Arrow Energy Ltd. announces annual filings


    TSX-V: AOF

    CALGARY, April 29 /CNW/ - Arrow Energy Ltd. ("Arrow") is pleased to
announce that it has filed its annual audited financial statements for the
year ended December 31, 2007 and accompanying Management's Discussion and
Analysis on SEDAR.
    As per Press Release and SEDAR filing of April 22 of this year, the
Company has filed information and reports concerning Arrow's oil and gas
reserves, activities and properties, which are required to be provided under
National Instrument 51-101 - Standards of Disclosure for Oil and Gas
Activities. The financial statements, Management's Discussion and Analysis and
year-end Reserves Information are available for viewing under Arrow's profile
on SEDAR at www.sedar.com or its web-site www.arrow-energy.com.

    THE TSX VENTURE EXCHANGE HAS NOT REVIEWED AND DOES NOT ACCEPT
    RESPONSIBILITY FOR THE ADEQUACY OR ACCURACY OF THIS RELEASE.Arrow Energy Ltd.

                  2007 Management's Discussion and AnalysisTo our valued shareholders,

    2007 has been both an exciting and a challenging year for Arrow Energy.
We have experienced significant growth in terms of production, sales revenue
and reserves. We have had a tremendous year in terms of drilling and
completions. We believe we have made accretive and valuable choices for our
shareholders in terms of our acquisitions. However, we have also had to deal
with the significant costs of restructuring and reshaping the company into the
emerging junior oil and gas company that Arrow has become. Together, though,
we have made great strides. Our cash flow from operations in 2006 of over
$900k of loss has been dramatically reduced to a loss of $167k in 2007. We
experienced two quarters of positive cash flow from operations for the first
time since early 2005. We will continue to strive to improve our financial
position. I will outline below the steps that we are taking and have taken
that will help to ensure Arrow's future profitability.
    2008 brings with it an opportunity to focus Arrow to take advantage of
one of Alberta's greatest sources of unexplored resources, its eight Métis
Settlements and numerous aboriginal communities.

    Focussed on our Commitment to Growth - Defining Arrow's Core Areas
    Peavine Métis Settlement

    The acquisition of Tirmoil Energy's assets on and off Peavine Métis
Settlement has been the catalyst for Arrow's dramatic growth. One of the most
important benefits of this transaction has been the addition of crude oil
production to Arrow's asset mix for the first time in the company's history,
which has come at a time of unprecedented oil prices. Arrow along with its
partners have added to our Peavine/Dawson production base by drilling 2
producing wells, the 11-32-79-16W5 oil well and 102/16-32-79-16W5 gas well.
The 11-32 has been a stable producer for the company since its tie-in. The
16-32 despite significant operational difficulties which led to shut in of
production and delay of revenue for the entirety of Q4 has now been
stabilized. Arrow remains committed to growing our asset base on Peavine. We
have aggressive plans for exploration and development in 2008. Plans are in
place for a water injection scheme on Peavine that we believe will have a
positive impact on our production base. We are working with all of our
partners at Peavine to actively seek out opportunities to continue to grow our
oil and gas assets in and around the settlement.

    Gift Lake Area/Gift Lake Métis Settlement

    In addition to our assets on Peavine, we have extended our corporate
focus of building our asset base in and around Alberta's Métis Settlements to
Gift Lake Métis Settlement. April 1st, 2008 saw the closing of a strategic and
highly accretive acquisition immediately adjacent to settlement with a
negotiated effective date of October 1st, 2007. We saw this complementary
acquisition as being critical for us for the future, but also to replace the
Peavine production and revenue that we temporarily lost in Q4. The Gift Lake
assets averaged approximately 100 boe/d production during Q4 and made close to
$500k in net revenue during the period. At closing, Arrow's effective cost of
the acquisition, after adjustments for revenue from October 1st, 2007 until
closing, was approximately $3.1 MM. The revenues from this acquisition are not
accounted for in the audited financial statements and MD&A for the year ended
December 31, 2007 because they are treated as an adjustment to the acquisition
purchase price. They will begin to be accounted for as revenue in Q2 2008. If
we were to include the results for 2007 for Gift Lake as being part of our
results for 2007, Arrow would have had positive cash flow from operations for
the year. We look forward to being able to present a far more positive
financial statement to our shareholders once this acquisition becomes
evidenced in our reporting in the 2nd Quarter of 2008.
    We believe the Gift Lake acquisition is crucial for us as a company. It
solidifies our commitment to our shareholders that a strategy of building an
asset base which includes Alberta's Métis and aboriginal communities as an
influential part of our business operations is a strategy that will serve us
well as we strive for future growth and maturity as a company.

    Westlock

    Arrow's plan for growth involves a strategy of combining high impact
growth which often carries with it increased risk, with assets that provide
lower risk stable production and income. For Arrow, our Westlock shallow gas
assets do just that. Westlock has been and continues to be a source of
accessible, low risk production for the company. In 2007, our Westlock program
has led to 2 successful gas wells that have brought stabilized shallow gas
production to the company's asset base.
    We continue to receive decent value for our reserves at Westlock and
management believes that at this time in the company's evolution that these
assets continue to play an important part in our corporate growth strategy. We
definitely see upside in this area especially in gaining more control over the
area's gas infrastructure. We are assessing our options for better well and
pipeline control and will continue to keep you updated with any new
developments in this core area.

    Focused on our Commitment to Growth - Arrow's Acquisition Strategy

    Arrow has had a busy year in terms of acquisition. In addition to our key
acquisitions at Peavine and Gift Lake above, in the summer of 2007 we
completed the acquisition of the shares of Castle Rock Petroleum. That
acquisition has led to an increased presence for the company in Southern
Alberta.
    We had drilling success with our partners in the Hays/Grand Forks area as
we previously press released. To continue with our program in this area would
require an extensive seismic program and a significantly increased capital
budget for 2008 that would divert our attention from our core areas. I can
report to you that management is assessing our options in this area.
    As far as potential for the future, we see the Pearce area of Southern
Alberta, which we acquired in the Castle Rock acquisition, as holding real
promise for Arrow as we head into 2008. Arrow, along with our partners, has
recently completed a detailed engineering analysis of the area and our
potential drilling prospects. We are quite encouraged by the results of the
study as far as the economics for this play in the future are concerned. There
is a potential negative impact of the Alberta Government's royalty decision on
activity in the province; we are currently seeking relief on this project,
which will definitely impact on the outlook for the Pearce play economically.
I look forward to updating you with positive news about Arrow's plans for the
future in the Pearce Area.
    The Hotchkiss Area acquired from Castle Rock as well should bring us
positive results this year as well. At the time of this letter, we are looking
at getting three of our wells back on production, as there is now increased
and consistent plant capacity in the area. In addition, we are currently
looking at completing our drilling in the Deadwood area by the summer of 2008.
We are also actively negotiating an improved Farm-in agreement for the company
as the old Castle Rock agreement was no longer appropriate to the changed
operating conditions in the area subsequent to the divestiture of
Primewest/Taqa North's Hotchkiss/Stowe assets in late 2007. I look forward to
providing an operational update on this area in the coming quarters as we
still believe that the Hotchkiss Area will be a positive and accretive
addition to Arrow's Peace River Arch asset base.
    The company's other 2007 acquisitions form the basis of a suite of assets
we believe can be monetized to provide funds to be used to directly pay down
the company's debt. Additionally these proceeds will provide additional
working capital for building on Arrow's asset base in its emerging core areas.

    Focussed on our Commitment to Value Creation

    The company's 2007 activity, while creating a strong emerging junior
energy producer took a toll on our balance sheet. Our costs were very high.
With a negative cash flow from operations of just $167k for 2007, the
elimination of any of our major G&A items could have led to a positive cash
flow from operations for the year. We believe that by taking a critical view
of our cost base, focusing our energies on eliminating expensive one time
events, and by bringing consulting work in house to be handled by our new
staff team that the Company can reduce G&A expenses in 2008.
    For the year ended December 31, 2007, the company took a very
conservative approach to capitalizing G&A expenses. There were several items
booked to G&A that could have been capitalized, but were not.
    In early 2007 Arrow embarked on a legal process to deal with a failed
acquisition attempt, the overall cost of which was approximately $300k in
consulting and legal fees. Only a fraction of these expenditures were
capitalized. If we took no further steps to reduce our G&A, the elimination of
this item alone would represent a 12% reduction in the company's total G&A
expense for 2007.
    Another factor in the above failed transaction was the acquisition of
future space to handle the anticipated increase in staffing which would
ultimately be a result of a successful acquisition. In early 2007, Arrow
worked with its landlord at the time to acquire additional office space. When
the acquisition did not go through, we were not able to negotiate a favourable
exit for the company with regards to this lease commitment and the resultant
cost to the company was a resultant $196k for the year ended December 31,
2008. We have now exited all other lease obligations except for our current
space at 350, 703-6th Avenue SW. We see this space as being a suitable base
from which the company can grow and expand its operations. We have a
favourable lease rate, a building management team dedicated to controlling
operating costs and room to expand our operations. We look forward to not
having to deal with Calgary's volatile office space environment any time soon.
The net effect of unoccupied lease space on our 2007 G&A costs would be
approximately 8%.
    Acquisitions cost money, we all know at closing the cheque needs to be
cut or the property doesn't get transferred, but what about the "internal
cheque" that needs to be cut? It is easy to forget about the costs internally
to the company for making the acquisition. When a company is small, the
decision is often made to bring on "qualified experts" who can get the job
done and do it effectively. Unfortunately, in the case of Arrow, our
acquisitions in 2007 were not always straightforward and required a lot of
background work in accounting and land. Without internal staff to handle this,
we turned to outside help. The legal, accounting, engineering and
administrative fees to handle various transactions were extensive. Our
estimate for G&A expenses which could have been capitalized to acquisition
AFEs but were put into G&A expenses was at least $150k or another 6%.
    On top of this, there was significant clean up and organization of our
accounting department and systems subsequent to the departure of our former
CFO which we estimate cost the company an additional $100k in one time
professional fees to accounting consultants and significantly increased audit
and professional fees.
    I am pleased to report that with the addition of qualified, full time
staff in accounting and land we are determined to bring our deal costs under
control. For instance, under our new process, our costs on the recent Gift
Lake acquisition have been dramatically reduced from what they might have been
under our previous process using outside consultants. A staff of full time
individuals, as opposed to an office full of consultants, will also have a
dramatic effect on the company's cost control and cost base and is leading to
increased morale and dedication to seeing Arrow continue to thrive and
prosper.
    With the elimination of these costly one time items and increased
diligence with regard to capitalizing eligible G&A expenses, we believe we can
cut at least $500k from 2007's $2.6MM G&A expense. In fact, we have set the
budget for 2008 at $1.8MM. We believe that with extra effort we can strive to
reduce our costs further than just elimination of one time charges. Any
increase in G&A for 2008 certainly means an increase in our sales revenue and
production to justify an amount of this magnitude.

    Focussed on our Commitment to the Future

    We are facing an interesting time in our industry. The government seems
undecided on the path they need to take with regard to "fair royalties" in the
province that benefit all of us as citizens, but do not suffocate the energy
industry. We are living in a time of unprecedented pricing for natural
resources, while at the same time unprecedented bad judgement with regard to
debt in the United States has led our primary source of energy exports to
declare they may be or are headed for recession. This is incredibly hard to
believe when we have just come out of a time of colossal global M&A deals
being done. At the same time emerging global economic powers such as China,
India and Russia appear to be headed for energy consumption at levels never
before seen. Latest reports tell us that the mad dash globally to alternative
sources of energy such as bio-diesel have already led to and certainly will
lead to massive problems in terms of food shortages and burgeoning food
prices. Unprecedented commodity prices, unprecedented global demand, unproven
energy sources are not an economically viable alternative to drastically
reducing oil and gas activity?
    At Arrow, we believe that despite all of the uncertainty there is one
thing that is certain, in the near future the world needs Canada and
especially Alberta to look for ways to provide it with oil and natural gas
effectively, efficiently and in a way which is environmentally responsible.
This is Arrow's strategy for future growth. We believe we have the people,
assets and vision needed to help to be viable and important part of Alberta's
energy industry. We believe in a working partnership with the communities
where we have our operations, a partnership that creates an economic climate
locally that results in better infrastructure and life for their constituents.
This we believe is part of ensuring ongoing relationships which are so
critical to continuing successful operations.
    We believe 2008 and the future will afford Arrow the opportunity to grow
and thrive in the areas which are core to our operations. We will remain
stalwart in our commitment to providing value for our shareholders by
constantly seeking to do a better job of operating our company. We all have a
vested interest in ensuring our costs are constantly monitored, our
acquisitions are accretive and strategic, and our drilling is based on strong
science and defined reserves. Focussing on these things instead of listening
to the clamour and trying to "read the market" will continue to allow Arrow to
emerge as a growing, exciting energy company, dedicated to being part of the
energy industry for years to come.

    Respectfully submitted on behalf of the Board of Directors,
    Chris D. Tesarski, President & CEO


    Management Discussion and Analysis

    This Management Discussion and Analysis ("MD&A"), prepared effective
April 29, 2008 is management's assessment of financial condition and results
of operations of Arrow Energy Ltd. ("Arrow" or the "Company") for the 3-months
and year ended December 31, 2007, and should be read in conjunction with the
audited financial statements for the years ended December 31, 2007 and
December 31, 2006. These documents, along with other statutory filings, are
available on SEDAR at www.sedar.com and at the Company's Web site at
www.arrow-energy.com. This MD&A has been approved by the Board of Directors
and has been prepared with the oversight of the audit committee.

    Basis of Presentation

    The financial data presented in this MD&A has been prepared in accordance
with Canadian generally accepted accounting principles ("GAAP"). The
preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, and the disclosure of contingent assets and
liabilities, at the date of the financial statements, and the reported amounts
of revenues and expenses during the period. Actual results could differ from
these estimates.

    Non-GAAP Measurements

    This MD&A may contain the term "cash flow from operations", which should
not be considered an alternative to, or more meaningful than, cash flow from
operating activities as determined in accordance with Canadian GAAP; it is
used by Arrow to analyze operating performance, leverage and liquidity. Cash
flow from operations as presented does not have any standardized meaning
prescribed by Canadian GAAP and therefore may not be comparable with the
calculation of similar measures by other entities. Cash flow from operations
per share is calculated using the same weighted average number of shares
outstanding used in the calculation of income per share. Cash flow from
operations represents cash flow from operating activities expressed before
changes in non-cash working capital and asset retirement costs and is
reconciled to net loss on the Statement of Cash Flows.
    Arrow also uses "operating netbacks" as a key performance indicator of
field results by commodity. Operating netbacks do not have a standardized
meaning prescribed by Canadian GAAP and therefore may not be comparable with
the calculation of similar measures by other companies. Operating netbacks are
determined by deducting royalties and operating, processing and transportation
expenses from petroleum and natural gas sales.
    Cash flow from operations and operating netbacks are not intended to
represent operating profits, nor should they be viewed as an alternative to
cash flow provided by operating activities, net earnings or other measures of
financial performance calculated in accordance with Canadian GAAP.
    Total BOEs are calculated by multiplying the daily production by the
number of days in the period.

    Forward Looking Statements

    This disclosure includes forward-looking statements and assumptions
respecting the Company's strategies, future operations, expected financial
results, financing sources, commodity prices, costs of production and quantum
of oil and natural gas reserves and discusses certain issues, risks and
uncertainties that can be expected to impact on any of such matters. By their
nature, forward-looking statements are subject to numerous risks and
uncertainties that can significantly affect future results. Actual future
results may differ materially from those assumed or described in such
forward-looking statements as a result of the impact of issues, risks and
uncertainties whether described herein or not, which the Company may not be
able to control. The reader is therefore cautioned not to place undue reliance
on such forward-looking statements. The Company disclaims any intention or
obligation to update or revise these forward-looking statements, as a result
of new information, future events or otherwise.

    BOE Presentation

    All barrels of oil equivalent ("BOE") conversions are based on the widely
used conversion ratio of six thousand cubic feet ("Mcf) of natural gas to one
barrel ("bbl") of oil. BOEs may be misleading, particularly if used in
isolation. A BOE conversion ratio of 6 Mcf: 1 bbl is based upon an energy
equivalency conversion method primarily applicable at the burner tip and does
not represent a value equivalency at the wellhead.

    Description of Business

    Arrow Energy Ltd. was incorporated August 21, 2001. On May 3, 2004 Arrow
Energy Ltd. amalgamated with 1095862 Alberta Ltd. and then with Red Chip Inc.
Throughout these amalgamations, the Company retained the name Arrow Energy
Ltd.
    Tirmoil Energy Ltd., through a successful takeover bid, succeeded in
acquiring control of Arrow Energy Ltd. effective September 1, 2006.
    On September 28, 2007, by way of a Plan of Arrangement, Castle Rock
Petroleum Ltd. became a wholly owned subsidiary of Arrow Energy Ltd.
    Arrow is a Calgary, Alberta based public company engaged in the
acquisition, exploration, development and production of petroleum and natural
gas reserves in Alberta. The Company's common shares are listed on the TSX
Venture Exchange "TSX-V" under the trading symbol "AOF".

    Quarterly Information

    The following table summarizes revenue from petroleum and natural gas
sales, net of royalties, cash flow from operations and net income for Arrow
for the periods indicated.Quarterly                                        2007
    Financial Data ($)            Dec 31      Sep 30      Jun 30      Mar 31
    -------------------------------------------------------------------------
    Production revenue,
     net of royalties            555,981   1,179,571     946,886     649,392
    Pipeline revenue             325,252     356,990     383,046     253,017
    Cash flow from
     operations(1)              (793,330)    495,472     267,101    (132,776)
    Per share basic               ($0.05)      $0.03       $0.02      ($0.01)
    Per share diluted(2)             N/A         N/A         N/A         N/A
    Net income (loss)         (1,140,703)   (428,561)   (273,174)   (592,288)
    Per share basic               ($0.07)     ($0.03)     ($0.03)     ($0.04)
    Per share diluted(2)             N/A         N/A         N/A         N/A


    Quarterly                                        2006
    Financial Data ($)            Dec 31      Sep 30      Jun 30      Mar 31
    -------------------------------------------------------------------------
    Production revenue,
     net of royalties            402,351     465,293     490,545    596, 258
    Pipeline revenue                   -           -           -           -
    Cash flow from
     operations(1)              (234,800)   (778,474)    (44,748)    150,109
    Per share basic               ($0.02)     ($0.06)      $0.00       $0.01
    Per share diluted(2)             N/A         N/A       $0.00       $0.01
    Net income (loss)           (630,307)   (806,002)   (149,307)   (135,033)
    Per share basic               ($0.04)     ($0.06)     ($0.02)     ($0.01)
    Per share diluted(2)             N/A         N/A         N/A         N/A

    (1) Cash flow from operations and cash flow per share are non-GAAP terms
        that represent cash generated from operating activities before
        changes in non-cash working capital and other operating items.
        Arrow's cash flow from operations may not be comparable to other
        companies'. Arrow considers cash flow a key measure of performance as
        it demonstrates Arrow's ability to generate the cash flow necessary
        to fund future capital investments.
    (2) A diluted per-share calculation would be anti-dilutive and is
        therefore not applicable.


    Selected Annual Information

    Set out below is selected annual information for the last three years:

    $                                           2007        2006        2005
    -------------------------------------------------------------------------
    Petroleum and natural gas sales        4,532,810   2,405,769   4,381,363
    Pipeline revenue                       1,318,305           -           -
    Shareholders' equity                  14,738,683   6,627,588   8,075,332
    -------------------------------------------------------------------------
    Cash flow from operations(1)            (163,533)   (907,718)  1,544,797
      Per share, basic                        ($0.01)     ($0.06)      $0.11
      Per share, diluted(2)                      N/A         N/A         N/A
    -------------------------------------------------------------------------
    Net loss                              (2,434,726) (1,720,649)   (140,905)
      Per share, basic                        ($0.14)     ($0.12)     ($0.01)
      Per share, diluted(2)                      N/A         N/A         N/A
    -------------------------------------------------------------------------
    Capital assets                        20,081,782  10,328,370  10,225,817
    Long-term liabilities                  1,406,367   1,478,510   2,233,946
    -------------------------------------------------------------------------
    Shares outstanding
      Basic                               17,079,862  14,138,914  14,098,525
    -------------------------------------------------------------------------
    (1) Cash flow from operations and cash flow per share are non-GAAP terms
        that represent cash generated from operating activities before
        changes in non-cash working capital and other operating items.
        Arrow's cash flow from operations may not be comparable to other
        companies'. Arrow considers cash flow a key measure of performance as
        it demonstrates Arrow's ability to generate the cash flow necessary
        to fund future capital investments.
    (2) A diluted per-share calculation would be anti-dilutive and is
        therefore not applicable.Corporate Developments

    On February 1, 2007, the Company acquired the oil and gas assets of
Tirmoil, a related party. Tirmoil owned at the time of acquisition
approximately 65% of all the outstanding common shares of Arrow Energy Ltd.
The Company commenced reporting production from the acquisition date on
February 1, 2007. The acquisition of the oil and gas assets and oil
transportation pipeline represented the start of a new core operating area in
Peavine/Dawson.
    On September 28, 2007 Arrow acquired all the outstanding shares of Castle
Rock Petroleum Ltd. ("Castle Rock"), a public company trading on the TSX
Venture Exchange. The acquisition brought a number of new, highly motivated
shareholders to Arrow as well as several exciting operating areas.
    On September 28, 2007 Arrow issued 5,714,461 units ("Units") at a price
of $0.35 per Unit for cash proceeds, net of fees, of $1,803,291. This private
placement represented the start of Arrow's strategic partnership with a
limited market dealer in Toronto, to make investor relations and market
awareness a key priority for our company.
    On October 25, 2007, the Company entered into an agreement whereby the
Company acquired from two private vendors (the "Vendors") 100% of their
jointly owned petroleum and natural gas interests in the vicinity of
Carstairs, Alberta.
    On December 31, 2007, Arrow issued 1,250,000 shares on a flow-through
basis for cash proceeds, net of fees of $480,000.
    On April 1, 2008, Arrow acquired a producing property near its Peavine
core area in northern Alberta (Gift Lake area) from a private company for a
total consideration of $4.1 million. As the transaction was made effective
October 1, 2007, the cash back to Arrow after adjustments at closing was
approximately $1.0MM. At the time of acquisition, production from the
properties was approximately 97 barrels of oil equivalent per day, consisting
of 94 percent oil and 6 percent natural gas. The acquisition represented
development of the company's asset base in and around another one of Alberta's
major Métis Settlements, Gift Lake Métis Settlement.
    On April 2, 2008, Arrow reached an agreement with its bankers, Alberta
Treasury Branch, to extend its credit facility from $3.5MM to $6.0MM.
    On April 16, 2008, Arrow announced the appointment of Richard Edgar,
P. Geol. to the position of Executive Chairman, Richard Ballak, CGA to the
position of Corporate Controller, and Jorge Aviles to the position of
Coordinator of Corporate Affairs.Results of Operations

    -------------------------------------------------------------------------
                                 Three months ended         Years ended
                                December    December    December    December
    $                           31, 2007    31, 2006    31, 2007    31, 2006
    -------------------------------------------------------------------------
    REVENUES
    Petroleum and natural gas
     revenue                     989,697     466,525   4,532,810   2,405,769
    Royalties                   (433,716)    (64,174) (1,200,980)   (451,322)
    Pipeline revenue             325,252               1,318,305
    Other income                  (5,838)     19,313      43,352      42,523
    -------------------------------------------------------------------------
                                 875,395     421,664   4,693,488   1,996,970
    -------------------------------------------------------------------------
    EXPENSES
    Operating expense            550,452     190,693   1,110,315     740,183
    Transportation expense        28,802       8,521      57,868      67,301
    Pipeline expense             203,159           -     860,511           -
    General and
     administrative expense      803,638     375,432   2,595,221   1,053,772
    Reorganization costs               -      21,846           -     941,706
    Depletion, depreciation
     and accretion expense       646,862     424,119   2,902,330   1,396,614
    Interest and Part XII.6 tax   82,673      27,777     233,106      69,726
    Stock-based compensation
     expense                      53,304     162,456     288,833     183,579
    -------------------------------------------------------------------------
                               2,368,890   1,210,844   8,048,184   4,452,881
    -------------------------------------------------------------------------
    Loss from operations      (1,493,495)   (789,180) (3,354,696) (2,455,911)
    Loss on disposal of
     office equipment                  -           -           -      (8,388)
    -------------------------------------------------------------------------
    Net loss before taxes     (1,493,495)   (789,180) (3,354,696) (2,464,299)
    Future income tax
     recovery                   (352,792)   (158,873)   (919,970)   (743,650)
    -------------------------------------------------------------------------
    Net loss                  (1,140,703)   (630,307) (2,434,726) (1,720,649)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Net loss per share,
     basic and diluted             (0.07)      (0.04)      (0.14)      (0.12)
    -------------------------------------------------------------------------All references to the fourth quarter or Q4 throughout this document are
to the three-month period ended December 31, 2007, and all references to the
twelve month period are to the year ended December 31, 2007, unless specified
otherwise.

    Drilling Activity

    The following table summarizes the results of the wells that Arrow
drilled or participated in drilling for the year ended December 31, 2007 and
2006, respectively:Year ended              Year ended
                                   December 31             December 31
                                       2007                    2006
    -------------------------------------------------------------------------
                                   Gross         Net       Gross         Net
    -------------------------------------------------------------------------
    Natural gas                     3.00        1.06        1.00        0.31
    Oil                             3.00        0.68           -           -
    Dry & abandoned                    -           -           -           -
    -------------------------------------------------------------------------
    Total                           6.00        1.74        1.00        0.31
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Oil and Natural Gas Wells

    The following table summarizes Arrow's interest, as at December 31, 2007,
in wells that are producing or which Arrow considers to be capable of
production:

    -------------------------------------------------------------------------
                Producing               Producing             Non Producing
                   Oil                 Natural Gas             Natural Gas
           Gross         Net       Gross         Net       Gross         Net
    -------------------------------------------------------------------------
            5.00        1.45        9.00        4.10        9.00        4.10
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Undeveloped Land Holdings

    The undeveloped land holdings of Arrow as at December 31, 2007 and 2006,
respectively, are set forth in the following table:

    -------------------------------------------------------------------------
                                              Undeveloped Land
                                      Gross Acres              Net Acres
    -------------------------------------------------------------------------
                                    2007        2006        2007        2006
    -------------------------------------------------------------------------
    Total                         32,646      18,240      18,610      10,952
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------Production

    Arrow's average production in the fourth quarter was 183 BOE/d, compared
with 119 BOE/d in the three months ended December 31, 2006. The increase is
mainly due to the acquisition of the assets of Tirmoil Energy that closed in
early 2007 (the "Tirmoil Acquisition"). For the full year, Arrow's production
averaged 229 BOE/d, compared with 164 BOE/d in 2006. In addition to the
production growth resulting from the Tirmoil Acquisition, the higher
production rate for the full year is also attributable to six successful wells
drilled in 2007.
    The current production rate is approximately 300 BOE/d of which
approximately 100 BOE/d is reflective of the Gift Lake acquisition from a
private company which closed April 2, 2008. The Company has a production mix
of 57 percent natural gas and 43 percent oil.Three months ended          Years ended
                                       December 31             December 31
    Volumes                         2007        2006        2007        2006
    -------------------------------------------------------------------------
    Oil (bbl/d)                       86           -          98           -
    Natural gas (Mcf/d)              585         698         786         981
    -------------------------------------------------------------------------
    Total (BOE/d at 6:1)             184         116         229         164
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------Commodity Prices

    For the fourth quarter, the Company's average realized prices on natural
gas decreased by 15 percent from the prior-year period from $7.26/Mcf of
natural gas to $6.17/Mcf; the average natural gas price received during the
full year was $6.46/Mcf compared to $6.63/Mcf received in 2006.
    The average price per barrel of oil received in Q4 was $85.79/BOE,
compared with $0.00/BOE in the prior-year period when Arrow had no oil
production. The West Texas Intermediate ("WTI") oil price per barrel rose to
an average of US$72.33 in 2007 from US$66.09 in 2006. Part of this significant
year-over-year increase in oil prices, however, was offset by the stronger
Canadian dollar.-------------------------------------------------------------------------
                                   Three months ended          Years ended
                                       December 31             December 31
    Prices received                 2007        2006        2007        2006
    -------------------------------------------------------------------------
      Oil ($/bbl)                  85.79           -       74.48           -
      Natural gas ($/Mcf)           6.17        7.26        6.46        6.63
      Average ($/BOE)              62.30       45.67       54.05       41.72

    Benchmark prices
    -------------------------------------------------------------------------
      WTI (US$/bbl)                90.57       59.96       72.33       66.09
      Cdn/US average
       exchange rate                1.02       0.878       0.936       0.882
      Edmonton Par ($/BOE)         86.89       64.94       77.00       73.25
      Alberta spot ($/Mcf)          6.01        6.77        6.32        6.38Revenue

    Revenue from Arrow's oil and natural gas sales increased in the fourth
quarter to $989,697 compared to $466,525 in the same quarter of last year. For
the full year, revenue grew to $4,532,810 compared to $2,405,769 in 2006. The
revenue increases for both comparable periods are mainly a result of higher
production volumes and prices. Revenue of $989,697 for Q4 of 2007 decreased
28% from $1,370,492 for Q3 of 2007. This decrease was the result of three
wells being temporarily shut-in due to workovers and have since been producing
at expected rates.
    Pipeline income for the fourth quarter of 2007 totaled $325,252 and for
the total year was $1,318,305. The oil pipeline was part of the Tirmoil
Acquisition in 2007 and therefore there are no comparable numbers. On
March 26, 2008, the company announced that it had received approval from
Alberta Sustainable Resource Development, subject to filing normal course
regulatory documentation to begin construction of the "Peavine Connector
Road". The Arrow owned and operated oil pipeline on Peavine is currently
operating at 25% capacity and will directly benefit from oil being able to be
transported to and processed at its pipeline battery. Arrow intends to add
infrastructure to its current facility to handle significantly more volume
from the oilfields directly north of Peavine that would be easily accessed
from the connector road. The total volume of oil that passed through the
pipeline was 102,642 m(3), at an average tariff of $11.75 per m(3).

    Royalties

    Royalty expenses increased 576 percent from $64,174 ($6.01/BOE) in the
fourth quarter of 2006 to $433,716 ($25.62/BOE) in the fourth quarter of 2007.
For the full year, royalty expenses in 2007 amounted to $1,200,980
($13.24/BOE) as compared to $451,322 ($12.36/BOE) for the prior year.
Year-over-year, royalty expenses grew by 166 percent mainly due to additional
wells being drilled and the ten percent gross overriding royalty ("GORR")
payable on production related to the Peavine Métis Settlement lands.
    This increase in Q4 2007 royalty expense is primarily due to the
recording of royalty expenses related to late joint venture billings remitted
on partner operated wells and an adjustment to the GORR expense for a period
prior to October 1, 2007. As a result, Management does not consider the Q4
royalty expense to be indicative of performance in future quarters.
    As a percentage of revenue, the royalty rate in Q4 increased to
44 percent from 14 percent in the prior-year period. For the full year, the
royalty rate was 26 percent of revenue, compared with 19 percent in 2006.
    On October 25, 2007, the Government of Alberta announced significant
changes to the oil and natural gas royalty structure to be implemented on
January 1, 2009. Arrow is currently analyzing the potential impact of the
proposed changes to the Company.-------------------------------------------------------------------------
                                   Three months ended          Years ended
                                       December 31             December 31
    -------------------------------------------------------------------------
    $                               2007        2006        2007        2006
    Total                        433,716      64,172   1,200,980     451,320
    Per BOE                        25.62        6.01       14.33        7.54
    As a percent of revenue          44%         14%         26%         19%
    -------------------------------------------------------------------------Interest and Other Income

    The Company earned other income, primarily from royalty revenue. Other
income for the full year amounted to $43,352, with $42,523 reported for 2006.

    Operating and Transportation Expense and Pipeline Costs

    Operating expenses for the fourth quarter increased to $550,452
($32.51/BOE) from $190,693 ($17.86/BOE) in the fourth quarter of 2006. Total
operating expenses for the full year were $1,110,315 ($13.28/BOE), 85 percent
higher than the $740,183 ($12.36/BOE) reported for 2006. The increases are
primarily due to increased volumes. On a BOE basis, the increase was 7%. The
year-over-year rise in production costs on a BOE basis is mainly a result of
industry-wide increases in service and processing fees. Q4 2007 operating
costs increased by $331,445 from $219,007 in Q3, 2007 to $550,452 for Q4,
2007. This increase in expenses is due to joint venture billings received from
partner operated wells for costs realized prior to October, 2007 being
recorded in Q4 of 2007. As a result, Management does not consider the Q4
operating expense to be indicative of performance in future quarters. With the
activity levels in Alberta's conventional oil and gas production decreasing
and expected future growth in Arrow's production, Management expects operating
costs on a BOE basis to decrease overtime.
    Transportation costs were $28,802 ($1.70/BOE) in the fourth quarter,
compared with $8,521 ($0.80/BOE) in the prior-year period. Year-over-year,
transportation costs decreased from $67,301 ($1.12/BOE) in 2006 to $57,868
($0.69/BOE) in 2007, mainly as a result of lower natural gas sales. On a BOE
basis, the decrease in transportation costs primarily relates to a shift in
our mix of revenue stream from predominantly gas in 2006 to a mix of oil and
gas in 2007.-------------------------------------------------------------------------
                                   Three months ended          Years ended
                                       December 31             December 31
    -------------------------------------------------------------------------
    $                               2007        2006        2007        2006
    Operating expense per
      BOE(1)                       34.22       18.67       13.98       13.48
    -------------------------------------------------------------------------
    1)  includes transportation costsPipeline expenses were $203,159 for the fourth quarter of 2007 and
$860,511 for the full year. As Arrow acquired the pipeline from Tirmoil in
early 2007, there are no comparative numbers available for 2006.

    General and Administrative ("G&A") Expense

    In the fourth quarter, G&A expenses amounted to $803,638 as compared to
the $375,436 reported in the fourth quarter of 2006. G&A expenses for the full
year were $2,595,221 compared with $1,053,772 for 2006. General and
administrative costs for 2007 include $485,441 related to non-reoccurring
expenses. This amount consisted of $212,859 for legal costs associated with
unsuccessful acquisitions and a legal claim associate with the normal course
of business, rent expense of $196,997 on unused office space, and consulting
fees of $75,585. In addition, the Company experienced higher auditing, legal
and consulting costs due to the departure of the Company's former CFO.
Management expects to reduce G&A expenses and to be able to grow revenues
significantly while maintaining the current infrastructure and staffing
levels.-------------------------------------------------------------------------
                                   Three months ended          Years ended
                                       December 31             December 31
    $                               2007        2006        2007        2006
    -------------------------------------------------------------------------
    G&A expense, gross           817,290     390,192   2,636,921   1,166,572
    Capitalized overhead         (13,652)    (14,760)    (41,700)   (112,800)
    G&A expense, net             803,638     375,432   2,595,221   1,053,772
    G&A expense, per BOE, net      47.47       35.18       31.05       17.60
    -------------------------------------------------------------------------Stock-Based Compensation

    During the fourth quarter, stock-based compensation expense amounted to
$53,304, while Arrow reported $162,456 for the fourth quarter of 2006. The
Company incurred stock-based compensation expense of $288,833 for the full
year, compared with $183,579 for 2006. The higher stock-based compensation
expense for 2007 over 2006 was the result of a larger number of stock options
issued during the year, mainly to directors and key staff members.
    Arrow granted a total of 1,043,750 options in the year ended December 31,
2007.Netbacks

    -------------------------------------------------------------------------
                                   Three months ended          Years ended
                                       December 31             December 31
    $                               2007        2006        2007        2006
    -------------------------------------------------------------------------
    Realized price           $     62.30 $     45.67 $     54.05 $     41.72
    Royalties                      25.62        6.01       13.24       12.36
    Transportation expense          1.70        0.80        0.69        1.12
    Operating expense              32.51       17.86       13.24       12.36
    -------------------------------------------------------------------------
    Operating netback               2.47       23.47       26.85       15.88
    -------------------------------------------------------------------------
    Other income                   (0.34)       1.81        8.52        0.71
    G&A expense                    47.47       35.18       31.05       17.60
    Interest expense                4.88        2.60        2.78        1.16
    -------------------------------------------------------------------------
    Cash netback                  (50.22)     (12.50)       1.54       (2.17)
    -------------------------------------------------------------------------Depletion, Depreciation and Accretion ("DD&A") Expense

    Arrow's DD&A expense for the fourth quarter of 2007 totaled $646,862
compared with $424,119 for the fourth quarter of 2006. For the full year 2007,
DD&A expense amounted to $2,902,330; in 2006, Arrow reported DD&A expense of
$1,396,614 for the year. The higher DD&A costs in 2007 are primarily a result
of the Tirmoil Acquisition in February, the Lone Pine acquisition in October
and the capital costs required to bring proved reserves on production. The
current-period provision includes the depreciation of the major assets
acquired from Tirmoil. The oil pipeline, a considerable asset to the Company,
is being depreciated over a twenty-five year term; starting February 1, 2007.-------------------------------------------------------------------------
                                   Three months ended          Years ended
                                       December 31             December 31
    $                               2007        2006        2007        2006
    -------------------------------------------------------------------------
    DD&A expense, gross          646,862     424,119   2,902,330   1,396,614
    -------------------------------------------------------------------------
    DD&A expense, per BOE, net     38.21       39.74       34.72       23.33
    -------------------------------------------------------------------------Arrow uses the asset retirement obligation method to record the present
value of estimated cleanup and restoration costs for its well sites, pipelines
and facilities. The liability amount is increased each reporting period due to
the passage of time and the amount of accretion is charged to earnings in the
period. Arrow recorded $60,546 of accretion expense in 2007 (December 31, 2006
- $19,871) based on a total future liability of $1,081,877 (December 31, 2006
- $234,050). The increase in expense is due to additional wells drilled and
the acquisition of Tirmoil properties. The future liability increased due to
the Tirmoil and Castle Rock acquisitions.

    Future Income Taxes

    The future income tax recovery for the three months ended December 31,
2007 was $352,794 compared with $158,873 for the three months ended
December 31, 2006. For the full year, future income tax recovery was $919,970,
while for 2006, Arrow reported $743,650.
    Under the flow-through share agreement entered into in fiscal 2007, Arrow
is required to incur eligible expenditures for total gross proceeds of
$500,000 prior to December 31, 2008. No expenditures have yet been incurred
relating to this agreement.Capital Expenditures

    -------------------------------------------------------------------------
                                                     Years ended December 31
    -------------------------------------------------------------------------
    $                                                     2007          2006
    -------------------------------------------------------------------------
    Land                                                65,317        31,432
    Geological and geophysical                         201,616
    Drilling and completions                         1,335,290       767,149
    Production equipment and facilities                436,179       660,400
    Property acquisition                             1,542,393             -
    -------------------------------------------------------------------------
                                                     3,580,795     1,458,981
    -------------------------------------------------------------------------Capital expenditures in the fourth quarter were $230,578 as Arrow
completed various recompletions, equipping and tie-ins, and lease clean-ups.
    During the year, Arrow continued to add lands and prospects. At the end
of 2007, the Company's gross land position covered 32,646 acres (18,610 net).
Upcoming Crown land sales and ongoing farm-in negotiations are expected to
continue to enable the Company to increase its land base and drilling
inventory, particularly in northern Alberta on Metis-controlled lands.

    Share Capital and Option Activity

    As at December 31, 2007, the Company has 27,233,727 shares outstanding,
including 1,250,000 shares issued on a flow-through basis for gross proceeds
of $500,000 on December 31, 2007 and for which Arrow paid fees totaling
$20,000 to Northern Securities Inc.
    There were 2,190,178 options to acquire common shares outstanding at
December 31, 2007. The outstanding options of 725,000, 893,750, and 571,428
have an average exercise price of $0.45, $0.38 and $0.35 respectively and have
been granted in such numbers and with such vesting provisions as the Board of
Directors has determined pursuant to Arrow's stock option plan.-------------------------------------------------------------------------
                                                                    Weighted
                                                                     average
                                                                    exercise
                                              Number of options        price
    -------------------------------------------------------------------------
    Balance at December 31, 2006                     1,210,000   $      0.45
    Forfeited during the period                       (635,000)         0.45
    Granted during the period                        1,043,750          0.38
    Broker options issued for units                    571,428          0.35
    -------------------------------------------------------------------------
    Balance at December 31, 2007                     2,190,178          0.40
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Share Information (000s)     Q4 2007     Q4 2006        2007        2006
    -------------------------------------------------------------------------
    Weighted average shares
     outstanding
      Basic and diluted       25,475,575  14,138,914  17,079,862  14,138,914

    Working Capital, Liquidity, and Capital Resources

    Arrow Energy Ltd. is listed as an issuer on the TSX-V, trading under the
symbol "AOF". At December 31, 2007, the Company's market capitalization was
$10,076,479.

    Trading History on the
     TSX-V                       Q4 2007     Q4 2006     Q3 2007        2007
    -------------------------------------------------------------------------
    High                     $      0.46 $      0.65 $      0.55 $      0.55
    Low                      $      0.28 $      0.35 $      0.35 $      0.29
    Close                    $      0.37 $      0.45 $      0.42 $      0.37
    Volume (000s)                  3,399     370,076     318,615   1,055,161
    -------------------------------------------------------------------------At December 31, 2007, Arrow had a working capital deficiency of
$3,663,308, which included bank indebtedness of $3,037,838.
    At December 31, 2007, the Company had established a demand loan facility
in the amount of $3,500,000 with Alberta Treasury Branches. Interest on this
facility is charged monthly at the bank's prime rate plus 50 basis points. The
credit facility is secured by a fixed and floating charge on the assets of the
Company and is subject to annual review. Arrow has recently completed the
renegotiation with the Alberta Treasury Branch for an increase in the demand
loan facility to $6,000,000.

    Commitments and Contingencies

    The Company has remaining lease commitments for office space of $128,000
and $973,674 which expire on August 31, 2008 and July 1, 2012, respectively.
    Additionally, Arrow is involved in a legal claim associated with the
normal course of business. At this time and in the opinion of management, this
matter is not reasonably expected to result in a material adverse effect on
the Company's financial position.
    In 2007, the Company committed to renounce $500,000 of exploration
expenses pursuant to a flow-through share issue completed December 31, 2007.
Arrow has until December 31, 2008 to incur these exploration expenditures.

    Related-Party Transactions

    For the period ended December 31, 2007, Arrow has $13,574 (December 31,
2006: $37,906) included in legal fees and accounts payable to Parlée McLaws
LLP of which a director of Arrow is a partner. Parlée McLaws is legal council
for Arrow Energy Ltd.
    At December 31, 2007, the Company entered into a loan agreement with the
President of the Company to provide a loan in the amount of $100,000 for the
purchase of flow-through shares of the Company. The loan agreement is secured
by 250,000 common shares of the Company.
    At December 31, 2007 the Company has a payable to the Peavine Métis
Settlement in the amount of $71,899, to the Métis Settlement General Council
in Trust for Peavine for $165,104 and $146,307 to Tirmoil Energy Ltd. These
payables relate to revenues earned on land from participation in joint
ventures. The Peavine Métis Settlement owns 100% of Tirmoil Energy Ltd.
Tirmoil Energy Ltd. is the controlling shareholder of Arrow Energy Ltd.

    Hedging

    The Company had no hedges in place as at December 31, 2007 and does not
anticipate entering into any hedging arrangements in the immediate future.

    Future Accounting Pronouncements

    As of January 1, 2008, Arrow has adopted two new Canadian Institute of
Chartered Accountants ("CICA") standards:-   Section 3862, "Financial Instruments - Disclosures", and
    -   Section 3863, "Financial Instruments - Presentation"These replace Section 3861, "Financial Instruments - Disclosure and
Presentation". The new disclosure standard increases the emphasis on the risks
associated with both recognized and unrecognized financial instruments and how
those risks are managed. The new presentation standard carries forward the
former presentation requirements. The new financial instruments presentation
and disclosure requirements were issued in December 2006, and the Company is
assessing the impact on its financial statements.
    AS of January 1, 2008, the Company has adopted CICA Section 1535,
"Capital Disclosures", which requires additional disclosures of objectives,
policies and processes for managing capital. In addition, disclosures include
whether companies have complied with externally imposed capital requirements.
The new capital disclosure requirements were issued in December 2006, and the
Company is assessing the impact on its financial statements.

    Critical Accounting Estimates

    The Company's financial and operating results contain estimates made by
management in the following areas:1.  capital expenditures are based on estimates on projects in various
        stages of completion;
    2.  revenues, royalties and operating costs are based on estimates for
        which revenue had not yet been received and costs had not yet been
        realized;
    3.  depletion, depreciation and accretion are based on estimates of oil
        and natural gas reserves that the Company expects to recover in the
        future;
    4.  asset retirement obligations are based on estimates of future costs
        and timing of expenditures; and
    5.  the future recoverable value of capital assets is also based on
        estimates that the Company expects to realize in the future.Management's assumptions are based on factors that, in management's
opinion, are relevant and appropriate. Management's assumptions may change
overtime as operating conditions change.

    Oil and Natural Gas Reserves Determination
    ------------------------------------------
    The process of estimating reserves is complex. It requires significant
judgments and decisions based on available geological, geophysical,
engineering and economic data. Reserve estimates are based on current
production forecasts, prices and economic conditions. These estimates may
change substantially as additional data from ongoing development and
production activities becomes available and as economic conditions impact oil
and natural gas prices and costs.

    Depletion Expense
    -----------------
    The Company uses the full-cost method of accounting for exploration and
development activities. In accordance with this method of accounting, all
costs associated with exploration and development activities, whether
successful or not, are capitalized. The aggregate of net capitalized costs
(less costs of unproved properties) and estimated future development costs
(less estimated salvage values) is amortized using the unit-of-production
method based on estimated proved oil and natural gas reserves. An increase in
estimated proved oil and natural gas reserves or a decrease in estimated
future development costs would each result in a corresponding reduction in
depletion and depreciation expense.

    Impairment of Petroleum and Natural Gas Assets
    ----------------------------------------------
    The Company is required to review the carrying value of all petroleum and
natural gas assets for potential impairment. Impairment is indicated if the
carrying amount of the oil and natural gas property and equipment is not
recoverable by the future undiscounted funds flows. If impairment is
indicated, the amount by which the carrying value exceeds the estimated fair
value of the property and equipment is charged to earnings. The assessment of
impairment is dependent on estimates of reserves, production rates, prices,
future costs and other relevant assumptions.

    Stock-Based Compensation
    ------------------------
    Under the fair-value method of accounting for stock options, compensation
expense is determined on the date of grant using the Black-Scholes option
pricing model. The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options that are fully transferable and
have no vesting restrictions. Arrow's stock options are not transferable,
cannot be traded and are subject to vesting restrictions that would tend to
reduce value. The Black-Scholes model requires the input of several variables
including estimated volatility of Arrow's stock price over the life of the
option, estimated forfeitures and the estimated life of the option. Changes in
these estimates would alter the option's fair value and the related expense as
determined by the Black-Scholes model.

    Asset Retirement Obligations
    ----------------------------
    The Company is required to provide for future removal and restoration
costs. The Company must estimate these costs in accordance with existing laws,
contracts or other policies. The fair value of the liability for the Company's
asset retirement obligations is recorded in the period in which it is expected
to be incurred, discounted to its present value using the Company's
risk-adjusted interest rate and the expected inflation rate. The offset to the
liability is recorded in the carrying amount of property and equipment. The
liability amount is increased each reporting period due to the passage of
time, and the amount of accretion is charged to earnings in the period.
Revisions to the estimated timing of cash flows or to the original estimated
undiscounted cost could also result in an increase or decrease to the
obligation. Actual costs incurred upon settlement of the retirement obligation
are charged against the obligation to the extent of the liability recorded.

    Income Tax Accounting
    ---------------------
    The determination of the Company's income and other tax liabilities
requires interpretation of complex laws and regulations. All tax filings are
subject to audit and potential re-assessment after the lapse of considerable
time. Accordingly, the actual income tax liability may differ significantly
from that estimated and recorded by management.

    Risk Factors
    ------------
    There are a number of risk factors facing companies that participate in
the Canadian oil and gas industry. A summary of certain risk factors relating
to our business are provided in the Risk Factors section of our Annual
Information Form, filed on SEDAR.

    Additional Information
    ----------------------
    Additional information regarding the Company is available on SEDAR at
www.sedar.com or can be obtained by contacting Arrow Energy Ltd., Suite 350,
703 - 6th Avenue SW, Calgary, AB T2P 0T9 or on the Company's Web site at
www.arrow-energy.com.Arrow Energy Ltd.

                   2007 Consolidated Financial StatementsCONSOLIDATED FINANCIAL STATEMENTS

    MANAGEMENT'S RESPONSIBILITY STATEMENT

    The consolidated financial statements of Arrow Energy Ltd. and all
information in this report are the responsibility of management and have been
approved by the Board of Directors. The consolidated financial statements have
been prepared in accordance with Canadian generally accepted accounting
principles. The consolidated financial statements include amounts that are
based on estimates, which have been objectively developed by management using
all relevant information. All financial and operating data in this report is
consistent with the information in the consolidated financial statements.
    Arrow Energy Ltd. maintains appropriate systems of internal control to
give reasonable assurance that transactions are appropriately authorized,
assets are safeguarded from loss or misuse and financial records are properly
maintained to provide reliable information for the preparation of financial
statements. Arrow Energy Ltd. has effective disclosure controls and procedures
to ensure timely and accurate disclosure of material information relating to
the Company which complies with the current requirements of Canadian
securities legislation.
    Deloitte and Touche LLP, an independent firm of chartered accountants,
has been engaged to examine the financial statements and provide their
auditor's report. Their report is presented with the consolidated financial
statements.
    The Board of Directors are responsible for ensuring that management
fulfils its responsibilities for financial reporting and internal control. The
Board of Directors carries out this responsibility principally through its
Audit Committee. The Audit Committee is comprised entirely of independent
directors and meets regularly with management and with the Company's external
auditors to discuss the results of their audit examination and to review
issues related thereto. The external auditors have full access to the Audit
Committee with and without the presence of management. The Audit Committee
reviews the consolidated financial statements and Management's Discussion and
Analysis and recommends their approval to the Board of Directors.

    Signed "Chris Tesarski"

    Chris Tesarski
    President & CEO


    AUDITORS' REPORT TO THE SHAREHOLDERS

    We have audited the consolidated balance sheets of Arrow Energy Ltd. as
at December 31, 2007 and 2006 and the consolidated statements of operations,
comprehensive loss and deficit and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
    We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
    In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the Company as at
December 31, 2007 and 2006 and the results of its operations and its cash
flows for the years then ended in accordance with Canadian generally accepted
accounting principles.Calgary, Canada                          Signed "Deloitte & Touche LLP"
    April 23, 2008                                    Chartered Accountants



    Consolidated Balance Sheets

    Years Ended December 31
    -------------------------------------------------------------------------
                                                          2007          2006
    -------------------------------------------------------------------------
    ASSETS

    Current:
      Cash                                        $    155,692  $          -
      Accounts receivable                            1,765,956       399,795
      Deposits and prepaid expenses                    236,566       127,596
                                                  ---------------------------
                                                     2,158,214       527,391

    Capital assets (Note 5)                         20,081,782    10,328,370

                                                  ---------------------------
                                                  $ 22,239,996  $ 10,855,761
                                                  ---------------------------
                                                  ---------------------------

    LIABILITIES AND SHAREHOLDERS' EQUITY

    LIABILITIES:

    Current:
      Accounts payable and accrued liabilities    $  2,783,684  $  1,081,688
      Bank Loan (Note 8)                             3,037,838     1,667,975
                                                  ---------------------------
                                                     5,821,522     2,749,663

    Future income taxes (Note 10)                      324,490     1,244,460
    Asset retirement obligation (Note 6)             1,081,877       234,050

                                                  ---------------------------
                                                     7,227,889     4,228,173
                                                  ---------------------------
    SHAREHOLDERS' EQUITY:

      Share capital (Note 7)                        14,738,683     9,743,897
      Contributed surplus (Note 7(b))                6,306,827       482,368
      Deficit                                       (6,033,403)   (3,598,677)
                                                  ---------------------------
                                                    15,012,107     6,627,588
                                                  ---------------------------

                                                  $ 22,239,996  $ 10,855,761
                                                  ---------------------------
                                                  ---------------------------

    Commitments and contingencies (Note 11)
    Subsequent events (Note 14)
    Basis of Presentation - Going concern (Note 2)

    APPROVED ON BEHALF OF THE BOARD:

    (signed) "Richard Edgar", Director

    (signed) "Jason Pack", Director

    See accompanying notes to the financial statements



    Consolidated Statements of Operations, Comprehensive Loss and Deficit

    Years Ended December 31
    -------------------------------------------------------------------------
                                                          2007          2006
    -------------------------------------------------------------------------
    Revenue
      Petroleum and natural gas sales             $  4,532,810     2,405,769
      Royalties                                     (1,200,980)     (451,322)
                                                  ---------------------------
                                                     3,331,830     1,954,447

      Pipeline revenue                               1,318,305             -
      Other income                                      43,353        42,523
                                                  ---------------------------
                                                     4,693,488     1,996,970
                                                  ---------------------------
    Expenses
      Production and transportation                  1,168,183       807,484
      Pipeline                                         860,511             -
      General and administrative                     2,595,221     1,053,772
      Reorganization costs                                   -       941,706
      Interest                                         233,106        69,726
      Stock based compensation (Note 7a)               288,833       183,579
      Depletion, depreciation and accretion
       (Notes 5 and 6)                               2,902,330     1,396,614
                                                  ---------------------------
                                                     8,048,184     4,452,881
                                                  ---------------------------

    Loss from operations                            (3,354,696)   (2,455,911)

    Loss on disposal of office equipment                     -         8,388
                                                  ---------------------------

    Loss before income taxes                        (3,354,696)   (2,464,299)

    Income tax recovery
      Future                                          (919,970)     (743,650)
                                                  ---------------------------

    Net loss and comprehensive loss                 (2,434,726)   (1,720,649)

    Deficit, beginning of period                    (3,598,677)   (1,880,885)

    Interest receivable on share purchase loans              -         2,857
                                                  ---------------------------
    Deficit, end of period                        $ (6,033,403) $ (3,598,677)
                                                  ---------------------------
                                                  ---------------------------
    Net loss per share
      Basic and diluted                           $      (0.14) $      (0.12)

    Weighted average common shares (outstanding)
      Basic and diluted                             17,079,862    14,138,914

    See accompanying notes to the financial statements.



    Consolidated Statements Cash Flows

    Years Ended December 31
    -------------------------------------------------------------------------
                                                          2007          2006
    -------------------------------------------------------------------------

    CASH FLOWS RELATED TO THE FOLLOWING
     ACTIVITIES

    OPERATING:
      Net loss                                    $ (2,434,726) $ (1,720,649)
        Items not involving cash:
        Loss on disposal of office equipment                 -         8,388
        Depletion, depreciation and accretion        2,902,330     1,396,614
        Stock compensation expense                     288,833       183,579
        Future income tax recovery                    (919,970)     (743,650)
        Abandonment expenditures                             -       (32,195)
                                                  ---------------------------
                                                      (163,533)     (907,913)
      Changes in non-cash working capital (Note 12)   (119,442)      146,244
                                                  ---------------------------
                                                      (282,975)     (761,669)
                                                  ---------------------------
    FINANCING:
      Increase in bank loan                          1,369,863     1,667,975
      Share purchase loan                             (100,000)       56,826
      Proceeds from issuance of share capital        2,480,021             -
      Share issue costs                               (196,729)            -
                                                  ---------------------------
                                                     3,553,155     1,724,801
                                                  ---------------------------

    INVESTING:
      Additions to capital                          (2,038,402)   (1,458,981)
      Disposal of capital assets                       120,000         4,335
      Acquisition of oil & gas assets (Note 4)      (1,542,393)            -
      Changes in non-cash working capital(Note 12)     346,307      (322,186)
                                                  ---------------------------
                                                    (3,114,488)   (1,776,832)
                                                  ---------------------------

    Net increase (decrease) in cash                    155,692      (813,700)
    Cash, beginning of period                                -       813,700
                                                  ---------------------------

    Cash, end of year                             $    155,692  $          -
                                                  ---------------------------
                                                  ---------------------------

    See accompanying notes to the financial statements



    Notes to Financial Statements

    For the years ended December 31, 2007 and 2006

    -------------------------------------------------------------------------

    1.  Nature of Operations

        The principal business of Arrow Energy Ltd. (the "Company" or
        "Arrow") is the exploration for, exploitation, development and
        production of oil and natural gas reserves. All activity is conducted
        in Western Canada and comprises a single business segment.

    2.  Significant Accounting Policies

        Basis of Presentation
        ---------------------

        The financial statements have been prepared using Canadian generally
        accepted accounting principles applicable to a going concern, which
        assumes Arrow will continue operations in the foreseeable future and
        be able to realize assets and satisfy liabilities in the normal
        course of business. The Company had negative cash flow from
        operations in the amount of $282,975 and a working capital deficiency
        of $3,663,308 as at December 31, 2007. The Company's ongoing ability
        to continue as a going concern is dependent on its ability to
        generate future profitable operations, secure additional sources of
        financing, and on the continued support of its lenders, creditors,
        and shareholders. The outcome of all these matters cannot be
        predicted at this time. The financial statements do not reflect
        adjustments to the carrying values and classification of assets and
        liabilities that might be necessary should the Company be unable to
        continue its operations.

        Basis of Accounting
        -------------------

        The consolidated financial statements include the accounts of Arrow
        Energy Ltd. and its wholly owned subsidiary, Castle Rock Petroleum
        Ltd. All inter-entity transactions and balances have been eliminated.

        Cash and Cash Equivalents
        -------------------------

        The Company considers all highly liquid investments with maturities
        of three months or less at the date of purchase to be called cash and
        cash equivalents.

        Exploration and Development Costs
        ---------------------------------

        The Company follows the full cost method of accounting for petroleum
        and natural gas properties whereby all costs relating to the
        acquisition, exploration and development of petroleum and natural gas
        reserves are capitalized in one Canadian cost centre and charged
        against income, as set out below. Such costs may include lease and
        land acquisition costs, geological and geophysical expenses, lease
        rentals and other costs on non-producing properties, costs of
        drilling and completing both productive and non-productive wells,
        production equipment and corporate expenses directly related to
        acquisition, exploration and development activities. These costs
        along with estimated future capital costs in the current reserve
        report related to the development of proved reserves (net of salvage
        values) are included in the depletion calculation.

        Costs of acquiring and evaluating unproved properties may be excluded
        from the depletion base until it is determined whether proved
        reserves are attributable to the properties or impairment has
        occurred.

        Depletion of petroleum and natural gas properties and depreciation of
        production equipment is provided on the unit-of-production basis
        using estimated gross (before royalties) proved oil and natural gas
        reserves as determined by independent reservoir engineers. Natural
        gas reserves and production are converted, at a ratio of six thousand
        cubic feet of natural gas to one barrel of oil, for depletion and
        depreciation purposes.

        Proceeds from the sale of properties are applied against capitalized
        costs, with no gain or loss recognized, unless such a sale would
        alter the rate of depletion and depreciation by 20% or more.

        The Company calculates a ceiling test by comparing the carrying value
        of its property, plant and equipment to the sum of undiscovered cash
        flows expected to result from the future production of the Company's
        proved reserve base. If the sum of the undiscounted cash flows does
        not exceed the carrying value, the Company would then measure the
        amount of the impairment by comparing the carrying values of the
        petroleum and natural gas properties and equipment to the net present
        value of future cash flows from proved reserves. A risk-free interest
        rate is used to arrive at the net present value of future cash flows.
        Any excess of the carrying value over the Company's future cash flows
        would be recorded as a permanent impairment.

        Asset Retirement Obligation
        ---------------------------

        The Company recognizes the fair value of its asset retirement
        obligation (ARO) in the period in which it is incurred and when a
        reasonable estimate of fair value can be made. The fair value of the
        estimated ARO is recorded as a long-term liability with a
        corresponding increase in the carrying amount of the related asset.
        The capitalized amount is amortized on a unit-of-production basis
        over the life of the reserve. The liability is increased each period
        due to the passage of time and the amount of accretion is charged
        against earnings for that period. Increases or decreases to the ARO
        can also result from revisions to the original timing or amount of
        the estimated undiscounted cash flows.

        Joint Venture Activities
        ------------------------

        Substantially all of the Company's exploration and development
        activities are conducted jointly with others and, accordingly, the
        financial statements reflect only the Company's proportionate
        interest in such activities.

        Depreciation
        ------------

        Non-oil and gas assets are depreciated over their respective
        estimated useful lives using the declining-balance method at annual
        rates of 20% and 30%. Leasehold improvements are amortized on a
        straight-line basis over the lease.

        The pipeline is amortized on a straight-line basis over 25 years.

        Future Income Taxes
        -------------------

        The Company accounts for future income taxes using the liability
        method. Under this method, future income tax assets and liabilities
        are measured based upon temporary differences between the carrying
        values of assets and liabilities and their tax basis. Future income
        tax expense is computed based on the change during the year in the
        future tax assets and liabilities. Effects of changes in tax laws and
        tax rates are recognized when substantively enacted.

        Financial Instruments
        ---------------------

        The fair market value of financial instruments consisting of cash and
        cash equivalents, accounts receivable, accounts payable and accrued
        liabilities approximate their carrying value due to their short term
        to maturity. The Company's bank loan also approximates its carrying
        value as the credit facility bears interest at the prevailing
        interest rate.

        Stock Based Compensation Plan
        -----------------------------

        The fair value calculated related to stock options granted is
        deferred and charged against earnings, as stock compensation expense,
        over the vesting period of the stock options with a corresponding
        increase in contributed surplus.

        Consideration paid to the Company upon the exercise of the stock
        options is recorded as an increase to share capital, and an
        adjustment is made to transfer to share capital the compensation
        expense previously recognized in contributed surplus for the specific
        stock options exercised.

        The Company has not incorporated an estimated forfeiture rate for
        stock options in determining the stock option fair value in order to
        calculate its compensation expense, as the Company has assumed that
        all stock options granted will vest. Accordingly, forfeitures are
        accounted for as they occur and are treated as a change in estimate.
        The cumulative effect of the change on current and prior periods is
        recognized in the period of the change in estimate for unvested
        options that are forfeited or cancelled.

        Revenue Recognition
        -------------------

        Petroleum and natural gas sales are recognized when title passes from
        the Company to the purchaser. Pipeline revenue is recognized when the
        services have been provided.

        Measurement Uncertainty
        -----------------------

        The amounts recorded for depletion and depreciation of petroleum and
        natural gas properties and equipment, the asset retirement obligation
        and the amount used for the ceiling test calculation are based on
        estimates of proven reserves, production rates, oil and natural gas
        prices, future costs and other relevant assumptions.

        The amounts disclosed relating to the fair value of stock options
        issued are based on estimates of the expected lives of the options,
        expected stock price volatility, expected dividends and other
        relevant assumptions. By their nature, these estimates are subject to
        measurement uncertainty, and the effect of changes in such estimates
        on the financial statements of future periods could be significant.

        Per Share Information
        ---------------------

        Per share information is calculated using the weighted average number
        of shares outstanding during the year. The treasury stock method is
        used in calculating diluted earnings per share. This method assumes
        that only "in-the-money" stock options and warrants are exercised and
        that any proceeds and unrecognized stock based compensation expense
        would be used to purchase common shares at the average market price
        during the year.

    3.  Changes in Accounting Policies

        On January 1, 2007, the Company adopted three new standards issued by
        the CICA relating to the accounting for and disclosure of financial
        instruments. Section 3855 - "Financial Instruments - Recognition and
        Measurement" prescribes when a financial asset, financial liability,
        or non-financial derivative is to be recognized on the balance sheet
        as well as its measurement amount depending on its classification.
        This Section also specifies how gains and losses on financial
        instruments are to be presented. Section 3865 - "Hedges" expands on
        and replaces Accounting Guideline 13 - "Hedging Relationships" by
        specifying how hedge accounting is to be applied and what disclosures
        are necessary when it is applied. Section 1530 - "Comprehensive
        Income" introduces new standards for reporting and disclosure of
        comprehensive income. Comprehensive income is the change in equity of
        the Company during that period from transactions and other events and
        circumstances from non-owner sources including changes in the fair
        value of financial instruments designated as cash flow hedges as well
        as foreign currency translation amounts related to self-sustaining
        foreign operations.

        At January 1, 2007 and December 31, 2007 the Company's financial
        instruments included cash, accounts receivable, bank loan, and
        accounts payable and accrued liabilities. Cash is classified as held
        for trading and is measured at fair value, accounts receivable is
        classified as loans and receivables and is measured at amortized
        cost. The financial liabilities are all classified as other
        liabilities and are measured at amortized cost. The fair value of
        these financial instruments approximate their carrying value due to
        their short-term maturity or, as with the bank loan, it bears
        interest at the prevailing interest rate.

        The Company does not hold any derivative financial instruments or any
        embedded derivatives and does not apply hedge accounting under
        Section 3865. The Company selected January 1, 2003 as its transition
        date for accounting of any potential embedded derivatives.

        The Company has adopted these sections retroactively without
        restatement. The classification of the Company's opening balances for
        financial instruments as at January 1, 2007 has resulted in no
        material gains or losses that require either separate presentation in
        other comprehensive income or recognition in earnings (losses).

        The Company adopted CICA Handbook Section 1506, Accounting Changes,
        the only effect of which is to provide disclosure and the resulting
        impact to the Company when an entity has not applied a new source of
        generally accepted accounting principles that has been issued but is
        not yet effective.

        This applies to CICA Handbook Sections 3862, "Financial Instruments
        Disclosure," and 3863, "Financial Instruments Presentation," which
        are required to be adopted for fiscal years on or after October 1,
        2007. The Company intends to adopt these standards January 1, 2008
        and it is expected that the only effect on the Company's consolidated
        financial statements will be incremental disclosures regarding the
        significance of financial instruments for the entity's financial
        position and performance; and the nature, extent and management of
        risks to which the entity is exposed arising from financial
        instruments.

        As of January 1, 2008, the Company is required to adopt CICA Handbook
        Section 1535, Capital Disclosures, which requires entities to
        disclose their objectives, policies, and processes for managing
        capital, and in addition, whether the entity has complied with any
        externally imposed capital requirements. The Company is assessing the
        impact of this new standard on its consolidated financial statements.

        In February 2008, the CICA issued Section 3064 Goodwill and Other
        Intangible Assets, replacing Section 3062 Goodwill and Other
        Intangible Assets and Section 3450 Research and Development Costs.
        Various other changes have been made to other sections of the CICA
        Handbook for consistency. The new Section will be applicable to
        financial statements relating to fiscal years beginning on or after
        October 1, 2008. Accordingly, the Corporation will adopt the new
        standard for its fiscal year beginning January 1, 2009. The new
        Section establishes standards for the recognition, measurement,
        presentation and disclosure of goodwill subsequent to its initial
        recognition and of intangible assets by profit-oriented enterprises.
        Standards concerning goodwill are unchanged from the standards
        included in the previous Section 3062. This will have no material
        impact on the Company.

        In January 2006, the CICA Accounting Standards Board (AcSB) adopted a
        strategic plan for the direction of accounting standards in Canada.
        As part of that plan, accounting standards in Canada for public
        companies are expected to converge with International Financial
        Reporting Standards (IFRS) by the end of 2011. Arrow continues to
        monitor and assess the impact of convergence of Canadian GAAP and
        IFRS.

    4.  Property Acquisition

        On February 1, 2007, the Company acquired the oil and gas assets of
        Tirmoil, a related party. Tirmoil owned at the time of acquisition
        approximately 65% of all of the outstanding common shares of Arrow
        Energy Ltd. The acquisition included $450,172 of assumed debt and
        $592,221 of purchase price adjustments. The Company commenced
        reporting production from the acquisition date on February 1, 2007.
        The acquisition was accounted for as a related party transaction and
        measured in these financial statements at the carrying amount of the
        oil and gas assets as previously recognized in the accounts of
        Tirmoil. The difference between the amount paid of $1,042,393 and the
        carrying amount of $6,431,518 has been credited to contributed
        surplus (Note 7(b)).

        On October 25, 2007, the Company entered into an agreement whereby
        the Company acquired from two private vendors (the "Vendors") 100% of
        their jointly owned petroleum and natural gas interests in the
        vicinity of Carstairs, Alberta. In consideration for this
        acquisition, Arrow paid to the Vendors a total of $1,800,000 as
        follows: (a) $700,000 paid by cash ($350,000 on closing and $350,000
        plus interest at 8% six months from closing); and (b) $1,100,000 by
        issuance of 2,000,000 units of Arrow at a price of $0.55 per unit.
        Each unit is comprised of one (1) common share and one (1) warrant
        entitling the holder to purchase on flow through common share at a
        price of $0.70 per common share exercisable until June 30, 2008. The
        fair value of the warrants has been calculated using the Black
        Scholes pricing model based on the following assumptions: risk-free
        of 4.5%, expected life of 0.67 years, no dividends and expected
        volatility of 75%.

        Business Acquisition

        On September 28, 2007 Arrow acquired all the outstanding shares of
        Castle Rock Petroleum Ltd., a public company trading on the TSX
        Venture Exchange. Arrow issued 4,180,325 common shares valued at
        $1,755,737 before transaction costs. Arrow exchanged one Arrow Common
        Share for every five Castle Rock "A" Shares and one Arrow Common
        Share for each one half of a Castle Rock B Share.

        The acquisition has been accounted for using the purchase-price
        method. Management has estimated the fair market value on
        September 28, 2007 based on currently available information as
        follows:

        ---------------------------------------------------------------------

        ---------------------------------------------------------------------
        Consideration:

          Common Shares                                         $  1,755,737
          Transaction costs                                           54,598
        ---------------------------------------------------------------------
                                                                $  1,810,335

        ---------------------------------------------------------------------
        Net Assets Received at Estimated Fair Value
          Cash                                                  $    381,745
          Accounts receivable                                        381,083
          Prepaid                                                     29,827
          Property, plant & equipment                              1,559,127
          Accounts payable                                          (453,556)
          Asset retirement obligation                                (87,891)
        ---------------------------------------------------------------------
                                                                $  1,810,335
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        In relation to the Castle Rock Acquisition, the Company has made its
        best estimate as to the net assets acquired and the consideration
        given. The final purchase price adjustment has not yet been
        determined by the Company and the vendor, and all costs have not yet
        been finalized. Therefore, the above amount may be subject to
        adjustment.

        These financial statements incorporate the operations of the Castle
        Rock Acquisition from September 28, 2007 forward.

    5.  Capital Assets

                                    -----------------------------------------
                                                December 31, 2007
                                    -----------------------------------------
                                                   Accumulated
                                                  Depletion and   Net Book
                                        Cost      Depreciation      Value

        Petroleum and natural gas
         properties                 $ 23,032,566  $  6,663,254  $ 16,369,312
        Pipeline                       3,740,798       112,225     3,628,573
        Office equipment and
         furniture                       121,045        37,148        83,897

                                    -----------------------------------------
                                    $ 26,894,409  $  6,812,627  $ 20,081,782
                                    -----------------------------------------
                                    -----------------------------------------

                                    -----------------------------------------
                                                December 31, 2006
                                    -----------------------------------------
                                                   Accumulated
                                                  Depletion and   Net Book
                                        Cost      Depreciation      Value
        Petroleum and natural gas
         properties                 $ 14,253,636  $  3,944,999  $ 10,308,637
        Office equipment and
         furniture                        45,575        25,842        19,733

                                    -----------------------------------------
                                    $ 14,299,211  $  3,970,841  $ 10,328,370
                                    -----------------------------------------
                                    -----------------------------------------

        Petroleum and natural gas properties as at December 31, 2007 include
        costs of $2,353,420 (December 31, 2006 - $1,040,310) relating to
        undeveloped land, which has been excluded from the amounts subject to
        depletion.

        The pipeline which was included in the Tirmoil Acquisition is not
        included in the full-cost pool as it is amortized on a straight-line
        basis over 25 years.

        The ceiling test was applied in accordance with the full cost
        accounting guidelines and no impairment resulted. The future prices
        used in the ceiling test calculation are based on the December 31,
        2007 benchmark commodity price forecast of our independent reserve
        evaluators as follows:

        ---------------------------------------------------------------------
        Year                                 Price Forecast
                                 Oil (CDN $/Bbl)      Natural Gas (CDN $/Mcf)
        ---------------------------------------------------------------------
        2008                          88.17                    6.51
        2009                          84.54                    7.22
        2010                          83.16                    7.69
        2011                          81.26                    7.70
        2012                          80.73                    7.61
        2013                          81.25                    7.78
        2014                          82.88                    7.96
        2015                          84.55                    8.14
        ---------------------------------------------------------------------
        Thereafter (inflation %)     +2%/yr                  +2%/yr
        ---------------------------------------------------------------------

    6.  Asset Retirement Obligation

        The total future asset retirement obligation was estimated by
        management based on the Company's net ownership interest in all wells
        and facilities, estimated costs to reclaim and abandon the wells and
        facilities, and the estimated timing of the costs to be incurred in
        future periods. The Company has estimated the net present value of
        its total asset retirement obligation to be $1,081,877 as at
        December 31, 2007 (December 31, 2006 - $234,050) based on a total
        future liability of $4,855,639 (December 31, 2006 - $449,985). These
        payments are expected over the next 20 years with the majority of
        costs incurred between 2010 and 2026. The Company's credit adjusted
        risk free rate of 8.0% and an inflation rate of 2.0% were used to
        calculate the present value of the asset retirement obligation.

        A reconciliation of the asset retirement obligation is provided
        below:

                                                  ---------------------------
                                                   December 31,  December 31,
                                                          2007          2006
                                                  ---------------------------

        Carrying amount, beginning of period      $    234,050  $    245,836
        Increase in obligations                        223,615         6,468
        Pipeline                                       563,666             -
        Settlement of liabilities                            -       (32,195)
        Accretion expense                               60,546        19,871
        Change in estimate                                   -        (5,930)
                                                  ---------------------------
        Carrying amount, end of period            $  1,081,877  $    234,050
                                                  ---------------------------
                                                  ---------------------------

    7.  Share Capital

                                                  ---------------------------
                                                        Number
                                                     of Shares        Amount
                                                  ---------------------------
        Balance, December 31, 2005 and 2006         14,138,914  $  9,743,897
        Shares deposited into treasury                 (50,000)      (34,500)
        Shares issued for acquisition                4,180,325     1,755,737
        Units issued for private placement
          Shares issued net of costs                 5,714,488     1,181,273
        Shares issued on a flow through basis
         net of cost basis                           1,250,000       480,000
        Note Receivable on flow through issue                -      (100,000)
        Shares issued for a P&NG acquisition         2,000,000     1,100,000
                                                  ---------------------------
        Balance, December 31, 2007                  27,233,727  $ 14,126,407
                                                  ---------------------------
                                                  ---------------------------

                                                  ---------------------------
                                                        Number
                                                   of Warrants        Amount
                                                  ---------------------------
        Balance, December 31, 2006                           -             -
        Units issued for private placement
          Broker warrants                              285,714  $     46,286
          Warrants                                   2,857,244       463,731
        Warrants issued for a P&NG acquisition       2,000,000       102,259
                                                  ---------------------------
        Balance, December 31, 2007                   5,142,958  $    612,276
                                                  ---------------------------
                                                  ---------------------------

        (I) On September 28, 2007 Arrow acquired all the outstanding shares
        of Castle Rock Petroleum Ltd. ("Castle Rock") a public company
        trading on the TSX Venture Exchange. Arrow issued 4,180,325 common
        shares valued at $1,755,736 before transaction costs. Arrow exchanged
        one Arrow Common Share for every five Castle Rock A Shares and one
        Arrow Common Share for each one-half of a Castle Rock B Share.

        (II) On September 28, 2007 Arrow issued 5,714,488 units ("Units") at
        a price of $0.35 per Unit for proceeds of $2,000,020. Each Unit is
        comprised of one (1) common share ("Common Share") and one-half (1/2)
        Common Share purchase warrant. Each whole warrant entitles the holder
        to purchase one (1) additional Common Share at a price of $0.50 per
        Common Share for a period of twenty-four (24) months following the
        date of closing; however, if after four months and one day following
        the closing date the closing price of the Common Shares is equal to
        or exceeds $0.75 for 20 consecutive days, then the warrants shall
        automatically accelerate to expire on the date which is 30 days after
        the 20 days. The securities issued have a four (4) month hold period
        which expired on January 29, 2008.

        In connection with the private placement, Arrow paid fees totaling
        $196,729 and issued Broker Options exercisable for a total of 571,428
        Units ("Broker Unit") at a price of $0.35 for a period of twenty-four
        (24) months from the closing date. Each unit has an option and
        warrant attached. If the option is exercised, the warrant can then be
        exercised. The fair value of the option is $112,001. The fair value
        of the warrant is $46,286. Each Broker Unit is exercisable at the
        same price and on the same terms and conditions as the Units. The
        fair value has been calculated using the Black Scholes pricing model
        based on the following assumptions: risk-free rate of 4.5%, expected
        life of two years, no dividends and expected volatility of 90%.

        (III) On November 20, 2007 and in connection with a P&NG acquisition,
        Arrow issued to two private vendors 2,000,000 units of Arrow at a
        price of $0.55 per unit. Each unit is comprised of one (1) common
        share and one (1) warrant entitling the holder to purchase one (1)
        flow through common share at a price of $0.70 per common share
        exercisable until June 30, 2008. The fair value of these warrants is
        $102,259.

        (IV) On December 31, 2007 Arrow issued 1,250,000 shares on a flow-
        through basis for gross proceeds of $500,000 on December 31, 2007 and
        for which Arrow paid fees totaling $20,000 to Northern Securities
        Inc.

        (a) Stock Options

        Under the Company's stock option plan, options may be granted in such
        numbers and with such vesting provisions as the Board of Directors
        may determine. At the time an option is granted, the Board will
        determine the exercise price of the option. The aggregate number of
        shares that may be available for issuance, from time to time, under
        the plan shall not exceed 20% of outstanding shares. In addition, the
        aggregate number of shares so available for issuance under the plan
        to any one person in any 12 month period shall not exceed 5% of the
        issued shares calculated at the time of grant of the option.

        The Company incurred stock-based compensation expense of $288,833 for
        the full year, compared with $183,579 for 2006.

                                                  ---------------------------
                                                                    Weighted
                                                                     average
                                                     Number of      exercise
                                                       Options         price
                                                  ---------------------------
        Balance at December 31, 2005                   840,000        $ 0.80
        Granted during the period                    1,210,000          0.45
        Expired during the period                     (155,000)         0.75
        Cancelled during the period                   (685,000)         0.82
                                                  ---------------------------
        Balance at December 31, 2006                 1,210,000        $ 0.45
        Forfeited during the period                   (635,000)         0.45
        Granted during the period                    1,043,750          0.40
        Broker options issued                          571,428          0.35
                                                  ---------------------------
        Balance at December 31, 2007                 2,190,178        $ 0.40
                                                  ---------------------------
                                                  ---------------------------

        The following table summarized information about stock options
        outstanding as at December 31, 2007:

        ---------------------------------------------------------------------
                                                                    Weighted
                                         Options                Average Years
        Exercise Price               Outstanding   Exercisable     to Expiry
        ---------------------------------------------------------------------
        $0.45                            893,750       606,250           4.1
        $0.38                            725,000       725,000           4.5
        $0.35                            571,428       571,428           1.8
        ---------------------------------------------------------------------
        Total                          2,190,178     1,902,678           3.6
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The total stock options exercisable at December 31, 2007 was
        1,902,678 (2006 - 293,334) at a weighted average exercise price of
        $0.39 (2006 - $0.45). The weighted average fair market value of
        options granted during the year ended December 31, 2007 was $0.27
        (2006 - $0.29) per option. The fair value of each option granted and
        broker option was estimated on the date of grant using the Black-
        Scholes option-pricing model with the following assumptions:

                                                   December 31,  December 31,
                                                          2007          2006

        Risk-free interest rate                           4.5%         4.03%
        Estimated hold period prior to exercise (years)     5             5
        Volatility in the price of the Company's
         common shares                                   90.0%         94.3%

        (b) Contributed Surplus

        A summary of the change in the Company's contributed surplus balance
        for the year ended December 31, 2007 is as follows:

        Balance, December 31, 2005                              $    298,789
        Stock-based compensation expense                             183,579
                                                                -------------
        Balance, December 31, 2006                              $    482,368
        Acquisition of oil and gas assets (Note 4)                 5,389,125
        Cancellation of shares                                        34,500
        Stock-based compensation expense                             288,833
        Fair value of common shares included in broker units         112,001
                                                                -------------
        Balance December 31, 2007                               $  6,306,827
                                                                -------------
                                                                -------------

    8.  Operating Line

        During the third quarter of 2007, Arrow re-negotiated its loan
        facility from $4,200,000 to $3,500,000 with an institutional bank.
        The formal agreement was not signed until November 28, 2007. The
        facility bears interest at the bank's prime lending rate plus 50
        basis points, payable monthly and is secured by a fixed and floating
        charge on the assets of the Company. The credit facility is subject
        to annual review. On April 2, 2008, the facility was renegotiated and
        the loan facility increased from $3,500,000 to $6,000,000. This
        increase reflects the recognition by the bank of the Company's higher
        reserve base at December 31, 2007, as evaluated by Sproule &
        Associates Ltd, an independent engineering firm based in Calgary,
        Alberta. At December 31, 2007 Arrow was not in compliance with their
        debt covenants relating to working capital. However, the Alberta
        Treasury Branch has acknowledged that Arrow Energy Ltd. was in
        default of the established working capital covenant with a ratio of
        0.94:1 and has waived this breach.

    9.  Financial Instruments

        Commodity Price Risk
        --------------------
        The Company has commodity price risk associated with its sale of oil
        and gas.

        Credit Risk
        -----------
        A substantial portion of the Company's accounts receivable are with
        customers and joint venture participants in the oil and natural gas
        industry and are subject to normal industry credit risks.

        Interest Rate Risk
        ------------------
        Arrow is exposed to interest rate cash flow risk on floating interest
        rate bank debt due to fluctuations in market interest rates. The
        remainder of the Company's financial assets and liabilities are not
        exposed to interest rate risk.

        Financial Instruments
        ---------------------
        Financial instruments of the Company carried on the balance sheet
        consist mainly of cash, accounts receivable, accounts payable and
        accrued liabilities, bank loan.

        At December 31, 2007 there were no significant differences between
        the carrying value of these financial instruments and their estimated
        fair value.

    10. Income Taxes

        The future income tax recovery for 2007 and 2006 varies from the
        amount that would be computed by applying the combined federal and
        provincial income tax rates of 32.12% (2006 - 34.49%) to the loss
        before income taxes as shown below:

                                                  ---------------------------
                                                   December 31,  December 31,
                                                          2007          2006
                                                  ---------------------------
        Computed income tax recovery              $ (1,077,207) $   (849,933)
        Changes resulted from:
        Resource allowance                                             6,823
        Permanent difference                            98,688        49,475
        Rate adjustment and other                       58,549        49,985
                                                  ---------------------------
        Income tax (recovery) provision           $   (919,970) $   (743,650)
                                                  ---------------------------
                                                  ---------------------------

        The major components of the future income tax liability at
        December 31, 2007 and 2006 using the combined federal and provincial
        income tax rates of 25.00% (2006 - 31.47%) are as follows:

                                                  ---------------------------
                                                   December 31,  December 31,
                                                          2007          2006
                                                  ---------------------------
        Property and equipment                    $   (953,054) $ (1,571,464)
        Share issue costs deductible for tax
         purposes                                       65,580        59,117
        Asset retirement obligation                    270,469        73,660
        Non-capital losses carried forward             292,515       194,227
                                                  ---------------------------
                                                  $   (324,490) $ (1,244,460)
                                                  ---------------------------
                                                  ---------------------------

        The Company has a non-capital loss for income tax purposes of
        $1,170,061, which can be used to offset income in future periods.
        This loss expires in 2027.

    11. Commitments and Contingencies

        (a) The Company has remaining lease commitments for office space of
        $128,000, and $973,674 which expire on August 31, 2008, and July 1,
        2012 respectively.

        (b) The Company is involved in a legal claim associated with the
        normal course of business. At this time, in the opinion of
        management, this matter is not reasonably expected to result in a
        material adverse effect on the Company's financial position.

        (c) In 2007 the Company committed to renounce $500,000 of exploration
        expenses pursuant to a flow-through share issue completed
        December 31, 2007. Arrow has until December 31, 2008 to incur these
        exploration expenditures. The Corporation will be subject to a
        Part XII.6 tax based on the prescribed rate and the balance of
        exploration expenditures not yet incurred.

    12. Supplementary Cash Flow Information

        The following table details the components of non-cash working
        capital provided by (used in) operations.

                                                  ---------------------------
                                                   December 31,  December 31,
                                                          2007          2006
                                                  ---------------------------
        Accounts receivable                       $ (1,366,161) $  1,172,390
        Deposits and prepaid expenses                 (108,970)      (45,361)
        Accounts payable and accrued liabilities     1,701,996    (1,302,971)
                                                  ---------------------------
                                                       226,865      (175,942)
                                                  ---------------------------
        Operating                                     (119,442)      146,244
        Investing                                 $    346,307  $   (322,186)
                                                  ---------------------------

    13. Related-Party Transactions

        For the year ended December 31, 2007, Arrow has $13,574 (December 31,
        2006: $37,906) included in legal fees and accounts payable to Parlee
        McLaws LLP of which a director of Arrow is a partner. Parlee McLaws
        is legal council for Arrow Energy Ltd.

        At December 31, 2007, the Company entered into a loan agreement with
        the President of the Company to provide a loan in the amount of
        $100,000 for the purchase of flow-through shares of the Company. The
        loan agreement is secured by 250,000 common shares of the Company.

        At December 31, 2007 the Company has a payable to the Peavine Métis
        Settlement in the amount of $71,899, to the Métis Settlement General
        Council in Trust for Peavine for $165,104 and $146,307 to Tirmoil
        Energy Ltd. These payables relate to revenues earned on land from
        participation in joint ventures. The Peavine Métis Settlement owns
        100% of Tirmoil Energy Ltd. Tirmoil Energy Ltd. is the controlling
        shareholder of Arrow Energy Ltd.

    14. Subsequent Events

        Arrow has entered into an agreement to acquire from a private oil and
        gas company, producing properties in northern Alberta. The purchase
        price for these fixed assets was $4,100,000 and closed on April 1,
        2008.
For further information: Arrow Energy Ltd., Chris Tesarski, President &
CEO, or Richard Edgar, Executive Chairman, Telephone: (403) 237-9996,
Facsimile: (403) 264-0416