer on October 18, 2007. Following the repricing of the options on November 14, 2008, the 200,000 options are exercisable at $0.10 per share until expiry on April 23, 2012. Subsequent to the year ended September 30, 2009, our company issued 350,000 stock options to Mr. Denny, each option of which entitles Mr. Denny to acquire one common share at the exercise price of $0.20 until expiry on October 14, 2014. All of the 350,000 stock options vested immediately.
(3)	Mr. Cook was appointed our chief operations office on October 20, 2008 and resigned from that position on October 20, 2009.

Compensation Discussion and Analysis

There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers. Our directors and executive officers may receive stock options at the discretion of our board of directors in the future. We do not have any material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that stock options may be granted at the discretion of our board of directors from time to time. We have no plans or arrangements in respect of remuneration received or that may be received by our executive officers to compensate such officers in the event of termination of employment (as a result of resignation, retirement, change of control) or a change of responsibilities following a change of control.

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Effective April 23, 2007, we entered into an Executive Employment Agreement with Mr. Mulacek pursuant to which he has agreed to serve as our chief executive officer for a term of one year. We have agreed to pay Mr. Mulacek an annual salary of $120,000 and he may be eligible to receive an annual bonus as determined by the board of directors based upon the performance of our company. We have also agreed to grant to Mr. Mulacek options to purchase 300,000 shares of our common stock at an exercise price equal to the lower of (i) $1.25 or (ii) the minimum price per share allowable pursuant to the stock option plan to be adopted by the Company’s compensation committee. We also granted 600,000 options to Mr. Mulacek on June 19, 2008 at an exercise price of $0.39 which options vested immediately.

Effective October 18, 2007, we entered into an executive employment agreement with Reginald Denny and appointed Mr. Denny as our chief financial officer. Under the terms of the executive employment agreement, Mr. Denny will receive an annual salary of $85,000, to be paid in accordance with our company’s usual payroll procedures. Pursuant to the executive employment agreement, Mr. Denny will also receive stock options to acquire up to 200,000 shares of our common stock at an exercise price of $1.70 per share, exercisable until October 18, 2012. One third of the options vested immediately and one third vested on each of the first and second anniversaries. Reginald Denny was also granted 300,000 options on June 19, 2008 at an exercise price of $0.39 which options vested immediately.

Effective October 20, 2008, we entered into executive employment agreement with Garret Cook and appointed Mr. Cook as our Chief Operations Officer for a term of one year. Under the terms of the executive employment agreement, Mr. Cook will receive an annual salary of $120,000 and he may be eligible to receive an annual bonus as determined by the board of directors based on the performance of our company. We also agreed to grant Mr. Cook options to purchase 100,000 shares of our common stock at an exercise price equal to the lower of (i) $1.25, or (ii) the minimum price per share allowable pursuant to our company’s stock option plan. The executive employment agreement terminated on October 20, 2009, subsequent to our year ended September 30, 2009, upon the resignation of Mr. Cook as our Chief Operations Officer.

Grants of Plan-Based Awards Table

The following table sets out each grant of an award made to a named executive officer in the last year ended September 30, 2009 under any plan:

(1)	Mr. Mulacek was appointed our president, secretary and treasurer on April 23, 2007. Subsequent to the year ended September 30, 2009, Mr. Mulacek was granted 600,000 options on October 14, 2009, each option of which is exercisable at $0.20 per share until expiry on October 14, 2014.

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(2)	Mr. Denny was appointed our chief financial officer on October 18, 2007. Subsequent to the year ended September 30, 2009, Mr. Denny was granted 350,000 options on October 14, 2009, each option of which is exercisable at $0.20 per share until expiry on October 14, 2014.
(3)	Mr. Cook was appointed our chief operations office on October 20, 2008 and resigned from that position on October 20, 2009.

Outstanding Equity Awards at Fiscal Year-End

We established a 2008 Amended Stock Option Plan, as amended, to provide for the issuance of stock options to acquire an aggregate of up to 5,000,000 shares of our common stock.

The particulars of unexercised options, stock that has not vested and equity incentive plan awards for our named executive officers are set out in the following table:

(1)	Mr. Mulacek was appointed our president, secretary and treasurer on April 23, 2007. On November 14, 2008, our company repriced the 300,000 options (originally granted on April 23, 2007) held by Mr. Mulacek from $1.30 per share to $0.10 per share. Mr. Mulacek was also granted 600,000 options at an exercise price of $0.39 on June 19, 2008 which options vested immediately. Subsequent to the year ended September 30, 2009, we entered into a Stock Option Agreement with Mr. Mulacek and issued him an additional 600,000 options in consideration for services provided as chief financial officer. Each option is exercisable into one common share at the exercise price of $0.20 until October 14, 2014.
(2)	Mr. Denny was appointed our chief financial officer on October 18, 2007. Mr. Denny was granted 200,000 options at an exercise price of $1.70 on October 18, 2007 (of which 66,667 have vested), 300,000 options at an exercise price of $0.39 on June 19, 2008 which options vested immediately and 100,000 options at an exercise price of $0.12 on November 14, 2008 which options vested immediately. On November 14, 2008, our company repriced the 200,000 options held by Mr. Denny from $1.70 per share to $0.10 per share. Pursuant to the terms of an amended stock option agreement dated November 14, 2008, we agreed to amend the vesting provisions such that all of the remaining options not already vested under the original agreement vested on November 14, 2008, the date of the amended agreement.

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	Subsequent to the year ended September 30, 2009, we entered into a Stock Option Agreement with Mr. Denny and issued him an additional 350,000 options in consideration for services provided as chief financial officer. Each option is exercisable into one common share at the exercise price of $0.20 until October 14, 2014.
(3)	Mr. Cook was appointed our chief operations office on October 20, 2008 and resigned from that position on October 20, 2009. Mr. Cook was granted 100,000 options at an exercise price of $0.13 on October 20, 2008 and 100,000 options at an exercise price of $0.17 on April 20, 2009 which options vested immediately.

Aggregated Option Exercises

There were no options exercised by any officer or director of our company during our twelve month period ended September 30, 2009. Subsequent to the year ended September 30, 2009, Pierre Mulacek exercised 300,000 stock options which had an exercise price of $0.10 on December 2, 2009 and Reginald Denny exercised 150,000 stock options which had an exercise price of $0.10 on December 2, 2009.

Long-Term Incentive Plan

Currently, our company does not have a long-term incentive plan in favor of any director, officer, consultant or employee of our company.

Director Compensation

The particulars of compensation paid to our directors for our year ended September 30, 2009, is set out in the following director compensation table:

(1)	Pierre Mulacek was appointed as a director of our company on April 23, 2007. Subsequent to the year ended September 30, 2009, Mr. Mulacek was granted 600,000 options on October 14, 2009 at an exercise price of $0.20 which options vested immediately.
(2)	Erich Hofer was appointed as a director of our company on March 19, 2007. Subsequent to the year ended September 30, 2009, Mr. Hofer was granted 300,000 options on October 14, 2009 at an exercise price of $0.20 which options vested immediately.

We have no formal plan for compensating our directors for their service in their capacity as directors, although such directors are expected in the future to receive stock options to purchase common shares as awarded by our board of directors or (as to future stock options) a compensation committee which may be established. Directors are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of our board of directors. Our board of directors may award special remuneration to any director undertaking any special services on our behalf other than services ordinarily required of a director. No director received and/or accrued any compensation for their services as a director, including committee participation and/or special assignments.

Pension and Retirement Plans

Currently, we do not offer any annuity, pension or retirement benefits to be paid to any of our officers, directors or employees, in the event of retirement.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following table sets forth, as of December 15, 2009, certain information with respect to the beneficial ownership of our common stock by each stockholder known by us to be the beneficial owner of more than 5% of our common stock and by our directors and executive officers. Each person has sole voting and investment power with respect to the shares of common stock, except as otherwise indicated. Beneficial ownership consists of a direct interest in the shares of common stock, except as otherwise indicated. Except as otherwise noted, the number of shares beneficially owned includes common stock which the named person has the right to acquire, through conversion or option exercise, or otherwise, within 60 days after December 15, 2009. Beneficial ownership calculations for 5% stockholders are based solely on publicly filed Schedule 13Ds or 13Gs, which 5% stockholders are required to file with the Securities and Exchange Commission.

(1)	Based on 37,700,250 shares of common stock issued and outstanding as of December 15, 2009.
(2)	Consists of 587,500 common shares and stock options to acquire an aggregate of 1,200,000 shares of common stock exercisable within sixty days of December 15 2009. Of such options, 600,000 are exercisable at $0.39 until June 19, 2013 and 600,000 are exercisable at $0.20 until October 14, 2014.
(3)	Consists of 1,000,000 common shares and stock options to acquire an aggregate of 900,000 shares of common stock exercisable within sixty days of December 15, 2009. Of such options, 300,000 are exercisable at the price of $0.10 until April 25, 2012, 300,000 are exercisable at the price of $0.39 until June 19, 2013 and 300,000 are exercisable at $0.20 until October 14, 2014.
(4)	Consists of 165,000 common shares and stock options to acquire an aggregate of 800,000 shares of common stock exercisable within sixty days of December 15, 2009. Of such options, 50,000 are exercisable at the price of $0.10 until October 18, 2012, 100,000 are exercisable at the price of $0.12 until November 19, 2013, 300,000 are exercisable at a price of $0.39 until June 19, 2013 and 350,000 are exercisable at $0.20 until October 14, 2014.
(6)	Includes options to acquire an aggregate of 2,900,000 shares of common stock exercisable within sixty days of December 15, 2009.

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Securities Authorized For Issuance Under Equity Compensation Plan

This information can be found under Item 5 – “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”

Changes in Control

We are unaware of any contract or other arrangement the operation of which may at a subsequent date result in a change of control of our company.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Other than as set forth herein, and to our knowledge, no director, executive officer, principal shareholder holding at least 5% of our common shares, or any family member thereof, had any material interest, direct or indirect, in any transaction, or proposed transaction, during the year ended September 30, 2009 or in any currently proposed transaction, in which the amount involved in the transaction exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at the year end for the last two completed fiscal years.

On October 20, 2008, our company entered into an Executive Employment Agreement with its Chief Operations Officer. Pursuant to the agreement, we agreed to pay an annual salary of $120,000 and the executive may be eligible to receive an annual bonus determined by the Board of Directors based on the performance of our company. In addition, our company agreed to grant options to purchase 100,000 shares of common stock with an exercise price equal to the lower of (i) $1.25 or (ii) the minimum price per share allowable pursuant to our company’s stock option plan. An additional incentive stock option to acquire up to an additional 100,000 shares of common stock under the same terms will be granted upon the six month anniversary of the agreement. On April 20, 2009, we granted the additional 100,000 stock options to our Chief Operations Officer.

On November 14, 2008, we re-priced the exercise price of 300,000 stock options with an exercise price of $1.35 per share to $0.10 per share. These stock options were granted to a Director of our company on April 23, 2007 and expire on April 23, 2012.

On November 19, 2008, we entered into a Stock Option and Subscription Agreement with our Chief Financial Officer. Pursuant to the terms of the agreement, we agreed to grant 100,000 stock options in consideration for continued services as Chief Financial Officer. Each option vests immediately and is exercisable at a price of $0.12 per share until expiry on November 19, 2013

Corporate Governance

We currently act with two directors, consisting of Pierre Mulacek and Erich Hofer. We have determined that Erich Hofer is an independent director as defined by Nasdaq Marketplace Rule 4200(a)(15). We currently act with a standing audit committee and a compensation committee. We do not have a standing nominating committee but our entire board of directors acts as our nominating committee.

Audit Committee

Our audit committee consists of Erich Hofer. Mr. Hofer is a non-employee director of our company and is independent as defined by Nasdaq Marketplace Rule 4200(a)(15). The audit committee was established in accordance with Section 3(a)(58)(A) of the Securities and Exchange Act of 1934. The audit committee is directed to review the scope, cost and results of the independent audit of our books and records, the results of the annual audit with management and the adequacy of our accounting, financial and operating controls; to recommend annually to the board of directors the selection of the independent registered accountants; to consider proposals made by the independent registered accountants for consulting work; and to report to the board of directors, when so requested, on any accounting or financial matters.

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Our board of directors has determined that it does not have an audit committee member that qualifies as an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K. We believe that the audit committee member is capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. In addition, we believe that retaining an independent director who would qualify as an “audit committee financial expert” would be overly costly and burdensome and is not warranted in our circumstances given the early stages of our development and the fact that we have not generated revenues to date.

Compensation Committee

Our compensation committee consists of Erich Hofer. Mr. Hofer is a non-employee director of our company and is independent as defined by Nasdaq Marketplace Rule 4200(a)(15). The compensation committee oversees our compensation and employee benefit plans, stock option plan and practices and produces a report on executive compensation. The compensation committee acts in accordance with our Compensation Committee Charter.

Transactions with Independent Directors

Our independent director did not enter into any transaction, relationship or arrangement during the year ended September 30, 2009 that was considered by our board of directors in determining whether the director maintained his independence in accordance with Nasdaq Marketplace Rule 4200(a)(15).

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit fees

The aggregate fees billed for the two most recently completed years ended September 30, 2009 and 2008 for professional services rendered by Malone & Bailey, PC, of Houston, Texas for the audit of our annual consolidated financial statements, quarterly reviews of our interim consolidated financial statements and services normally provided by the independent accountant in connection with statutory and regulatory filings or engagements for these fiscal periods were as follows:

In the above table, “audit fees” are fees billed by our company’s external auditor for services provided in auditing our company’s annual financial statements for the subject year. “Audit-related fees” are fees not included in audit fees that are billed by the auditor for assurance and related services that are reasonably related to the performance of the audit review of our company’s financial statements. “Tax fees” are fees billed by the auditor for professional services rendered for tax compliance, tax advice and tax planning. “All other fees” are fees billed by the auditor for products and services not included in the foregoing categories.

Policy on Pre-Approval by Audit Committee of Services Performed by Independent Auditors

The board of directors pre-approves all services provided by our independent auditors. All of the above services and fees were reviewed and approved by the board of directors either before or after the respective services were rendered.

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The board of directors has considered the nature and amount of fees billed by Malone & Bailey, PC and believes that the provision of services for activities unrelated to the audit is compatible with maintaining Malone & Bailey, PC.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(3)	Articles of Incorporation and Bylaws
3.1	Articles of Incorporation (incorporated by reference from our Registration Statement on Form SB-2 filed on August 19, 2004)
3.2	Bylaws (incorporated by reference from our Registration Statement on Form SB-2 filed on August 19, 2004)
3.3	Articles of Merger filed with the Secretary of State of Nevada on October 17, 2006 (incorporated by reference from our Current Report on Form 8-K filed on November 1, 2006)
3.4	Certificate of Change filed with the Secretary of State of Nevada on October 17, 2006 (incorporated by reference from our Current Report on Form 8-K filed on November 1, 2006)
(4)	Instrument Defining the Rights of Holders
4.1	Debenture with John Thomas Bridge & Opportunity Fund (incorporated by reference from our Current Report on Form 8-K filed on March 26, 2008)
(10)	Material Contracts
10.1	Executive Employment Agreement dated April 23, 2007 between our company and Pierre Mulacek (incorporated by reference from our Quarterly Report on Form 10-QSB filed on May 21, 2007)
10.2	Executive Employment Agreement dated October 18, 2007 with Reginald Denny (incorporated by reference from our Current Report on Form 8-K filed October 19, 2007)
10.3	Purchase Agreement dated March 19, 2008 with John Thomas Bridge & Opportunity Fund (incorporated by reference from our Current Report on Form 8-K filed on March 26, 2008)
10.4	Warrant Certificate with John Thomas Bridge & Opportunity Fund (incorporated by reference from our Current Report on Form 8-K filed on March 26, 2008)
10.5	10% Promissory Note dated July 14, 2008 issued by our company to Aton Select Fund Limited in the principal amount of $375,000 (incorporated by reference from our Quarterly Report on Form 10-QSB filed on August 14, 2008)
10.6	Stock Purchase Agreement dated August 21, 2008, by and between Billie J. Eustice and the Gary L. Little Trust, as Sellers, and Arkanova Acquisition Corporation (incorporated by reference from our Current Report on Form 8-K filed on August 25, 2008)
10.7	Form of Note Purchase Agreement dated September 3, 2008 between our company and an unaffiliated lender (incorporated by reference from our Current Report on Form 8-K/A filed on December 10, 2008)
10.8	First Amendment to Stock Purchase Agreement dated October 3, 2008, by and between Billie J. Eustice and the Gary L. Little Trust, as Sellers, and Arkanova Acquisition Corporation (incorporated by reference from our Current Report on Form 8-K filed on October 6, 2008)
10.9	Executive Employment Agreement dated October 28, 2008 between our company and Garrett Cook (incorporated by reference from our Current Report on Form 8-K filed on October 23, 2008)
10.10	Amended and Restated Stock Option Agreement dated November 14, 2008 with Reginald Denny (incorporated by reference from our Current Report on Form 8-K filed on November 20, 2008)
10.11	Stock Option and Subscription Agreement dated November 19, 2008 with Reginald Denny (incorporated by reference from our Current Report on Form 8-K filed on November 20, 2008)
10.12	Employment Agreement dated October 18, 2008 between our company and Reginald Denny (incorporated by reference from our Quarterly Report on Form 10-Q filed on February 23, 2009)

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10.13	Employment Agreement dated October 18, 2008 between our company and Pierre Mulacek (incorporated by reference from our Quarterly Report on Form 10-Q filed on February 23, 2009)
10.14	Stock Option and Subscription Agreement dated April 20, 2009 with Garrett Cook
10.15	Note Purchase Agreement dated April 17, 2009 between our company and Global Project Finance AG (incorporated by reference from our Current Report on Form 8-K filed on May 13, 2009)
10.16	Promissory Note dated April 17, 2009 issued by our company to Global Project Finance AG (incorporated by reference from our Current Report on Form 8-K filed on May 13, 2009)
10.17	Note Purchase Agreement dated April 29, 2009 between our company and Aton Select Fund Limited (incorporated by reference from our Current Report on Form 8-K filed on May 13, 2009)
10.18	Promissory Note dated April 29, 2009 issued by our company to Aton Select Fund Limited (incorporated by reference from our Current Report on Form 8-K filed on May 13, 2009)
10.19	Loan Consolidation Agreement dated as of October 1, 2009, between Arkanova Acquisition Corporation and Aton Select Funds Limited (incorporated by reference from our Current Report on Form 8-K filed on October 7, 2009)
10.20	Note Purchase Agreement dated as of October 1, 2009, between Arkanova Acquisition Corporation and Aton Select Funds Limited (incorporated by reference from our Current Report on Form 8-K filed on October 7, 2009)
10.21	Promissory Note dated October 1, 2009, of Arkanova Acquisition Corporation (incorporated by reference from our Current Report on Form 8-K filed on October 7, 2009)
10.22	Stock Option Agreement dated October 14, 2009 with Pierre Mulacek (incorporated by reference from our Current Report on Form 8-K filed on October 19, 2009)
10.23	Stock Option Agreement dated October 14, 2009 with Erich Hofer (incorporated by reference from our Current Report on Form 8-K filed on October 19, 2009)
10.24	Stock Option Agreement dated October 14, 2009 with Reginald Denny (incorporated by reference from our Current Report on Form 8-K filed on October 19, 2009)
(21)	Subsidiaries
21.1*	Arkanova Development LLC (Nevada Limited Liability Company) Arkanova Acquisition Corporation (Delaware) Prism Corporation (Oklahoma) Provident Energy Associates of Montana, LLC (Montana Limited Liability Company)
(31)	Section 302 Certification
31.1*	Section 302 Certification under Sarbanes-Oxley Act of 2002 of Pierre Mulacek
31.2*	Section 302 Certification under Sarbanes-Oxley Act of 2002 of Reginald Denny
(32)	Section 906 Certification
32.1*	Section 906 Certification under Sarbanes-Oxley Act of 2002

*Filed herewith

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ARKANOVA ENERGY CORPORATION

/s/ Pierre Mulacek
By: Pierre Mulacek
President, Chief Executive Officer,
Secretary, Treasurer and Director
(Principal Executive Officer)
Dated: December 23, 2009
/s/ Reginald Denny
By: Reginald Denny
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Dated: December 23, 2009

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s/ Pierre Mulacek
By: Pierre Mulacek
President, Chief Executive Officer,
Secretary, Treasurer and Director
(Principal Executive Officer)
Dated: December 23, 2009
/s/ Reginald Denny
By: Reginald Denny
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Dated: December 23, 2009
/s/ Erich Hofer
By: Erich Hofer
Director
Dated: December 23, 2009

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