10-Q

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

FORM 10-Q

(Mark One)

[ x ]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

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

For the transition period from __________ to ____________

Commission File Number: 000-51612

_______________________________________
(Exact name of registrant as specified in its charter)

Nevada	68-0542002
(State or other jurisdiction of incorporation or	(I.R.S. Employer Identification No.)
organization)

2441 High Timbers Drive, Suite 120 The Woodlands, Texas 77380
(Address of principal executive offices) (Zip Code)

281.298.9555
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [ x ]   No [    ]

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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 currently applicable to the Registrant).

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 definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

39,722,168 shares of common stock issued and outstanding as at August 4, 2010.

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

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

It is the opinion of management that the unaudited consolidated interim financial statements for the nine months ended June 30, 2010 include all adjustments necessary in order to ensure that the unaudited consolidated interim financial statements are not misleading.

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Arkanova Energy Corporation

Consolidated Balance Sheets

(unaudited)

		June 30,			September 30,
		2010			2009
ASSETS
Cash and cash equivalents	$	440,179		$	11,022
Oil and gas receivables, net of allowance of $0 and $0		79,957			84,829
Prepaid expenses and other		396,063			299,277
Other receivables, net of allowance of $79,020 and $79,020		83,929			83,929
Total current assets		1,000,128			479,057
Property and equipment, net of accumulated depreciation of $60,694 and $30,046 Oil and gas properties, full cost method		293,934			88,822
Unevaluated		14,034,251			14,034,251
Evaluated, net of accumulated depreciation of $5,604,813 and $5,599,580		113,157			90,514
Pipeline		162,424			106,948
Total assets	$	15,603,894		$	14,799,592
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	307,265		$	410,641
Accrued liabilities		561,811			847,041
Due to related party		341			109,650
Notes payable		976,225			11,122,500
Derivative liability		26,002			–
Deferred proceeds		1,500,000			–
Total current liabilities		3,371,644			12,489,832
Loans payable		12,063,701			–
Total liabilities		15,435,345			12,489,832
Contingencies and commitments
Stockholders’ Equity Common Stock, $0.001 par value, 1,000,000,000 shares authorized, 39,722,168 (September 30, 2009 - 37,100,250) shares issued and outstanding		39,722			37,100
Additional paid-in capital		16,343,886			15,533,238
Retained deficit		(16,215,059	)		(13,260,578	)
Total stockholders’ equity		168,549			2,309,760
Total liabilities and stockholders’ equity	$	15,603,894		$	14,799,592

See accompanying notes to consolidated financial statements

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Arkanova Energy Corporation

Consolidated Statements of Operations

(unaudited)

		Three months			Three months			Nine months			Nine months
		Ended			Ended			Ended			Ended
		June 30,			June 30,			June 30,			June 30,
		2010			2009			2010			2009
Revenue
Oil and gas sales	$	257,954		$	155,569		$	828,881		$	384,379
Total revenue		257,954			155,569			828,881			384,379
Expenses
General and administrative expenses		494,113			339,861			1,441,689			1,216,511
Oil and gas production costs		458,963			460,808			1,505,043			1,711,531
Depletion		1,453			–			5,233			65,551
Impairment of oil and gas properties		–			–			–			5,533,043
Operating loss		(696,575	)		(645,100	)		(2,123,084	)		(8,142,257	)
Other income (expenses)
Interest expense		(196,530	)		(333,827	)		(600,877	)		(963,703	)
Interest income		–			–			1,021			2,123
Rental income		–			–			–			368
Gain on write-off of account payable		–			–			–			150,000
Gain on forgiveness of debt		–			–			–			10,000
Loss on extinguishment of debt		–			–			(291,000	)		–
Gain on derivative liability		51,711			–			33,544			–
Net loss	$	(841,394	)	$	(978,927	)	$	(2,980,396	)	$	(8,943,469	)
Loss per share – basic and diluted	$	(0.02	)	$	(0.03	)	$	(0.08	)	$	(0.25	)
Weighted average common shares outstanding		38,429,000			36,450,000			37,817,000			36,450,000

See accompanying notes to consolidated financial statements

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Arkanova Energy Corporation

Consolidated Statements of Cash Flows

(unaudited)

		Nine months			Nine months
		Ended			Ended
		June 30,			June 30,
		2010			2009
Operating Activities
Net loss	$	(2,980,396	)	$	(8,943,469	)
Adjustment to reconcile net loss to net cash used in operating activities:
Amortization of discount on debenture		–			335,527
Depreciation		55,778			8,804
Depletion		5,233			65,551
Gain on write-off of account payable		–			(150,000	)
Gain on forgiveness of debt		–			(10,000	)
Loss on extinguishment of debt		291,000			–
Impairment of oil and gas properties		–			5,533,043
Gain on derivative liability		(33,544	)		–
Stock-based compensation		292,731			81,960
Changes in operating assets and liabilities:
Prepaid expenses		(96,786	)		(557,800	)
Oil and gas receivables		4,872			(60,442	)
Other receivables		–			(84,957	)
Accounts payable and accrued liabilities		(39,109	)		204,005
Accrued interest		522,274			440,781
Due to related parties		(109,309	)		(7,447	)
Net Cash Used in Operating Activities		(2,087,256	)		(3,144,444	)
Investing Activities
Deposit		–			(20,000	)
Restricted cash		–			9,000,000
Net cash paid on acquisition of Prism		–			(5,676,586	)
Deposit received on sale of oil and gas properties		1,500,000			–
Purchase of equipment		(128,833	)		(127,889	)
Purchase of pipeline		(80,607	)		–
Oil and gas property expenditures		(47,876	)		(51,050	)
Net Cash Provided by Investing Activities		1,242,684			3,124,475
Financing Activities
Proceeds from issuance of promissory notes		1,168,729			600,000
Repayment of debenture		–			(500,000	)
Proceeds from exercise of stock options		105,000			–
Net Cash Provided by Financing Activities		1,273,729			100,000
Net Change in Cash		429,157			80,031
Cash and cash equivalents – beginning of period		11,022			464
Cash and cash equivalents – end of period	$	440,179		$	80,495

Supplemental Cash Flow and Other Disclosures (Note 9)

See accompanying notes to consolidated financial statements

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Arkanova Energy Corporation

Notes to Consolidated Financial Statements

(unaudited)

NOTE 1: BASIS OF PRESENTATION

Arkanova Energy Corporation (formerly Alton Ventures, Inc.) (“Arkanova” or the “Company”) was incorporated in the state of Nevada on September 6, 2001 to engage in the acquisition, exploration and development of mineral properties.

In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments, consisting of only normal recurring accruals, necessary for a fair statement of financial position, results of operations, and cash flows. The information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and the accompanying notes included in our Annual Report on Form 10-K for the year ended September 30, 2009. The accounting policies are described in the “Notes to the Consolidated Financial Statements” in the 2009 Annual Report on Form 10-K and updated, as necessary, in this Form 10-Q. The year-end consolidated balance sheet data presented for comparative purposes was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. The results of operations for the nine months ended June 30, 2010 are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.

Accounting for Derivative Instruments

ASC 815-24 (formerly SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,”), requires all derivatives to be recorded on the balance sheet at fair value. Arkanova’s derivatives are separately valued and accounted for on our balance sheet. Fair values for securities traded in the open market and derivatives are based on quoted market prices. Where market prices are not readily available, fair values are determined using market based pricing models incorporating readily observable market data and requiring judgment and estimates.

The pricing model Arkanova used for determining fair values of its derivatives is the Black-Scholes option-pricing model. Valuations derived from this model are subject to ongoing internal and external verification and review. The model uses market-sourced inputs such as interest rates, exchange rates and option volatilities. Selection of these inputs involves management’s judgment and may impact net income.

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 $16,215,059 since inception and has a negative working capital of $2,371,516 at June 30, 2010. 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: 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.

Unevaluated Properties, Arkansas and Colorado

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

						Total
						Net Carrying
		Acquisition		Exploration		Value
Balance, September 30, 2009	$	9,958,520	$	4,075,731	$	14,034,251
Cost incurred during the period	$	–	$	–	$	–
Balance, June 30, 2010	$	9,958,520	$	4,075,731	$	14,034,251

Evaluated and Developed Properties, Montana

The net carrying value of Arkanova’s evaluated oil and gas properties for June 30, 2010 and September 30, 2009 was $113,157 and $90,514.

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NOTE 4: RELATED PARTY TRANSACTIONS

(a)	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 per share until expiry on October 14, 2014.
(b)	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.
(c)	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.
(d)	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 $0.20 per share for proceeds of $30,000.
(e)	On February 8, 2010, the Company entered into a Stock Option Agreement with an employee of the Company. Pursuant to the terms of the agreement, the Company granted 250,000 stock options exercisable at a price of $0.31 per share until expiry on February 8, 2015. 125,000 stock options shall vest on August 8, 2010 and the remaining 125,000 options shall vest on February 8, 2011.
(f)	On June 4, 2010, the Company issued 300,000 shares of common stock to a director of the Company upon the exercise of 300,000 options at $0.10 per share for proceeds of $30,000.

NOTE 5: NOTES PAYABLE

(a)

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, Modifications and Extinguishments (“ASC 470-50”) and ASC 470-60, Troubled Debt Restructurings (“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. On October 1, 2009, Acquisition entered into a Loan Consolidation Agreement to consolidate the promissory notes as described in Note 5(a), (b) and (c). Refer to Note 5(d).

(b)

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, accrues interest at 8% per annum and is due on September 3, 2009. 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 and was fully amortized by September 3, 2009. On October 1, 2009, Acquisition entered into a Loan Consolidation Agreement to consolidate the promissory notes as described in Notes 5(a), (b) and (c). Refer to Note 5(d).

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(c)	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. On October 1, 2009, Acquisition entered into a Loan Consolidation Agreement to consolidate the promissory notes as described in Notes 5(a), (b) and (c). Refer to Note 5(d).
(d)	On October 1, 2009, our subsidiary borrowed $1,168,729 and consolidated its outstanding promissory note balances into one new promissory note in the principal amount for $12,000,000. The new loan also adds accrued interest of $818,771 to this new principal amount. The note bears interest at 6% per annum, is due on September 30, 2011, and is secured by our guarantee and also a pledge of our wholly owned subsidiary, Provident. Interest is payable 10 days after maturity in our common shares. The number of shares payable will be determined by dividing $1,440,000 by the average stock price over the 15 business day period immediately preceding the date on which the promissory note matures.
	As further consideration for this new loan, Arkanova issued the note holder 821,918 common shares with a fair value of $240,000. In addition, Arkanova will issue $240,000 worth of shares of common stock to the note holder on October 1, 2010. Arkanova evaluated the application of ASC 470-50 and ASC 470-60 by Debtors and determined the debt modification was substantial and qualified as a debt extinguishment. The additional stock due was valued at $480,000 and is expensed as a loss on extinguishment of debt.
	During the nine month period ended June 30, 2010, Acquisition delivered to the Investor an additional 900,000 common shares with a fair value of $291,000 per our prior and heretofore unfulfilled obligation under Section 3 of the Note Purchase Agreement relating to the $9,000,000 Note. The obligation was recorded as a liability of $450,000 originally by Arkanova because the lender had the option of requesting cash of $450,000 or 900,000 common shares. During fiscal 2010, the lender requested the 900,000 common shares. The common shares had a fair value of $291,000 and the resulting gain of $189,000 was recorded as a gain against the loss on extinguishment of debt. The total loss on extinguishment of debt for the nine months ended June 30, 2010 is $291,000.

NOTE 6: 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 5,000,000 shares of Arkanova’s common stock available for issuance under the plan.

During the nine months ended June 30, 2010, Arkanova granted 1,750,000 stock options, of which 1,500,000 stock options are exercisable at $0.20 per share until October 14, 2014, 250,000 stock options are exercisable at $0.31 per share until February 8, 2015. The weighted average grant date fair value of stock options granted during the nine months ended June 30, 2010 was $0.19.

During the nine months ended June 30, 2010, 900,000 of stock options were exercised for cash proceeds of $105,000 and 200,000 of stock options were forfeited upon the termination of the agreement with the former Chief Operating Officer. During the nine months ended June 30, 2010, Arkanova recorded stock-based compensation of $292,731, as general and administrative expense.

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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, 2009	2,653,333		0.38
Granted	1,750,000		0.22
Exercised	(900,000	)	0.12
Forfeited/Cancelled	(100,001	)	0.16
Expired	(99,999	)	0.14
Outstanding, June 30, 2010	3,303,333		0.38	3.52	4,100
Exercisable, June 30, 2010	3,053,333		0.38	3.43	4,100

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:

	Nine months
	ended
	June 30,
	2010
Expected dividend yield	0.00%
Expected volatility	187%
Expected life (in years)	2.55
Risk-free interest rate	1.23%

A summary of the status of the Company’s non-vested stock options as of June 30, 2010, and changes during the nine month period ended June 30, 2010, is presented below:

			Weighted Average
	Number of		Grant Date
Non-vested options	options		Fair Value
			$
Non-vested at September 30, 2009	133,334		0.13
Granted	1,750,000		0.19
Forfeited/Cancelled	(100,001	)	0.14
Vested	(1,533,333	)	0.17
Non-vested at June 30, 2010	250,000		0.28

At June 30, 2010, there was $30,096 of unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the Plan. There was $4,100 intrinsic value associated with the outstanding options at June 30, 2010.

NOTE 7: DERIVATIVE INSTRUMENTS

In June 2008, the FASB ratified ASC 815-15, “Derivatives and Hedging – Embedded Derivatives” (“ASC 815-15”). ASC 815-15, specifies that a contract that would otherwise meet the definition of a derivative, but is both (a) indexed to its own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. ASC 815-15 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock, including evaluating the instrument’s contingent exercise and settlement provisions, and thus able to qualify for the ASC 815-15 scope exception. It also clarifies the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. ASC 815-15 is effective for the first annual reporting period beginning after December 15, 2008 and early adoption is prohibited.

Initially, Arkanova evaluated all of its financial instruments and determined that 250,000 warrants associated a March 2008 financing qualified for treatment under ASC 815-15 and adjusted its financial statements to reflect the adoption of the ASC 815-15 as of October 1, 2009. The fair value of these warrants were reclassified as of October 1, 2009 in the amount of $85,461 from additional paid in capital with $59,546 to derivative liability and the remaining cumulative effect of the change in accounting principle in the amount of $25,915 was recognized as an adjustment to the opening balance of retained earnings. The impact of ASC 815-15 for the year to date period ending June 30, 2010 resulted in a decrease in the derivative liability of $33,544 with a corresponding income of $33,544 on derivative instruments.

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The fair values of the warrants on October 1, 2009 and June 30, 2010 were estimated using the following assumptions:

		June 30, 2010		October 1, 2009
Expected volatility		200%		175%
Expected term		2.75 years		3.5 years
Risk free rate		1.00%		0.95%
Expected dividends		-		-
Fair value	$	26,002	$	59,546

NOTE 8: COMMITMENTS

(a)	See Note 5.
(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. On October 20, 2009, this agreement was terminated due to the resignation of its Chief Operations Officer. At the time of resignation 99,999 options had vested and the remaining 100,001 warrants were forfeited. The 99,999 vested options expired on January 20, 2010, three months after the resignation of the Chief Operations Officer.
(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. As of June 30, 2010, the Company owed $120,835 to the former owner of Prism Corporation.
(d)	On February 8, 2010, Arkanova entered into an Employment Agreement with its Field Manager. Pursuant to the agreement, Arkanova agreed to pay an annual salary of $120,000 and the employee may be eligible to receive an annual bonus determined by the Board of Directors based on the performance of the Company. The term of the agreement is for one year and upon expiration of the agreement, it will be renewed for another year unless terminated. In addition, Arkanova has agreed to grant options to purchase 250,000 shares of common stock with an exercise price equal to $0.31. The options are exercisable until February 8, 2015.
(e)	On April 9, 2010, Arkanova’s subsidiary, Provident, entered into a Purchase and Sale Agreement with Knightwall Invest, Inc. Pursuant to the agreement, Provident agreed to sell to Knightwall 30% of the of the leasehold interests comprising Provident’s 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 Unit, for a purchase price of $7,000,000 (the “Purchase Price”). The closing of the purchase and sale, which is subject to the payment in full of all installments of the Purchase Price and other conditions of closing, is scheduled to occur on August 6, 2010. There is no assurance at this time, however, that the closing will occur.
	Knightwall is a lender to Arkanova and it currently has an outstanding loan to Arkanova of $363,000 in principal amount bearing interest at the rate of 10% per annum and due and payable by Arkanova on July 8, 2010. The principal and accrued interest to the maturity date (together $367,077.53) was paid in full from the portion of the Purchase Price paid by Knightwall on August 3, 2010. Refer to Note 10(f).
	The Purchase Price is payable in installments, with the initial payment of $1,500,000 being due on or before April 9, 2010 (received), a second payment of $2,000,000 being due on June 8, 2010 (received on July 2, 2010), a third payment of $2,000,000 ($367,077.53 of which Knightwall is entitled to apply to the payment in full of its loan described in Note5(b)) being due on July 8, 2010 (received on August 3, 2010), and the remaining $1,500,000 being due at the closing of the purchase and sale.

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NOTE 9: SUPPLEMENTAL CASH FLOW AND OTHER DISCLOSURES

		Nine months		Nine months
		Ended		Ended
		June 30,		June 30,
		2010		2009
Supplemental Disclosures:
Interest paid	$	33,000	$	–
Income taxes paid	$	–	$	–
Noncash Financing and Investing Activities
Cumulative effort of change in accounting principal	$	25,915	$	–
Accounts payable related to capital expenditures	$	106,927	$	1,207

NOTE 10: SUBSEQUENT EVENTS

(a)	On July 2, 2010, Provident received the 2nd payment of $2,000,000 from Knightwall pursuant to the Purchase and Sale Agreement described in Note 8(e).
(b)	On July 17, 2010, Arkanova entered into an executive employment agreement with the Chief Executive Officer (the “CEO”) of Arkanova. Arkanova agreed to pay an annual salary of $240,000 in consideration for him carrying out his duties as an executive of Arkanova. Pursuant to the terms of the agreement, and in the event the Company undergoes a change of control event, the agreement will automatically terminate and Arkanova is required to pay an amount equal to the total of:
	1)	$360,000 (calculated as 18 months salary payable under the agreement); and
	2)	The cost for a period of 18 months to obtain family and/or spousal health insurance that is similar in coverage to that provided to the CEO as of the date of the change of control.
(c)	On July 17, 2010, Arkanova entered into an executive employment agreement with the Chief Financial Officer (the “CFO”) of Arkanova. Arkanova agreed to pay an annual salary of $170,000 in consideration for him carrying out his duties as an executive of Arkanova. Pursuant to the terms of the agreement, and in the event the Company undergoes a change of control event, the agreement will automatically terminate and Arkanova is required to pay an amount equal to the total of:
	1)	$255,000 (calculated as 18 months salary payable under the agreement); and
	2)	The cost for a period of 18 months to obtain family and/or spousal health insurance that is similar in coverage to that provided to the CFO as of the date of the change of control.
(d)	On July 17, 2010, Arkanova amended and restates the 2008 Amended Stock Option Plan to revise the termination provision for vested Non-Qualified Stock Options. The termination date of vested Non-Qualified Stock Options was extended from a period of three months to a period of one year.
(e)	On July 17, 2010, Arkanova repaid principal amount of $30,000 and interest of $8,250 pursuant to the promissory note agreement described in Note 5(a). The note was then renewed and the maturity date was extended to October 17, 2010.
(f)	On August 3, 2010, Provident received the 3rd payment of $2,000,000 ($367,078 of which Knightwall applied to its loan described in Note 5(b)) pursuant to the Purchase and Sale Agreement described in Note 8(e).

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

This quarterly report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expect”, “plan”, “anticipate”, “believe”, “estimate”, “predict”, “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 the section entitled “Risk Factors”, that may cause our company’s or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements 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, performance or achievements. 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.

Our unaudited consolidated interim financial statements are stated in United States dollars and are prepared in accordance with United States generally accepted accounting principles. The following discussion should be read in conjunction with our unaudited consolidated financial statements and the related notes that appear elsewhere in this quarterly report.

In this quarterly report, unless otherwise specified, all references to “common shares” refer to the shares of our common stock and the terms “we”, “us”, “our” and “Arkanova” mean Arkanova Energy Corporation.

Results of Operations for the Three and Nine Months Ended June 30, 2010

The following summary of our results of operations should be read in conjunction with our unaudited consolidated interim financial statements for the three and nine months ended June 30, 2010 which are included herein:

		Three Months			Three Months			Nine Months			Nine Months
		Ended			Ended			Ended			Ended
		June 30, 2010			June 30, 2009			June 30, 2010			June 30, 2009
Revenue	$	257,954		$	155,569		$	828,881		$	384,379
Expenses	$	954,529		$	800,669		$	2,951,965		$	8,526,636
Operating Loss	$	(696,575	)	$	(645,100	)	$	(2,123,084	)	$	(8,142,257	)
Interest Expense	$	(196,350	)	$	(333,827	)	$	(600,877	)	$	(963,703	)
Interest Income	$	-		$	-		$	-		$	2,123
Rental Income	$	-		$	-		$	-		$	368
Gain on write-off of accounts payable	$	-		$	-		$	-		$	150,000
Gain on forgiveness of debt	$	-		$	-			-		$	10,000
Loss on extinguishment of debt	$	-		$	-		$	(291,000	)	$	-
Gain on derivative liability	$	51,711		$	-		$	33,544		$	-
Net Loss	$	(841,394	)	$	(978,927	)	$	(2,980,396	)	$	(8,943,469	)

Revenues

During the three months ended June 30, 2010, we generated $257,954 in revenue from oil and gas sales as compared to revenue of $155,569 during the three months ended June 30, 2009. During the nine months ended June 30, 2010, we generated $828,881 in revenue from oil and gas sales as compared to revenue of $384,379 during the nine months ended June 30, 2009. The increased revenue during the three and nine months ended June 30, 2010 resulted from 10 old wells being remediated and put back into production.

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On April 9, 2010, our subsidiary, Provident Energy Associates of Montana LLC, entered into a Purchase and Sale Agreement with Knightwall Invest, Inc. Pursuant to the agreement, Provident Energy agreed to sell to Knightwall Invest 30% of the leasehold interests comprising Provident Energy’s 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 Unit, for a purchase price of $7,000,000. The closing of the purchase and sale, which is subject to the payment in full of all installments of the purchase price and other conditions of closing, was scheduled to occur on August 6, 2010 but will be delayed until an agreed upon later date due to delays in the drilling start date. Following the closing of the agreement, we anticipate that revenues will decrease by approximately 30%. For more information on the proposed disposition, see sub-heading “Proposed Sale of Subsidiary Interest”.

Expenses

Expenses increased during the three months ended June 30, 2010 to $954,709 as compared to $800,669 during the three months ended June 30, 2009. The increase is largely as a result of increased general and administrative expenses of $494,113 for the three months ended June 30, 2010 compared to $339,861 for the three months ended June 30, 2009. There was oil and gas production costs of $458,963 and depletion expenses of $1,453 for the three months ended June 30, 2010 compared to oil and gas production costs of $460,808 and depletion expenses of $nil for the three months ended June 30, 2009. The main components of our general and administrative expenses during the three months ended June 30, 2010 included employment compensation expenses of $250,877, stock based compensation of $25,796, professional and audit fees of $53,372, interest of $984 and other general and administrative expenses of $163,084.

Expenses substantially decreased during the nine months ended June 30, 2010 to $2,951,965 as compared to $8,526,636 during the nine months ended June 30, 2009. The decrease was primarily due to a $5,533,043 impairment of oil and gas properties that occurred during the nine months ended June 30, 2009. Aside from this large one-time write-down, general and administrative expenses increased from $1,216,511 during the nine months ended June 30, 2009 to $1,441,689 during the nine months ended June 30, 2010, largely the result of increased compensation expenses. The main components of our general and administrative expenses during the nine months ended June 30, 2010 included employment compensation expenses of $573,769, stock based compensation of $292,731, professional and audit fees of $167,362, interest of $2,520 and other general and administrative expenses of $405,307. The nine months ended June 30, 2010 also resulted in oil and gas production costs of $1,505,043 and depletion expenses of $5,233, as compared to oil and gas production costs of $1,711,531 and depletion expenses of $65,551 for the nine months ended June 30, 2009.

Following the closing of the Purchase and Sale Agreement dated April 9, 2010 with Knightwall Invest, we anticipate that oil and gas production costs, depletion and some general and administrative expenses related to management of our oil and gas interests will decrease by approximately 30%. For more information on the proposed disposition, see sub-heading “Proposed Sale of Subsidiary Interest”.

Liquidity and Capital Resources

Working Capital

		At June 30,		At September 30,
		2010		2009
		(unaudited)		(audited)
Current assets	$	1,000,128	$	479,057
Current liabilities		3,371,644		12,489,832
Working capital deficiency	$	2,371,516	$	12,010,775

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We had cash and cash equivalents of $440,179 and a working capital deficiency of $2,371,516 as at June 30, 2010 compared to cash and cash equivalents of $11,022 and a working capital deficiency of $12,010,775 as at September 30, 2009.

Only July 17, 2010, our company entered into a Note Purchase Agreement with Global Project Finance AG, pursuant to which Global Project Finance purchased, and our company sold and issued to Global Project Finance, a promissory note in the principal amount of $300,000, bearing interest at a rate of 10.0% per annum with a maturity date occurring at any time after October 17, 2010. As a result, our working capital has increased by the principal amount.

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 $13,270,000 over the next twelve month period to fund our plan of operations and approximately $700,000 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 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.

Proposed Sale of Subsidiary Interest

On April 9, 2010, our subsidiary, Provident Energy Associates of Montana LLC, entered into a Purchase and Sale Agreement with Knightwall Invest, Inc. Pursuant to the agreement, Provident Energy agreed to sell to Knightwall Invest 30% of the leasehold working interests comprising Provident Energy’s 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 Unit, for a purchase price of $7,000,000. The closing of the purchase and sale, which is subject to the payment in full of all instalments of the purchase price and other conditions of closing, was scheduled to occur on August 6, 2010 but will be delayed because of delayed drilling commitments. There is no assurance at this time, however, that the closing will occur.

Knightwall Invest is a lender to our company and it currently has an outstanding loan to our company of $330,000 in principal amount bearing interest at the rate of 10% per annum and due and payable by our company on July 8, 2010, plus interest of $33,000. The total amount due ($367,077.53, which includes accrued interest to the date of payment) was paid in full from the portion of the purchase price paid by Knightwall Invest on August 3, 2010.

The purchase price is payable in instalments, with the initial payment of $1,500,000 paid on April 8, 2010, a second payment of $2,000,000 was paid on July 8, 2010, a third payment of $2,000,000 ($367,077.53 of which Knightwall Invest applied to the payment in full of its loan to our company) being due on July 8, 2010 and paid on August 3, 2010, and the remaining $1,500,000 being due at the closing of the purchase and sale.

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Outstanding Promissory Note

On October 1, 2009, our subsidiary entered into a Loan Consolidation Agreement to consolidate its outstanding promissory notes. We 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 provided for the consolidation and cancellation of the former notes and the additional loan amount. Interest of $818,771 on the former notes was consolidated to the new principal amount of $12,000,000. The promissory note bears interest at 6% per annum, is due on September 30, 2011, and is secured by a pledge of all of our subsidiary’s interest in its wholly-owned subsidiary, Provident Energy. Interest on the promissory note is payable 10 days after maturity in shares of our company’s common stock. The number of shares payable as interest will be determined by dividing $1,440,000 by the average stock price over the 15 business day period immediately preceding the date on which the promissory note matures.

As inducement to the note holder to provide the additional loan of $1,168,729, our subsidiary has agreed to cause our company to issue 821,918 shares of common stock to the note holder. In addition, we have agreed to 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 Provident Energy and a guarantee of indebtedness by our company.

Our subsidiary has also agreed to cause our company to issue an additional 900,000 shares of common stock to the lender as soon as reasonably practical following the execution of the Loan Consolidation Agreement, in accordance with our company’s heretofore unfulfilled obligation under Section 3 of the Note Purchase Agreement relating to the $9,000,000 note. We issued the 900,000 shares on May 27, 2010.

Capital Requirements for the Next Twelve Month Period

In addition to funds required to eliminate our working capital deficiency, we anticipate that we will require approximately $13,270,000 for operating expenses during the next twelve month period as set out below.

Estimated Expenses for the Next Twelve Month Period
Lease Acquisition Costs	$	5,600,000
Exploration & Operating Costs:
Drilling Cost	$	3,500,000
Reactivate Battery 29 and put on 8 additional wells		2,000,000
Seismic Costs	$	300,000
Employee and Consultant Compensation	$	1,070,000
Professional Fees	$	250,000
General and Administrative Expenses	$	550,000
Total	$	13,270,000

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, Remediation and Seismic Costs

We estimate that our exploration and development costs on our property interests will be approximately $5,800,000 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 $5,600,000 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.

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Estimated Timeline of Exploration Activity on Property

Date	Objective
August 2010	Commence drilling Max 1 – 2817 in the TMCBSU in Montana and complete in the Cut Bank and test Bakken formation.
October 2010	Commence drilling second Cut Bank well or first Bakken well if warranted.
November 2010	Commence drilling third Cut Bank well or 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 $1,000,000. As of August 4, 2010, we had five employees, including Pierre Mulacek and Reginald Denny. We pay Mr. Mulacek, our Chief Executive Officer, an annual salary of $240,000, Mr. Denny, our Chief Financial Officer, an annual salary of $170,000.

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 $550,000 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, geological engineering, etc.

Cash Used In Operating Activities

Operating activities used cash of $2,087,256 during the nine months ended June 30, 2010 as compared to $3,144,444 during the nine months ended June 30, 2009.

Cash From Investing Activities

Investing activities provided cash of $1,242,684 during the nine months ended June 30, 2010 as compared to investing activities providing cash of $3,124,475 during the nine months ended June 30, 2009.

Cash from Financing Activities

Financing activities provided cash of $1,273,729 during the nine months ended June 30, 2010 as compared to financing activities using cash of $100,000 during the nine months ended June 30, 2010. During the nine months ended June 30, 2010, we received $1,168,729 from the issuance of promissory notes and $105,000 from the exercise of stock options.

Capital Expenditures

As of August 4, 2010, our company did not have any material commitments for capital expenditures.

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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.

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. 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

We utilize the full-cost method of accounting for petroleum and natural gas properties. Under this method, we capitalize 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 August 4, 2010, we had properties with proven reserves. The 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, we consider 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 June 30, 2010, the proved property had a net book value of $113,157

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Recent Accounting Pronouncements

In June 2008, the FASB ratified ASC 815-15, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“ASC 815-15”). ASC 815-15, “Accounting for Derivatives and Hedging Activities” (“ASC 815-15”), specifies that a contract that would otherwise meet the definition of a derivative, but is both (a) indexed to its own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. ASC 815-15 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock, including evaluating the instrument’s contingent exercise and settlement provisions, and thus able to qualify for the ASC 815-15 scope exception. It also clarifies the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. ASC 815-15 is effective for the first annual reporting period beginning after December 15, 2008 and early adoption is prohibited.

Initially, we evaluated all of our financial instruments and determined that 250,000 warrants associated with a March 2008 financing qualified for treatment under ASC 815-15 and adjusted our financial statements to reflect the adoption of the ASC 815-15 as of October 1, 2009. The fair value of these warrants were reclassified as of October 1, 2009 in the amount of $85,461 from additional paid in capital with $59,546 to derivative liability and the remaining cumulative effect of the change in accounting principle in the amount of $25,915 was recognized as an adjustment to the opening balance of retained earnings. The impact of ASC 815-15 for the year to date period ending June 30, 2010 resulted in a decrease in the derivative liability of $33,544 with a corresponding loss of $33,544 on derivative instruments.

The fair values of the warrants on October 1, 2009 and June 30, 2010 were estimated using the following assumptions:

		June 30, 2010		October 1, 2009
Expected volatility		200%		175%
Expected term		2.75 years		3.5 years
Risk free rate		1.00%		0.95%
Expected dividends		-		-
Fair value	$	26,002	$	59,546

ASC 815-24 (formerly SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,”), requires all derivatives to be recorded on the balance sheet at fair value. Our derivatives are separately valued and accounted for on our balance sheet. Fair values for securities traded in the open market and derivatives are based on quoted market prices. Where market prices are not readily available, fair values are determined using market based pricing models incorporating readily observable market data and requiring judgment and estimates.

The pricing model we used for determining fair values of our derivatives is the Black-Scholes option-pricing model. Valuations derived from this model are subject to ongoing internal and external verification and review. The model uses market-sourced inputs such as interest rates, exchange rates and option volatilities. Selection of these inputs involves management’s judgment and may impact net income.

Risk Factors

Much of the information included in this quarterly report includes or is based upon estimates, projections or other forward looking statements. Such forward looking statements include any projections and estimates made by us and our management in connection with our business operations. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein.

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Such estimates, projections or other forward looking statements involve various risks and uncertainties as outlined below. We caution the reader that important factors in some cases have affected and, in the future, could materially affect actual results and cause actual results to differ materially from the results expressed in any such estimates, projections or other forward looking statements.

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 $16,404,059 as at June 30, 2010. 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.

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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 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.

If we experience rapid growth in our operations, it 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.

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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 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, Colorado and Montana 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.

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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 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;

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• the price of foreign imports of oil and gas;
• the cost of exploring for, producing and delivering oil and gas;
• 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 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.

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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 3. Quantitative and Qualitative Disclosures About Market Risk.

Not Applicable.

Item 4T. Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our president and chief executive officer (who is acting as our principal executive officer) and our chief financial officer (who is acting as our principal financial officer and principal accounting officer) to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of June 30, 2010, the end of the three month period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our president and chief executive officer (who is acting as our principal executive officer) and our chief financial officer (who is acting as our principal financial officer and principal accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our president and chief executive officer (who is acting as our chief executive officer) and our chief financial officer (who is acting as our principal financial officer and principal accounting officer) concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

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There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. 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 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On June 2, 2010, one of our directors exercised 300,000 options to purchase common shares at an exercise price of $0.10 per common share and, accordingly, we issued 300,000 common shares to one of our directors for gross proceeds of $30,000. We issued the common shares relying on exemptions from registration provided by Section 4(2) and/or Regulation D of the Securities Act of 1933.

On July 17, 2010, our company entered into a Note Purchase Agreement with Global Project Finance AG, pursuant to which Global Project Finance AG purchased, and our company sold and issued to Global Project Finance AG, a promissory note in the principal amount of $300,000, bearing interest at a rate of 10.0% per annum with a maturity date occurring at any time after October 17, 2010. We issued the note relying on exemptions from registration provided by Regulation S of the Securities Act of 1933.

On August 1, 2010, we granted 100,000 options to purchase common shares in our company in consideration for the services provided by an employee of our company. In addition, on August 10, 2010 we granted an additional 200,000 options to purchase common shares in our company to an existing employee for continued services to our company. We granted the options to purchase shares common shares in our company to each employee relying on exemptions from registration provided by Section 4(2) of the Securities Act of 1933.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. (Removed and Reserved).

Item 5. Other Information.

On July 17, 2010, our company entered into a Note Purchase Agreement with Global Project Finance AG, pursuant to which Global Project Finance purchased, and our company sold and issued to Global Project Finance, a promissory note in the principal amount of $300,000, bearing interest at a rate of 10.0% per annum with a maturity date occurring at any time after October 17, 2010. Pursuant to the agreement, Global Project Finance is permitted to maintain security interest in the oil, gas and mineral leases owned by our company and covering on the acreage in Phillips and Monroe County, Arkansas, and any and all wells located on the acreage covered by the said leases that are owned and operated by our company, right-of-ways and easements and our company’s share of production obtained from such wells.

Item 6. Exhibits.

(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)

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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	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)
10.2	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)
10.3	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)
10.4	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)
10.5	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)
10.6	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)
10.7	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)
10.8	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)
10.9	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)
10.10	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)
10.11	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)
10.12	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)
10.13	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)

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10.14	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)
10.15	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)
10.16	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)
10.17	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)
10.18	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)
10.19	Purchase and Sale Agreement dated April 9, 2010, by and between Provident Energy Associates of Montana, LLC, as Seller, and Knightwall Invest, Inc., as Buyer (incorporated by reference from our Current Report on Form 8-K filed on April 12, 2010)
10.20	Executive Employment Agreement dated July 17, 2010 with Pierre Mulacek (incorporated by reference from our Current Report on Form 8-K filed on July 22, 2010)
10.21	Executive Employment Agreement dated July 17, 2010 with Reginald Denny (incorporated by reference from our Current Report on Form 8-K filed on July 22, 2010)
10.22*	Note Purchase Agreement dated as of the 17th day of July, 2010, between our company and Global Project Finance AG.
(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 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: August 16, 2010

/s/ Reginald Denny

By: Reginald Denny

Chief Financial Officer

(Principal Financial Officer and

Principal Accounting Officer)

Dated: August 16, 2010

EX-10.22

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Pierre Mulacek, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Arkanova Energy Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 16, 2010

/s/ Pierre Mulacek

Pierre Mulacek

President, Chief Executive Officer, Secretary,

Treasurer and Director

(Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Reginald Denny, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Arkanova Energy Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 16, 2010

/s/ Reginald Denny

Reginald Denny

Chief Financial Officer

(Principal Financial Officer and Principal

Accounting Officer)

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officers of Arkanova Energy Corporation (the “Company”) hereby certify that:

(1) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2010 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 16, 2010

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