UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.
20549





Form
10-K





(Mark
      One)þ
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934For
      the fiscal year ended September 30, 2009or ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934For
      the transition period from __________ to
  _____________





Commission
file number: 000-51152





PETROHUNTER
ENERGY CORPORATION


(Exact
name of registrant as specified in its charter)





Maryland
            98-0431245(State
      or other jurisdiction of
              incorporation
      or organization)
            (I.R.S.
      Employer
              Identification
      No.)








1600
      Stout Street, Suite 450
            80202Denver,
      Colorado
            (Zip
      Code)(Address
      of principal executive offices)





Registrant’s
telephone number, including area code:


(303) 572-8900





Securities
registered pursuant to Section 12(b) of the Act:


None





Securities
registered pursuant to Section 12(g) of the Act:


Common
Stock, $0.001 par value


(Title of
class)





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





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.


 ̈
Yes                      ý No





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.


ý
Yes                       ̈No





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).


 ̈
Yes                       ̈No (not
required)








Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.   ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
      accelerated filer    ̈
            Accelerated
      filer    ̈Non-accelerated
      filer   ̈
            Smaller
      reporting company þ





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





State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter: $3,525,943 as of
March 31, 2009.





As of
December 31, 2009, the registrant had 380,468,544 shares of common stock
outstanding.








FORWARD-LOOKING
STATEMENTS





Certain
statements contained in this Annual Report constitute “forward-looking
statements”. These statements, identified by words such as “plan”, “anticipate”,
“believe”, “estimate”, “should”, “expect” and similar expressions include our
expectations and objectives regarding our future financial position, operating
results and business strategy. These statements reflect the current views of
management with respect to future events and are subject to risks, uncertainties
and other factors that may cause our actual results, performance or
achievements, or industry results, to be materially different from those
described in the forward-looking statements. Such risks and uncertainties
include those set forth under the caption “Management’s Discussion and Analysis
of Financial Condition and Results of Operation” and elsewhere in this Annual
Report. We do not intend to update the forward-looking information to reflect
actual results or changes in the factors affecting such forward-looking
information. We advise you to carefully review the reports and documents we file
from time to time with the Securities and Exchange Commission (the
“SEC”).





All
subsequent written and oral forward-looking statements attributable to us, or
persons acting on our behalf, are expressly qualified in their entirety by the
cautionary statements. We assume no duty to update or revise our forward-looking
statements based on changes in internal estimates or expectations or
otherwise.








CURRENCIES





All
amounts expressed herein are in U.S. dollars.








2


GLOSSARY





Certain
Definitions





Terms
used to describe quantities of oil and natural gas and marketing





·
            Bbl— 42 U.S. gallons
      liquid volume, of crude oil or other liquid
  hydrocarbons.




·
            BOE—
      One barrel of oil equivalent, converting natural gas to oil at the ratio
      of 6 Mcf of natural gas to 1 Bbl of
oil.




·
            MBbl
      — One thousand barrels.




·
            Mcf
      — One thousand cubic feet of natural
gas.




·
            Mcfe—
      One thousand cubic feet of natural gas equivalent, converting oil or
      condensate to natural gas at the ratio of 1 Bbl of oil or condensate to 6
      Mcf of natural gas.




·
            MMcf
      — One million cubic feet of natural
gas.




·
            MBOE
      — One thousand BOE.




Terms
used to assign a present value to the Company’s reserves





·
            Standardized
      measure of discounted future net cash flows, after income
      taxes— The present
      value, discounted at 10%, of the after-tax future net cash flows
      attributable to estimated net proved reserves.  The Company
      calculates this amount by assuming that it will sell the oil and natural
      gas production attributable to the proved reserves estimated in its
      independent engineer’s reserve report for the oil and natural gas spot
      prices on the last day of the year, adjusted for quality and
      transportation. The Company also assumes that the cost to produce the
      reserves will remain constant at the costs prevailing on the date of the
      report. The assumed costs are subtracted from the assumed revenues
      resulting in a stream of future net cash flows. Estimated future income
      taxes, using rates in effect on the date of the report, are deducted from
      the net cash flow stream. The after-tax cash flows are discounted at 10%
      to result in the standardized measure of the Company’s proved
      reserves.




·
            Standardized
      measure of discounted future net cash flows before income
      taxes— The discounted
      present value of proved reserves is identical to the standardized measure
      described above, except that estimated future income taxes are not
      deducted in calculating future net cash flows. The Company discloses the
      discounted present value without deducting estimated income taxes to
      provide what it believes is a better basis for comparison of its reserves
      to the producers who may have different income tax
  rates.





Terms used to classify the Company’s reserve quantities





The
Securities and Exchange Commission (“SEC”) definition of proved oil and natural
gas reserves, per Regulation S-X, is as follows:





•
            Proved
      oil and natural gas reserves—
      Proved oil and natural gas reserves are the estimated quantities of crude
      oil, natural gas, and natural gas liquids which geological and engineering
      data demonstrate with reasonable certainty to be recoverable in future
      years from known reservoirs under existing economic and operating
      conditions, i.e., prices and costs as of the date the estimate is made as
      defined in Rule 4-10(a)(2).





Prices
include consideration of changes in existing prices provided only by contractual
arrangements, but not on escalations based upon future conditions.





3








•
            Proved
      developed reserves—Proved
      reserves that can be expected to be recovered through existing wells with
      existing equipment and operating methods as defined in Rule
      4-10(a)(3).





•
            Proved
      undeveloped reserves—Proved
      reserves that are expected to be recovered from new wells on undrilled
      acreage, or from existing wells where a relatively major expenditure is
      required as defined in Rule
4-10(a)(4).





Terms
used to describe the legal ownership of the Company’s oil and natural gas
properties





•
            Working
      interest—
      A real property interest entitling the owner to receive a specified
      percentage of the proceeds of the sale of oil and natural gas production
      or a percentage of the production, but requiring the owner of the working
      interest to bear the cost to explore for, develop and produce such oil and
      natural gas. A working interest owner who owns a portion of the working
      interest may participate either as operator or by voting its percentage
      interest to approve or disapprove the appointment of an operator and
      drilling and other major activities in connection with the development and
      operation of a property.


4


PETROHUNTER
ENERGY CORPORATION





FORM 10-K





FOR
THE FISCAL YEAR ENDED


SEPTEMBER
30, 2009


INDEX





PagePART IItem
      1.
            Business
            6Item
      1A.
            Risk
      Factors
            9Item
      1B.
            Unresolved
      Staff Comments
            12Item
      2.
            Properties
            12Item
      3.
            Legal
      Proceedings
            14Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            14PART IIItem
      5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            15Item
      6.
            Selected
      Financial Data
            15Item
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
            15Item
      7A.
            Quantitative
      and Qualitative Disclosures About Market Risk
            23Item
      8.
            Financial
      Statements and Supplementary Data.
            23Item
      9.
            Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure
            52Item
      9A(T).
            Controls
      and Procedures
            53Item
      9B.
            Other
      Information
            55PART IIIItem
      10.
            Directors,
      Executive Officers and Corporate Governance
            55Item
      11.
            Executive  Compensation
            57Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            59Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence
            61Item
      14.
            Principal
      Accounting Fees and Services
            63PART IVItem
      15.
            Exhibits,
      Financial Statement Schedules
            65





5


PART I





ITEM 1.
            BUSINESS





General





PetroHunter
Energy Corporation (collectively, with its subsidiaries, referred to herein as
“PetroHunter”, “Company”, “we”, “us” or “our”), formerly Digital Ecosystems
Corp. (“Digital”), is an oil and gas exploration and production company, which
currently holds oil and gas interests located in the Piceance Basin of Western
Colorado, and in the Beetaloo Basin in the Northern Territory in
Australia.  Since our inception in 2005, our business activities have
been financed by raising capital through the sale of common stock, and through
the issuance of notes and convertible notes.





Digital
was incorporated on February 21, 2002, under the laws of the State of
Nevada. On February 10, 2006, Digital entered into a Share Exchange
Agreement (the “Agreement”) with GSL Energy Corporation (“GSL”) and certain
shareholders of GSL pursuant to which Digital acquired more than 85% of the
issued and outstanding shares of common stock of GSL, in exchange for shares of
Digital’s common stock. On May 12, 2006, the parties to the Agreement
completed the share exchange and Digital changed its business to the business of
GSL. Subsequent to the closing of the Agreement, Digital acquired all the
remaining outstanding stock of GSL, and effective August 14, 2006, Digital
changed its name to PetroHunter Energy Corporation and reincorporated under the
laws of the State of Maryland.





As a
result of the Agreement, GSL became a wholly-owned subsidiary of PetroHunter.
Since this transaction resulted in the former shareholders of GSL acquiring
control of PetroHunter, for financial reporting purposes the business
combination was accounted for as an additional capitalization of PetroHunter (a
reverse acquisition with GSL as the accounting acquirer).





In
October 2006, GSL Energy Corporation changed its name to PetroHunter Operating
Company. In March 2006, GSL acquired a 50% interest in four exploration permits
held by Sweetpea Corporation Pty Ltd. (“Sweetpea”), an Australian corporation;
and effective January 1, 2007, we acquired 100% of the common shares of
Sweetpea from MAB Resources, LLC (“MAB”), a Delaware limited liability company
which is also in the business of oil and gas exploration and development, and is
our largest shareholder. Sweetpea is the record owner of four exploration
permits issued by the Northern Territory of Australia. On October 20, 2006,
PetroHunter formed PetroHunter Energy NT Ltd., also known as PetroHunter
Australia Ltd. (“PetroHunter Australia”) for the purpose of holding and
developing its assets in Australia, but no assets were assigned into PetroHunter
Australia. In May 2007, we approved the dissolution of PetroHunter
Australia.





Through
September 30, 2009 Sweetpea has sold 75% of its original 100% working interest
to Falcon Oil & Gas Australia Pty Ltd (“Falcon
Australia”).  PetroHunter currently owns a 25% working interest in the
four exploration permits covering 7 million acres in Australia, including one
well (known as the Beetaloo Basin Project), and a 100% working interest in
leases covering 20,000 acres and ten wells in the Piceance Basin in Western
Colorado. These oil and gas wells have not yet commenced oil and gas
production.





During
fiscal 2010, Sweetpea began the process of selling its remaining 25% working
interest in the Beetaloo Basin project in Australia to Falcon Australia in order
to consolidate the interest in this property to facilitate its further
financing. In consideration, Sweetpea will receive 25% of the shares in Falcon
Australia, which currently owns the other 75% working interest and operates the
project (See Note 14 - Subsequent Events of the Notes to Consolidated Financial
Statements included in Item 8. Financial Statements and Supplementary
Data).





Our
annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports
on Form 8-K, as well as any amendments to such reports and all other filings
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are
available free of charge to the public on the Company’s website at
www.petrohunter.com. To access the Company’s SEC filings, select “SEC FILINGS”
under the INVESTOR RELATIONS tab on the Company’s website. You may also request
a copy of these filings at no cost by making written or telephone requests for
copies to our principal executive offices at PetroHunter Energy Corporation,
Investor Relations, 1600 Stout Street, Suite 450, Denver, CO 80202. The
telephone number is (303) 572-8900 and the facsimile number is
(303) 893-4838. Our





6


periodic
and current reports filed with the SEC can be found on our website and on the
SEC’s website at www.sec.gov.





Business
Strategy





During
the period ended September 30, 2009, we continued to focus our efforts in two
core properties: the Beetaloo Basin in Australia and the Piceance Basin, of
Western Colorado.  We also focused on improving our liquidity. We sold
additional working interests in the Beetaloo Basin and the Piceance Basin to
Falcon Oil & Gas Ltd. (“Falcon”), a related party, as follows. In September
2008, we closed on an agreement with Falcon to sell a 50% working interest in
the Beetaloo Basin and sold an additional 25% working interest in the Beetaloo
Basin to Falcon in June 2009.  In August 2008, we closed a transaction
with Falcon selling a 25% working interest in five wells located within our
20,000-acre Buckskin Mesa Project located in the Piceance Basin, in Western
Colorado. As a component of this sale Falcon had an option to purchase an
additional 50% interest in these wells.  In February 2009, Falcon
decided not to pursue this project or participate in the purchase of an
additional 50% interest. As a result of Falcon’s election, in accordance with
our agreements, Falcon assigned the 25% working interest back to us. We are in
the process of pursuing other potential partners in relation to our Buckskin
Mesa Project.





Australia





Beetaloo
Basin Project





As of
September 30, 2009, Sweetpea, our wholly-owned Australian subsidiary, owned a
25% non-operated working interest in four exploration permits in the Northern
Territory, comprising the Beetaloo Basin Project, operated by Falcon. Sweetpea
participated in the deepening of the Shenandoah #1A during the year ended
September 30, 2009. During September 2007, Sweetpea had drilled that well (as
100% working interest owner and operator as the Shenandoah #1) to a total depth
of 1,555 meters (4,740 feet). We are very encouraged with the results of the
logging program that was conducted after the well was deepened to 2,714 meters
(8,904 feet), and we plan further testing/deepening activities for
2010.





We have
also applied for two additional exploration permits in the Northern Territory in
Australia covering an additional 1.5 million acres that are adjacent to our
Beetaloo Basin Project acreage. We continue to await the outcome of the
application for these permits.





Northwest
Shelf Project





In March
2007, Sweetpea acquired Exploration Permit #WA-393-P in the Barrow Sub-Basin of
the Carnavon Basin on the Northwest Shelf of Australia.  Sweetpea did
not carry out the required work program associated with this permit and this
permit was cancelled during the year ended September 30, 2009.





Piceance
Basin, Colorado





Buckskin Mesa
Project





The
Buckskin Mesa Project area was purchased on September 17, 2005 from MAB
Resources, subject to certain agreements with Daniels Petroleum Company
("DPC").  The property is located in the northern part of the Piceance
Basin in Rio Blanco County, Colorado.  The acquisition included
20,000 net acres and five previously drilled that were shut-in. PetroHunter
drilled five wells on this acreage during the years ended September 30, 2007 and
2008. We attempted to complete three of these wells in the quarter ending March
31, 2009; however we were not successful in completing these three wells. All
ten wells are shut-in.





Per the
agreement with DPC we were required to drill 5 additional wells by July 31,
2009, or pay DPC $2 million, or return these leases to DPC. We did not drill
these additional five wells. Global Project Finance AG (“Global”) holds a first
lien on this leasehold interest as described in Note 8 – Notes Payable, in the
Notes to Consolidated Financial Statements included in Item 8. Financial
Statements and Supplementary Data. We are in the process of negotiating a
mutually agreeable alternative to assigning the leases back with Daniels in
order to be able to further explore for oil and gas on this leasehold interest.
We are not able to determine if these negotiations will be successful. We are in
the process of evaluating other alternatives to further explore this leasehold
interest in conjunction with these negotiations.




7




Financing
Strategy





During
the year ended September 30, 2009, we completed several asset sale transactions
with Falcon that were entered into to reduce cash requirements for capital
expenditures, to improve working capital, and to provide available funds to
attempt to complete our Buckskin Mesa Project wells.





Marketing
and Pricing





We have
historically derived our revenues principally from the sale of natural gas and
associated condensate production from wells operated by us and others in the
Piceance Basin, in Western Colorado. Our revenues have been determined, to a
large degree, by prevailing natural gas prices for production situated in the
Rocky Mountain Region of the United States, specifically,
Colorado.  Energy commodity prices in general, and the Company’s
regional prices in particular, have been highly volatile in the past, and such
high levels of volatility are expected to continue in the future. We cannot
predict or control the market prices for the sale of our natural gas,
condensate, or oil production.





Natural
Gas Marketing





Historically,
we have sold all of our natural gas production to a diverse group of
third-party, non-affiliated entities in a portfolio of transactions of various
durations and prices (daily, monthly and longer term), under a marketing
agreement with EnCana, who was the operator of our 8 producing gas wells that we
sold effective December 1, 2008. As of September 30, 2009, we are not producing
or selling any natural gas.





Competition





We
operate in the highly competitive oil and gas areas of acquisition and
exploration, areas in which other competing companies have substantially larger
financial resources, operations, staffs and facilities. Such companies may be
able to pay more for prospective oil and gas properties or prospects and to
evaluate, bid for and purchase a greater number of properties and prospects than
our financial or human resources permit.





Employees





At
September 30, 2009, we had 4 full time equivalent employees. In addition,
we utilized the services of 1 full time consultant. Our employees are not
covered by a collective bargaining agreement.





Environmental
Regulation





Our
exploration, drilling and production activities from wells and natural gas
facilities, including the operation and construction of pipelines, plants and
other facilities for transporting, processing, treating or storing oil, natural
gas and other products are subject to stringent federal, state and local laws
and regulations governing environmental quality, including those relating to oil
spills and pollution control, that are constantly changing. Although such laws
and regulations can increase the cost of planning, designing, installing and
operating such facilities, it is anticipated that, absent the occurrence of an
extraordinary event, compliance with existing federal, state and local laws,
rules and regulations governing the release of materials in the environment or
otherwise relating to the protection of the environment, will not have a
material effect upon our business operations, capital expenditures, operating
results or competitive position.





8





ITEM 1A.
            RISK
      FACTORS





Risks
Related to Our Business





We
have a limited operating history and have generated only very limited revenues.
We have incurred significant losses and will continue to incur losses for the
foreseeable future.  If we fail to secure significant sources of
funding in the short term, we may not be able to continue in
existence.





The
report of our independent registered public accounting firm on the financial
statements for the years ended September 30, 2009 and 2008 includes an
explanatory paragraph relating to significant doubt or uncertainty of our
ability to continue as a going concern.  We have an accumulated
deficit of $279 million as of September 30, 2009 and generated losses of $130
million for the year then ended. For the 2010 fiscal year, we do not expect our
operations to generate sufficient cash flows to provide working capital to pay
overhead expenses, the funding of our lease acquisitions, and the exploration
and development of our properties. Without adequate financing, we may not be
able to successfully develop prospects that we have, and we may not achieve
profitability from operations in the near future or at all.





As a
result of severe cash flow constraints, we have experienced substantial
difficulties in meeting our short term cash needs, particularly in relation to
our past due financing and vendor commitments. Substantially all of our assets
are pledged, and extreme volatility in energy pricing and a deteriorating global
economy are creating great difficulties in the capital markets and have greatly
hindered our ability to raise debt and/or equity capital. Further, as the result
of a series of asset sale transactions, we no longer have proven reserves, which
will increase our difficulties in obtaining any financing. During the year ended
September 30, 2009 we have obtained minimal debt financing from related parties
which we expect will not continue in the near future. We have a $64.9 million
working capital deficit as of September 30, 2009, and substantially all of our
current assets are concentrated in marketable equity securities we received in
conjunction with the sale of a total of 75% of our working interest
in  our Australian assets to a related party. Those securities have
experienced a dramatic decline in value and the price of these securities
remains highly volatile.





We
have completed several significant asset dispositions during the past years,
which leaves us with two primary projects that are both undeveloped and subject
to substantial risks.





During
the years ended September 30, 2009 and 2008, we experienced significant
dispositions of assets, both in sale transactions and as a result of our
inability to maintain certain financial commitments.  These
dispositions of non-core assets have resulted in our development risks being
concentrated in two primary projects in Australia and Colorado, which are both
undeveloped and at this stage without proved reserves associated with
them.





The
value of the securities of Falcon received in the sale of a 50% working interest
in four exploration permits in Australia is highly volatile and subject to
significant changes in value due to significant changes in market value, and
their value has substantial implications on our future liquidity.





The
common stock of Falcon represents the substantial majority of current assets and
our current liquidity, resulting in a concentration of risk.  The
shares are subject to significant market volatility and are subject to
significant restrictions on our ability to sell the
securities.  Accordingly, our inability to realize sufficient value
from these securities and/or our inability to convert the securities into cash
to fund our operations and development plans when needed, could present material
adverse consequences to us.





Two
related parties control a significant percentage of our outstanding common
stock, which may enable them to control many significant corporate actions and
may prevent a change in control that would otherwise be beneficial to our
stockholders.





Entities
controlled by Marc A. Bruner and Christian Russenberger beneficially owned
approximately 25.3% and 14.5%, respectively, of our common stock as of December
31, 2009.  The control and/or significant influence held by such
entities may have a substantial impact on matters requiring the vote of common
shareholders, including the election of our directors and most of our corporate
actions. Such control could delay, defer or prevent others from





9





initiating
a potential merger, takeover or other change in control that might benefit us
and our shareholders. Such control could adversely affect the voting and other
rights of our other shareholders and could depress the market price of our
common stock.





Marc A.
Bruner is the controlling owner of MAB Resources, LLC.  Mr. Bruner
serves as chairman of the board, chief executive officer and president of
Falcon, a company whose stock is traded on the TSX Venture Exchange, and our
partner in our primary exploration and development projects.





Christian
Russenberger, a related party and significant shareholder, is President of
Global Project Finance AG, our most significant creditor.





Our
convertible debentures could significantly dilute the interests of
shareholders.





In
November 2007, we issued convertible debentures in the aggregate principal
amount of approximately $7.0 million.  The debentures are
convertible into shares of our common stock at any time prior to their maturity
dates at a conversion price of $0.15, subject to adjustments for stock splits,
stock dividends, stock combinations and other similar
transactions.  The conversion prices of the convertible debentures
could be further lowered, perhaps significantly, in the event of our issuance of
common stock below the convertible debentures’ conversion price, either directly
or in connection with the issuance of securities that are convertible into, or
exercisable for, shares of our common stock.





In
addition, to date we have issued five-year warrants to the holders of the
convertible debentures.  The warrant holders are entitled to purchase
an aggregate of 52.2 million shares of our common stock at exercise prices
ranging from $0.12 to $0.28 per share, inclusive of warrants issued in
consideration of certain waivers and amendments during our fiscal year ended
September 30, 2009.  Both the number of warrants and the exercise
price are subject to potential adjustments which could result in further
dilution to our stockholders.





Neither
the convertible debentures nor the warrants establish a “floor” that would limit
reductions in the conversion price of the convertible debentures or the exercise
price of the warrants that may occur under certain circumstances.
Correspondingly, there is no “ceiling” on the number of shares that may be
issuable under certain circumstances under the anti-dilution adjustment in the
convertible debentures and warrants.  Accordingly, our issuance of the
convertible debentures and warrants could significantly dilute the interests of
our shareholders.





Our
failure to satisfy our registration, listing and other obligations with respect
to the common stock underlying the warrants issued to our convertible debenture
holders could result in adverse consequences, including acceleration of the
convertible debentures.





We are
required to file a registration statement, and to have it become effective, to
cover the resale of the common stock underlying the warrants, until the earlier
of the date the underlying common stock may be resold pursuant to Rule 144 under
the Securities Act of 1933 without any type of restriction or the date on which
the sale of all of the underlying common stock is completed, subject to certain
exceptions.  We will be subject to various penalties for failing to
meet our registration obligations, which include cash penalties and the forced
redemption of the convertible debentures.





We
are obligated to make significant periodic payments of interest on our portfolio
of debt.





We are
currently obligated to pay annual interest of approximately $5.0 million.
Currently, we are not able to make these interest payments and we are in the
process of renegotiating these terms. We have pledged or secured our assets in
respect to these obligations.





The
issuance of shares upon exercise of outstanding warrants and options may cause
immediate and significant dilution to our existing stockholders.





As of
September 30, 2009, we have issued warrants and options to purchase a total
of 172.3 million shares of common stock.  The issuance of shares upon
exercise of warrants and options may result in significant dilution to the
interests of our existing stockholders.




10




Our
officers, directors and advisors are engaged in other businesses, which may
result in conflicts of interest.





Certain
of our officers, directors, and advisors also serve as directors of other
companies or have significant shareholdings in other companies.  To
the extent that such other companies participate in ventures in which we may
participate, or compete for prospects or financial resources with us, these
officers and directors will have a conflict of interest in negotiating and
concluding terms relating to the extent of such participation.  In the
event that such a conflict of interest arises at a meeting of the Board of
Directors, a director who has such a conflict must disclose the nature and
extent of his interest to the Board of Directors and abstain from voting for or
against the approval of such participation or such terms.





We
depend on a limited number of key personnel who would be difficult to
replace.





We depend
on the performance of our executive officers and key employees. The loss of any
member of our senior management or other key employees could negatively impact
our ability to execute our strategy.  We do not maintain key person
life insurance policies on any of our employees.





Substantially
all of our oil and gas properties are located in the Piceance Basin of Western
Colorado and in the Northern Territory in Australia, making us vulnerable to
specific risks associated with operating in these geographic areas.





We may be
exposed to the effect of seasonal weather conditions, lease stipulations, delays
or interruptions of production from these areas caused by significant
governmental regulation, transportation capacity constraints, the availability
and capacity of compression and gas processing facilities, curtailment of
production or interruption of transportation of natural gas produced from the
wells in these areas, as well as the remoteness and lack of infrastructure in
the case of the Australian properties.





We
have limited control over activities on our oil and gas properties as we do not
operate or do not intend to operate.





As we do
not operate the properties in which we own an interest, we do not have control
over normal operating procedures, expenditures or future development of
underlying properties.





We
have found material weaknesses in our internal controls that require remediation
and concluded that our internal controls over financial reporting at
September 30, 2009, were not effective.





As we
discuss in Part II, Item 9A(T), “Controls and Procedures”, of this
Form 10-K, we have determined that we continue to have deficiencies,
including material weaknesses, in our internal control over financial reporting
as of September 30, 2009.





We
are subject to various risks associated with our Australian
operations.





A
significant portion of our remaining assets are in Australia, which subjects us
to various risks associated with doing business in a foreign country. These
risks include, among other things:





·
            governmental
      and regulatory requirements unique to the
  country;




·
            exposure
      to foreign currency losses;




·
            foreign
      taxation requirements, which can differ significantly from U.S.
      regulations;




·
            local
      economic and/or political instability;
and




·
            potential
      difficulties in our ability to expatriate cash and/or assets to the
      U.S.





11




These
risks are beyond our control, and could result in material adverse consequences
to us.





Risks
Relating to the Oil and Gas Industry





We are subject to various risks
associated with the oil and gas industry, summarized as
follows:





•
            A
      substantial or extended decline in natural gas and oil prices may
      adversely affect our ability to meet our capital expenditure obligations
      and financial commitments.





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





•
            Competition
      in the oil and gas industry is intense, and many of our competitors have
      greater financial, technological and other resources than we do, which may
      adversely affect our ability to
compete.





•
            Our
      industry is heavily regulated which increases our cost of doing business
      and decreases our profitability.





•
            Our
      operations must comply with complex environmental regulations that may
      have a material adverse effect on our
business.





Risks
Related to Our Common Stock





We
are subject to various risks in respect to our Common Stock, summarized as
follows:





•
            Our
      stock price and trading volume may be volatile, which could result in
      losses for our stockholders.





•
            Our
      common stock may not meet the criteria necessary to qualify for listing on
      one or more particular stock exchanges on which we seek or desire a
      listing. Even if our common stock does meet the criteria, it is possible
      that our common stock will not be accepted for listing on any of these
      exchanges.





•
            Our
      common stock may be thinly traded, and therefore, an investor may not be
      able to easily liquidate his or her
investment.





•
            We
      have not and do not anticipate paying dividends on our common
      stock.








ITEM 1B.
            UNRESOLVED
      STAFF COMMENTS





Not
Required by Form 10-K for Smaller Reporting Companies.








ITEM 2.
            PROPERTIES





Location
and Characteristics





Our
headquarters are located at 1600 Stout Street, Suite 450, Denver, Colorado,
80202. The lease for this office space of approximately 3,800 square feet has a
term expiring September 1, 2014. The annual rent is approximately $0.2 million,
including adjustments for inflation and expenses, as well as termination
fees for additional square footage we had leased through September 1, 2009. We
no longer occupy that space.





Currently,
we own oil and gas leases in Colorado, where we own ten wells on our Buckskin
Mesa property (20,000 gross and net acres), and in the Northern Territory in
Australia, where we own a 25% working interest in the Beetaloo Basin project
(7,000,000 gross and 1,750,000 net acres), including one well. The wells on
these properties have not yet commenced oil and gas production. In fiscal 2008,
we owned working interests in eight natural gas wells in Colorado which were
operated by EnCana Oil & Gas USA (“EnCana”).  These interests were
sold to a third party in December 2008. We also owned other undeveloped
acreage in Montana and Western Colorado in fiscal 2008. This acreage has been
sold or the underlying leases have expired.




12




Plan
of Operations





In fiscal
2010, we will focus on executing and implementing a financing strategy with
Falcon Australia for our Beetaloo Basin project in Australia in order to further
explore and develop this acreage, as well as to pursue opportunities to further
explore our Buckskin Mesa acreage. We will continue to reduce operating costs
and attempt to reduce/renegotiate our debt, accounts payable and other
liabilities, and potentially acquire additional properties.





Oil
and Gas Reserves





The
following table is a summary of our oil and gas reserves. For the year ended
September 30, 2008, the reserves are presented as estimated by independent
petroleum engineers Gustavson Associates, LLC. For the year ended September 30,
2009, the Company did not engage Gustavson or any other independent petroleum
engineers and has presented its internal estimates for that period ($’s in
thousands unless volumetric unit or per volumetric unit):





Year Ended
              September 30,2009
            
            
            2008Proved
      Undeveloped ReservesNatural
      gas (MMcf)
            
            
            —
            
            
            
            16,504Oil
      (MBbl)
            
            
            —
            
            
            
            5Proved
      Developed ReservesNatural
      gas (MMcf)
            
            
            —
            
            
            
            3,310Oil
      (MBbl)
            
            
            —
            
            
            
            2Total
      Proved Reserves (MMcfe)
            
            
            —
            
            
            
            19,856Estimated
      future net cash flows, before income tax
            
            $
            —
            
            
            $
            33,739Standardized
      measure of discounted future net cash flows, before income
      taxes
            
            $
            —
            
            
            $
            8,357Future
      income tax
            
            
            —
            
            
            
            —Standardized
      measure of discounted future net cash flows, after income
      taxes
            
            $
            —
            
            
            $
            8,357Calculated
      weighted average prices per unitGas
      ($/Mcf)
            
            $
            —
            
            
            $
            3.36Oil
      ($/Bbl)
            
            $
            —
            
            
            $
            79.47





Production
Volumes, Average Sales Prices and Average Production Costs





The
following table sets forth certain information regarding our historical U.S. net
production of oil and natural gas, and certain price and cost
information.





Year
      ended September 30,2009
            
            
            2008
            
            
            2007Production
      Data:Natural
      gas (Mcf)
            
            
            66,527
            
            
            
            286,474
            
            
            
            456,740Oil
      (Bbl)
            
            
            74
            
            
            
            348
            
            
            
            137Average
      Prices:Natural
      gas (per Mcf)
            
            $
            5.43
            
            
            $
            6.82
            
            
            $
            6.16Oil
      (per Bbl)
            
            $
            37.35
            
            
            $
            111.80
            
            
            $
            52.40Production
      Costs:Lease
      operating expenses (per Mcfe)
            
            $
            8.82
            
            
            $
            2.79
            
            
            $
            1.73





Productive
Wells





As of
September 30, 2009 we do not have any producing wells.




13


Oil
and Gas Drilling Activities





During
the year ended September 30, 2009, we participated in the deepening of the
Shenandoah #1 well (Shenandoah #1A) in the Beetaloo Basin in Australia and
conducted completion activities on three wells at our Buckskin Mesa
Project.





During
the fiscal year ended September 30, 2008, we drilled 2 gross wells and
2 net wells as follows: the Lake 6-22 well in the Buckskin Mesa Project in
Colorado, and the Shenandoah #1 well in the Beetaloo Basin in
Australia.





Oil
and Gas Interests





As of
September 30, 2009, we owned interests in the following undeveloped acreage
positions. Undeveloped acreage refers to acreage that has not been placed in
production.





UndevelopedGross
      Acres
            
            
            Net
      AcresLocationColorado
            
            
            
            
            20,000
            
            
            
            20,000Australia
            
            
            
            
            7,000,000
            
            
            
            1,750,000Total
            
            
            
            
            7,020,000
            
            
            
            1,770,000





Impairment
of Oil and Gas Properties





Costs
capitalized for properties accounted for under the full cost method of
accounting are subjected to a ceiling test limitation to the amount of costs
included in the cost pool by geographic cost center. Costs of oil and gas
properties may not exceed the ceiling which is an amount equal to the present
value, discounted at 10%, of the estimated future net cash flows from proved oil
and gas reserves plus the cost, or estimated fair market value, if lower, of
unproved properties. Should capitalized costs exceed this ceiling, impairment
expense equal to the costs exceeding the ceiling is recognized. As the Company
does not have available capital to develop the U.S. properties the entire U.S.
Full Cost Pool has been written down to $0.0 million as of September 30, 2009.
During the fiscal years ended September 30, 2009 and 2008, we recorded
impairment expense of $90.4 million and $30.8 million,
respectively.





Depreciation,
Depletion, Amortization and Accretion





Depreciation,
depletion, amortization and accretion expense was $0.2 million in 2009 and
$1.2 million in 2008.





ITEM 3.
            LEGAL
      PROCEEDINGS





As of
September 30, 2009, there are no legal proceedings filed or threatened (to our
knowledge) against or involving the Company.





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





None.





14


PART II





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





Market
Information





Our
common stock commenced trading on the OTC bulletin board on April 20, 2005,
under the symbol “DGEO,” and has been trading under the symbol “PHUN” since
August 21, 2006. The following table sets forth the high and low bid prices
per share of our common stock, as reported on the OTC bulletin board for the
periods indicated.





Quarter
      Ended
            High
            LowDecember
      31, 2007
            $0.31
            $0.15March
      31, 2008
            $0.25
            $0.12June
      30, 2008
            $0.30
            $0.15September
      30, 2008
            $0.24
            $0.11December
      31, 2008
            $0.13
            $0.06March
      31, 2009
            $0.15
            $0.01June
      30, 2009
            $0.04
            $0.02September
      30, 2009
            $0.04
            $0.01





On
December 30, 2009, the last sale price for our common stock was
$0.02.





Holders
and Dividends





We have
neither declared nor paid cash dividends on our capital stock and do not
anticipate paying cash dividends in the foreseeable future. Our current policy
is to retain cash to finance operations. Our Board of Directors will determine
future declaration and payment of dividends, if any, in accordance with
applicable corporate law.





As of
December 31, 2009, there were 220 record holders of our common
stock.





Recent
Sales of Unregistered Securities





None.





ITEM 6.
            SELECTED
      FINANCIAL DATA





Not
Required by Form 10-K for Smaller Reporting Companies.





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





The
following discussion of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements and notes
appearing elsewhere in this Form 10-K.





Results
of Operations - Year Ended September 30, 2009 versus Year Ended
September 30, 2008





Oil and Gas
Revenues –Oil and gas revenues were $0.1 million and $2.0 million
for the fiscal years ended September 30, 2009 and 2008, respectively, which
represents a decline of $1.9 million or 95%.  Oil and gas
revenues decreased as we sold our only producing wells effective as of December
1, 2008.




15




Costs
and Expenses





General and
Administrative– During 2009, general and administrative expenses were
$7.8 million as compared to $10.7 million in fiscal 2008, representing a
decrease of $3.0 million or 28%. The following table highlights significant
general and administrative expenses for the respective periods ($ in
thousands):




Period
      Ending September 30,2009
            
            
            2008
            
            
            ChangePayroll
            
            $
            2,193
            
            
            $
            2,572
            
            
            $
            (379
            )
            
            
            (15
            )%Consulting
      fees
            
            
            551
            
            
            
            1,936
            
            
            
            (1,385
            )
            
            
            (72
            )%Stock
      - based compensation expense
            
            
            2,942
            
            
            
            3,276
            
            
            
            (334
            )
            
            
            (10
            )%Legal
            
            
            355
            
            
            
            906
            
            
            
            (551
            )
            
            
            (61
            )%Travel
            
            
            22
            
            
            
            224
            
            
            
            (202
            )
            
            
            (90
            )%Investor
      relations
            
            
            79
            
            
            
            250
            
            
            
            (171
            )
            
            
            (68
            )%Insurance
            
            
            464
            
            
            
            575
            
            
            
            (111
            )
            
            
            (19
            )%Office
            
            
            320
            
            
            
            314
            
            
            
            6
            
            
            
            2
            %Other
            
            
            833
            
            
            
            689
            
            
            
            144
            
            
            
            21
            %Total
            
            $
            7,759
            
            
            $
            10,742
            
            
            $
            (2,983
            )





Payroll
Expense – Declined $0.4 million to $2.2 million, from $2.6 million in
2008. This 15% decline was attributable to the termination of a large percentage
of our workforce on March 31, 2009. These reductions were offset by additional
compensation paid to executive and officers during the year, including one time
awards of stock. As of September 30, 2009, the rightsizing of our labor force
was essentially complete as we had reduced the workforce from 30 full time
equivalents as of March 31, 2009 to four full time equivalents and one full time
consultant. We anticipate payroll expense in fiscal 2010 to be nominal in
comparison to prior fiscal periods.





Consulting
Fees – Declined $1.4 million or 72% due to the Company’s cost reduction
efforts and lower activity levels.





Stock-Based
Compensation - Decreased to $2.9 million in 2009 from $3.3 million in
2008, a decrease of $0.4 million. This 10% decrease results from fewer grants of
options during the period, coupled with grants issued being valued at a lower
intrinsic value resultant from significant declines in the value of our common
stock.  Additionally,  the Board of Directors approved the
extension of the terms of many of the employees of the Company who were
terminated in March 31, 2009. Accordingly,  a one-time expense was
realized related to this extension during the period. We anticipate stock-based
compensation expense in fiscal 2010 to be nominal in comparison to prior fiscal
periods.





Legal Fees
– Decreased to $0.4 million in 2009 from $0.9 million in 2008, a decrease of
$0.5 million. This 61% decrease is primarily attributable to efforts to reduce
the use of outside legal services in 2009, coupled with fewer equity and
property related transactions. We anticipate legal expense in fiscal 2010 to be
less in comparison to prior fiscal periods.





Travel
Costs – Decreased to $0.0 million in 2009 from $0.2 million in 2008. This
90% decrease results from our conscious efforts to manage costs.





Investor
Relations – Decreased to $0.1 million in 2009 from $0.3 million in 2008.
This 68% decrease is due primarily to our focus on expense
management.





Insurance,
Office, and Other –Remained at $1.6 million per year, for both 2009 and
2008.





Lease Operating
Expenses –Lease operating expenses decreased $0.2 million from $0.8
million in 2008 to $0.6 million in 2009. This decrease is primarily
attributed to property sales.





Impairment of Oil
and Gas Properties –During the year ended September 30, 2009, we
recorded impairment expense of $90.4 million, and during the year ended
September 30, 2008, we recorded an impairment of $30.8





16





million,
an increase of $59.6 million or 194%. The increase was due to the impairment of
the remaining book value of the U.S. full cost pool due to unsuccessful
exploration activity and the Company’s inability to fund additional
exploration.





Impairment
expense recorded in 2008 was primarily attributable to oil and gas properties
that were subsequently sold.





Depreciation,
Depletion, Amortization and Accretion –Depreciation, depletion,
amortization and accretion expense  was $0.2 million in 2009 and
$1.2 million in 2008, respectively.  This decrease is attributable to
decreases in production volumes related to the sale of our producing properties
in December 2008.





Gains (Losses) on
Conveyances of Property – During 2009, we completed several significant
asset sales, which resulted in our recognizing net gains of $2.5 million in
accordance with the full cost accounting rules.  During our first
quarter ended December 31, 2008, we sold our eight producing wells and realized
net proceeds of $2.3 million. The disposition of these assets was significant in
relation to our U.S. full cost pool, and therefore, we were required to evaluate
whether the transaction had significantly altered the relationship between our
capitalized costs and proved reserves, which could cause us to recognize a loss
under the full cost pool accounting rules.  Accordingly, our
evaluation resulted in our recognition of a $0.2 million loss on conveyance
during the quarter ended December 31, 2008. Similarly, during our third quarter
ended June 30, 2009, we sold an additional 25% of our exploration licenses and
permits in the Beetaloo Basin. This transaction was considered a recoup of
expenses and caused us to write down the remaining balances in the Australian
full cost pool to $0 and we recorded a gain on the conveyance of $2.7 million.
During fiscal 2008, we sold our Heavy Oil Project and our Southern Piceance
property, and we recorded losses on conveyance of $11.9 million and $8.6
million, respectively.





Interest Expense
–During 2009, interest expense was $16.2 million in comparison to
$11.2 million incurred in 2008. The $5.0 million net increase in interest
expense, or 45%, primarily relates to charges of $9.8 million including $1.4
million for the amortization of deferred financing costs, and $8.6 million for
the amortization of debt discount and beneficial conversion feature. These
charges were increased significantly during the current period as we deemed that
the underlying debt instruments would not be held to maturity and or be repaid
in cash, and therefore the related amortization and accretion charges were
accelerated during the period. (See Note 8 - Notes Payable, of the Notes to
Consolidated Financial Statements included in Item 8. Financial Statements and
Supplementary Data).





Net Loss
–Our net
loss of $129.7 million in 2009 compared to the loss of $76.9 million in 2008
represents an increase of $52.8 million or 68.7%, as a result of the factors
above, primarily impairment.





Going
Concern





The
report of our independent registered public accounting firm on the financial
statements for the years ended September 30, 2009 and 2008 includes
explanatory paragraphs relating to substantial doubt or uncertainty of our
ability to continue as a going concern.  We have generated a
cumulative net loss of $279.2 million, and we have a working capital deficit of
$64.9 million as of September 30, 2009. For our 2010 fiscal year, we expect
that we will be able to fund, on a very limited basis, overhead expenses from
the proceeds of sales of our Falcon shares. We do not believe we will be
investing cash in our properties in the foreseeable future. Our ability to
establish ourselves as a going concern is dependent upon our ability to obtain
additional funding in order to finance our planned operations.  Further,
our outstanding debentures (as further explained in Note 8 - Notes Payable of
the Notes to Consolidated Financial Statements included in Item 8. Financial
Statements and Supplementary Data) are in technical default.  Management
continues to negotiate with the Company's creditors.  However, our ability
to establish ourselves as a going concern is dependent upon our ability to
either refinance our currently outstanding obligations or obtain additional
funding and there are no assurances either of these can occur in the forseeable
future.





17


Schedule
of Contractual Commitments





The
following table summarizes the Company’s obligations and commitments to make
future payments under its notes payable, operating leases, employment contracts,
consulting agreements and service contracts for the periods specified as of
September 30, 2009 ($ in thousands):





Payments
      Due by PeriodContractual
      Obligations
            
            Total
            
            
            Less
      Than
              1 Year
            
            
            1-3
              Years
            
            
            3-5
              YearsOffice lease
            
            $
            632
            
            
            $
            176
            
            
            $
            255
            
            
            $
            201





Plan
of Operation





Colorado





In fiscal
year 2010 we will continue to focus on exploring alternative financing and/or
working interest partners to further explore on our  Buckskin Mesa
prospect.





Australia





During
fiscal 2010 we plan to continue to seek ways to finance the exploration and
development in the Beetaloo Basin project area located in Australia,
through Falcon Australia.





Liquidity
and Capital Resources





Our most
recent year ended September 30, 2009 continued to be a year of significant
transition for us. Our cash flows from operations continued to be insufficient
for us to meet our operating commitments.   Given these circumstances,
our primary goal during 2009 was to ensure liquidity to continue in existence,
and further our exploration activities, on a limited basis, on our remaining
properties. We continued to seek financing transactions, and to seek development
partners for our Buckskin Mesa Project in Colorado and our Beetaloo Basin
Project in Australia.





We
completed the sale of the following interests in our properties pursuant to a
purchase and sale agreement with Falcon dated August 25, 2008: (a) an undivided
50% working interest in four exploration permits in the Beetaloo Basin,
Australia, which closed on September 30, 2008 and yielded net cash proceeds of
$5.0 million and securities in the common stock of Falcon valued at $14.1
million as of September 30, 2008; and (b) an undivided 25% working interest in
the five wells drilled in Buckskin Mesa, including the 40-acre tract surrounding
each well, which closed on November 10, 2008, in exchange for a $7.0 million
cash work commitment to complete certain of these wells. In addition, in
December 2008, we completed the sale of our working interests in our eight
producing wells operated by EnCana Oil & Gas (USA), Inc., for net cash
proceeds of $2.3 million.





In
addition, as part of the Purchase and Sale Agreement with Falcon relating to our
Buckskin Mesa property, Falcon obtained an option to acquire up to a 50%
interest in our entire Buckskin Mesa Project, for total consideration of $28.5
million in cash or shares of Falcon common stock, and an $18.0 million work
commitment ($9.0 million of which would be a carried interest for us). Further,
Falcon had the option to elect to become the operator of the Buckskin Mesa
Project for an additional payment of $3.5 million. In February 2009, Falcon
elected not to exercise its option to acquire additional interests in the
Buckskin Mesa. In June 2009, we sold an additional 25% interest in our four
exploration permits in the Beetaloo Basin located in the Northern Territory of
Australia to Falcon. In consideration, we received relief of a $5.0 million note
payable to Falcon, as well as relief of $1.2 million in accounts payable related
to the prospect, and the remaining restrictions on our Falcon shares which had
secured the note payable were lifted, subject to our escrow agreement with
Falcon.








18




Working
Capital





Working
capital is the amount by which current assets exceed current liabilities, and
our working capital deficit is the result of having current liabilities in
excess of our current assets. Our working capital is impacted by changes in our
ongoing operating costs, along with the timing of operating cash receipts and
disbursements, borrowings of and payments toward debt, expenditures for and
sales of oil and gas properties, and increases and decreases in other assets
involving cash. We are in default of the underlying debt instruments included in
current liabilities, and penalty interest is accruing on this debt.





As of
September 30, 2009, we had a working capital deficit of $64.9 million
and a cash balance of $0.2 million. As of September 30, 2008, we had
working capital deficit of $3.9 million and cash of $1.0 million; accordingly
our working capital deficit increased by $61 million during 2009.





Cash
Flow – Year Ended September 30, 2009 versus Year Ended September 30,
2008





Net cash
used in or provided by operating, investing and financing activities for the
years ended September 30, 2009 and 2008 were as follows ($ in
thousands):





Year
      Ended
              September 30,2009
            
            
            2008Net
      cash used in operating activities
            
            $
            (8,900
            )
            
            $
            (21,737
            )Net
      cash provided by investing activities
            
            $
            3,361
            
            
            $
            14,145Net
      cash provided by financing activities
            
            $
            4,807
            
            
            $
            8,439





Net Cash Used in
Operating Activities.  Net cash used in operating activities
decreased approximately $12.8 million in 2009 as compared to 2008. The
improvement is attributed to the use of cash for paying off accounts payable,
shareholders and related parties of approximately $9 million in 2008, while in
2009 we received $2.5 million in receivable related payments and our accounts
payable balance increased by $0.2 million.





Net Cash Provided
in Investing Activities. Net cash
provided by investing activities decreased by approximately $11 million in 2009
as compared to 2008. The decrease in cash provided is primarily attributed to
one time property sales in 2008, netted against oil and gas property additions,
which provided approximately $12 million in 2008, and in 2009 property sale
proceeds net of oil and gas property additions resulted in $1 million of cash
provided.





Net Cash Provided
by Financing Activities.Net cash
provided by financing activities decreased by approximately $3.6 million in
2009 as compared to 2008 primarily due to our declining financial
position.





2009
Financing Transactions





During
2009, we completed financing transactions as follows:





(1)
            We
      issued an 18% subordinated debenture in the amount of $0.03 million to a
      shareholder of the Company in exchange for the relief of amounts due the
      shareholder. The subordinated debenture is collateralized by an interest
      in .01 million shares of Falcon common stock held by us as restricted
      marketable securities. In connection with the issuance of the debenture we
      issued 0.07 million warrants to purchase our common stock at $0.15 per
      share, which expire in January 2010.  The debenture was due on
      April 15, 2009. We made partial payments on the note and are currently in
      default under the terms of the debenture agreement for the remaining
      outstanding balance.





(2)
            We
      issued three subordinated convertible debentures totaling $0.2 million to
      two related parties in December 2008. These debentures bore interest at
      15% per annum and were due in May 2009. We issued 0.5 million warrants to
      purchase our common stock at $0.15 per share in connection with these
      debentures.  As of September 30, 2009 these debentures along
      with all related accrued interest have been
  repaid.




19





(3)
            We
      issued a promissory note in the amount of $0.1 million to a related party.
      This note bore interest at 15% per annum. As of September 30, 2009 we have
      repaid this note and all accrued
interest.





(4)
            We
      entered into a 10% secured loan agreement with Falcon. Under the terms of
      the loan agreement, Falcon agreed to advance us $5.0
      million.  This loan was secured by 14.5 million shares of Falcon
      common stock we had received as consideration in relation to the sale of a
      50% working interest in our four exploration permits in Australia to
      Falcon in October 2008.   In addition the loan was also
      secured by a first position security interest in the five wells we drilled
      in our Buckskin Mesa project. In June 2009, we sold an additional 25%
      interest in our Australian exploration permits to Falcon, for relief of
      debt in respect to this loan of $5.0 million, which released the shares as
      collateral.





2008
Financing Transactions





During
2008, we completed financing transactions as follows:





(1)
            We
      borrowed $8.3 million on our credit facility with Global, for a total of
      $39.8 million drawn as of September 30, 2008.   The credit
      facility bears interest at prime plus 6.75%, which ranged from 14.0% at
      the beginning of the year to 11.8% at the end of the
      year.  Accrued interest of $6.5 million at September 30, 2008
      was converted to into 32.6 million shares of our common
      stock.  We pay an advance fee of 2% on all amounts borrowed
      under the facility, totaling $0.2 million during the
      year.





(2)
            In
      November 2007, we completed the sale of 8.5% convertible debentures to
      several accredited investors for an aggregate principal amount of
      $7.0 million, for which we received $6.3 million in cash
      proceeds.  The remaining $0.7 million resulted from a transfer
      of $0.5 million or the $2.9 million common stock subscription outstanding
      at September 30, 2007 and $0.2 million of amounts converted from other
      accrued expenses.  The debenture holders also received five-year
      warrants to purchase 46.4 million shares of our common
      stock.  We paid a placement fee of $0.3
      million.





(3)
            We
      borrowed $1.4 million from Global under short term promissory notes, which
      were unsecured and bore interest at 15% per
    annum.





(4)
            We
      borrowed $0.9 million from vendors which was subsequently repaid during
      the year.





(5)
            We
      entered into four separate promissory notes with Bruner Family Trust, UTD
      March 28, 2005 for a total borrowing of $0.4 million in the current
      year.  Each note bears interest at 8.0%.  The funds
      were used to fund working capital needs.  The remaining $2.3 million
      of the $2.7 million balance due to the Bruner Family Trust was converted
      from the $2.9 million common stock subscription outstanding as of
      September 30, 2007.





Off-Balance
Sheet Arrangements





We do not
have any off-balance sheet arrangements.





Critical
Accounting Policies and Estimates





We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our Financial
Statements.





Reserve
Estimates





Our
estimates of oil and natural gas reserves, by necessity, are projections based
on an interpretation of geological and engineering data.  There are
uncertainties inherent in the interpretation of such data as well as the
projection of future rates of production and the timing of development
expenditures.  Reserve engineering is a subjective process of estimating
underground accumulations of oil and natural gas that are difficult to
measure.  The accuracy of any reserve estimate is a function of the quality
of available data, engineering and geological interpretation and judgment. 
Estimates of economically recoverable oil and natural gas reserves and future
net cash flows necessarily





20





depend
upon a number of variable factors and assumptions, such as historical production
from the area compared with production from other producing areas, and the
assumed effects of regulations by governmental agencies.  Any significant
variance in the assumptions could materially affect the estimated quantity and
value of the reserves which could affect the carrying value of our oil and gas
properties and/or the rate of depletion of the oil and gas
properties.





Oil
and Gas Properties





The
Company utilizes the full cost method of accounting for its oil and gas
properties. Under this method, subject to a limitation based on estimated value,
all costs associated with property acquisition, exploration and development,
including costs of unsuccessful exploration, are capitalized within a cost
center on a by country basis. No gain or loss is recognized upon the sale or
abandonment of undeveloped or producing oil and gas properties unless the sale
represents a significant portion of oil and gas properties and the gain
significantly alters the relationship between capitalized costs and proved oil
and gas reserves of the cost center. Depreciation, depletion and amortization of
oil and gas properties are computed on the units-of-production method based on
proved reserves. Amortizable costs include estimates of future development costs
of proved undeveloped reserves.





Capitalized
costs of oil and gas properties may not exceed an amount equal to the present
value, discounted at 10%, of the estimated future net cash flows from proved oil
and gas reserves plus the cost, or estimated fair market value, if lower, of
unproved properties. Should capitalized costs exceed this ceiling, an impairment
is recognized. The present value of estimated future net cash flows is computed
by applying year-end prices of oil and natural gas to estimated future
production of proved oil and gas reserves as of year-end, less estimated future
expenditures to be incurred in developing and producing the proved reserves and
assuming continuation of existing economic conditions.





Asset Retirement
Obligation





Asset
retirement obligations associated with tangible long-lived assets are accounted
for in accordance with Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) 410, “Accounting for Asset Retirement
Obligations”. The estimated fair value of the future costs associated
with dismantlement, abandonment and restoration of oil and gas properties is
recorded generally upon acquisition or completion of a well. The net estimated
costs are discounted to present values using a risk adjusted rate over the
estimated economic life of the oil and gas properties. Such costs are
capitalized as part of the related asset. The asset is depleted on the
units-of-production method on a field-by-field basis. The liability is
periodically adjusted to reflect (1) new liabilities incurred,
(2) liabilities settled during the period, (3) accretion expense, and
(4) revisions to estimated future cash flow requirements. The accretion
expense is recorded as a component of depreciation, depletion, amortization and
accretion expense in the accompanying consolidated statements of
operations.





Share
- Based Compensation





We use
the Black-Scholes option-pricing model and the straight-line attribution
approach to determine the fair-value of stock-based awards in accordance with
FASB ASC 718,“Compensation”.   The option-pricing model requires the input
of highly subjective assumptions, including the option’s expected life and the
price volatility of the underlying stock. The Company’s expected term represents
the period that stock-based awards are expected to be outstanding and is
determined based on historical experience of similar awards, giving
consideration to the contractual terms of the stock-based awards, vesting
schedules and expectations of future employee behavior as influenced by changes
to the terms of its stock-based awards. The expected stock price volatility is
based on the Company’s historical stock prices.





Impairment





We apply
the provisions of FASB ASC 360, “Property Plant and
Equipment,” which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets.  FASB ASC 360 requires a
long-lived asset to be sold to be classified as “held for sale” in the period in
which certain criteria are met, including that the sale of the asset within one
year is probable.  FASB ASC 360 also requires that the results of
operations of a component of an entity that either has been disposed of or is
classified as held for sale be reported in discontinued operations if the





21





operations
and cash flows of the component have been or will be eliminated from the
Company’s ongoing operations.





The
Company periodically reviews the carrying value of its long-term assets in
relation to historical results, current business conditions and trends to
identify potential situations in which the carrying value of assets may not be
recoverable.  If such reviews indicate that the carrying value of such
assets may not be recoverable, the Company would estimate the undiscounted sum
of the expected cash flows of such assets to determine if such sum is less than
the carrying value of such assets to ascertain if an impairment exists. If an
impairment exists, the Company would determine the fair value by using quoted
market prices, if available for such assets, or if quoted market prices are not
available, the Company would discount the expected future cash flows of such
assets.





Marketable
Securities





We received
marketable equity securities as consideration from the sale of certain of our
oil and gas properties, and account for them in accordance with FASB ASC
320,“Accounting for Certain
Investments in Debt and Equity Securities.”  As the shares we
have received will be made available for sale in the short term through the
terms in an underlying escrow agreement, we account for them by marking them to
market with unrealized gains and losses reflected as a component of Other
Comprehensive Income, until such gains or losses become realized, at which time
they are then recognized in our statement of operations. In addition, in
circumstances where significant price declines are experienced subsequent to the
balance sheet date, we consider whether such declines are other than temporary,
after considering our expected holding period, we may record a provision for
impairment in the event we do not expect the value of the securities to recover
from such a decline in market value. We consider our accounting for marketable
securities to involve significant management judgment that is subject to
estimation.





Recently
Issued Accounting Pronouncements





In
May 2009, the FASB issued FASB ASC 855, “Subsequent Events”. FASB ASC
855 incorporates accounting and disclosure requirements related to subsequent
events into U.S. GAAP. The requirements of FASB ASC 855 for
subsequent-events accounting and disclosure are not significantly different from
those in existing auditing standards, which we have historically followed for
financial reporting purposes, as a result, we do not believe this standard had
any material impact on our financial statements. We have evaluated subsequent
events through the date of issuance of these consolidated financial statements,
which is January 13, 2010.





In July
2009, the FASB issued new guidance relating to the “FASB Accounting Standards
Codification” at FASB ASC 105, as the single source of authoritative
nongovernmental U.S. generally accepted accounting principles (GAAP). The
codification is effective for interim periods ending after September 15, 2009.
All existing accounting standards are superseded as described in ASC 105. All
other accounting literature not included in the Codification is
non-authoritative. The adoption of ASC 105 did not impact our results of
operations, financial position or cash flows.





In
October 2009, we adopted certain accounting principles within FASB ASC 470
“Debt with Conversion and
Other Options” that requires the proceeds from the issuance of certain
convertible debt instruments to be allocated between a liability component
(issued at a discount) and an equity component. The resulting debt discount is
amortized over the period the convertible debt is expected to be outstanding as
additional non-cash interest expense. The change in accounting treatment is
effective for us in fiscal 2010, and it is required to be applied
retrospectively to prior periods.  Management is currently assessing
the potential impact that the adoption of this new guidance could have on our
financial statements in fiscal 2010.





In
October 2009, we adopted certain accounting principles within FASB ASC 805
“Business Combinations”
which requires an acquirer to recognize the assets acquired, the liabilities
assumed, including those arising from contractual contingencies, any contingent
consideration, and any non-controlling interest in the acquiree at the
acquisition date, measured at their fair values as of that date, with limited
exceptions specified in the statement.  It also requires the acquirer
in a business combination achieved in stages (sometimes referred to as a step
acquisition) to recognize the identifiable assets and liabilities, as well as
the non-controlling interest in the acquiree, at the full amounts of their fair
values (or other amounts determined in accordance with this accounting
principle).  In addition, the accounting principles requirement to
measure the non-controlling interest in the acquiree at fair value will result
in recognizing





22





the
goodwill attributable to the non-controlling interest in addition to that
attributable to the acquirer. ASC 805 also requires the acquirer to recognize
changes in the amount of its deferred tax benefits that are recognizable because
of a business combination either in income from continuing operations in the
period of the combination or directly in contributed capital, depending on the
circumstances. It also provides guidance on the impairment testing of acquired
research and development intangible assets and assets that the acquirer intends
not to use. ASC 805 applies prospectively to business combinations for
which the acquisition date is on or after October 1, 2009, therefore, the
adoption of ASC 805 did not have any impact on our historical financial
statements.





In
October 2009, we adopted certain accounting principles within FASB ASC 810
“Consolidation” which
establishes accounting and reporting standards for the non-controlling interest
in a subsidiary and for the deconsolidation of a subsidiary. It also clarifies
that a non-controlling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements.  ASC 810 also changes the way the consolidated
income statement is presented by requiring consolidated net income to be
reported at amounts that include the amounts attributable to both the parent and
the non-controlling interest. It also requires disclosure, on the face of the
consolidated statement of income, of the amounts of consolidated net income
attributable to the parent and to the non-controlling interest. ASC 810 requires
that a parent recognize a gain or loss in net income when a subsidiary is
deconsolidated and requires expanded disclosures in the consolidated financial
statements that clearly identify and distinguish between the interests of the
parent owners and the interests of the non-controlling owners of a
subsidiary.  The adoption of ASC 810 did not have any impact on our
historical financial statements.




In
January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-03
“Oil and Gas Reserve
Estimation and Disclosures.”The ASU aligns the current oil and gas
reserve estimation and disclosure requirements of FASB Accounting Standards
Codification Topic 932, Extractive Activities — Oil and
Gas, with those in SEC Final Rule Release No. 33-8995, Modernization of
Oil and Gas Reporting. The ASU will be effective for reporting periods ending on
or after December 31, 2009. We are currently assessing the impact that adoption
of this rule will have on our financial statements.




In
December 2008, the SEC issued revised reporting requirements for oil and natural
gas reserves that a company holds. Included in the new rule entitled “Modernization
of Oil and Gas Reporting Requirements”,are the following changes: 1) permitting use of new technologies to
determine proved reserves, if those technologies have been demonstrated
empirically to lead to reliable conclusions about reserve volumes; 2) enabling
companies to additionally disclose their probable and possible reserves to
investors, in addition to their proved reserves; 3) allowing previously excluded
resources, such as oil sands, to be classified as oil and natural gas reserves
rather than mining reserves; 4) requiring companies to report the independence
and qualifications of a preparer or auditor, based on current Society of
Petroleum Engineers criteria; 5) requiring the filing of reports for companies
that rely on a third party to prepare reserve estimates or conduct a reserve
audit; and 6) requiring companies to report oil and natural gas reserves using
an average price based upon the prior 12-month period, rather than year-end
prices. The new requirements are effective for registration statements filed on
or after January 1, 2010, and for annual reports on Form 10K for fiscal years
ending on or after December 31, 2009. Early adoption is not permitted. We are
currently assessing the impact that adoption of this rule will have on our
financial disclosures.


ITEM 7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Not
required by Form 10-K for Smaller Reporting Companies.





ITEM 8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA








23




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM











To the
Board of Directors of


PetroHunter
Energy Corporation


Denver,
Colorado




We have
audited the accompanying consolidated balance sheets of PetroHunter Energy
Corporation (the “Company”) as of September 30, 2009 and 2008, and the related
consolidated statements of operations, stockholders’ equity and comprehensive
income (loss), and cash flows for the years then ended. The Company’s management
is responsible for these financial statements. Our responsibility is to express
an opinion on these financial statements based on our audits.






We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.






In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of PetroHunter Energy Corporation as
of September 30, 2009 and 2008 and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.




The
accompanying financial statements have been prepared assuming that PetroHunter
Energy Corporation will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of operations. As discussed in Note 2, certain factors indicate substantial
doubt that the Company will be able to continue as a going concern. The
financial statements do not include any adjustments to reflect the possible
future effect on the recoverability and classification of assets or the amounts
and classification of liabilities that might result from the outcome of these
uncertainties.





As
discussed in Notes 3, 4, 8, 9, 10 11, 12 and 14, the Company had numerous
significant transactions with related parties.














Eide
Bailly LLP





Greenwood
Village, Colorado


January
8, 2010
















24


PETROHUNTER
ENERGY CORPORATION


CONSOLIDATED
BALANCE SHEETS


September
      30,ASSETS
            
            2009
            
            
            2008($
      in thousands)Current
      AssetsCash
      and cash equivalents
            
            $
            235
            
            
            $
            967ReceivablesOil
      and gas receivables, net
            
            
            —
            
            
            
            193GST
      receivables
            
            
            1
            
            
            
            504Other
      receivables
            
            
            16
            
            
            
            12Due
      from related parties
            
            
            —
            
            
            
            1,840Restricted
      marketable securities
            
            
            2,925
            
            
            
            7,495Unrestricted
      marketable securities
            
            
            455
            
            
            
            6,638Prepaid
      expenses and other assets
            
            
            205
            
            
            
            273TOTAL
      CURRENT ASSETS
            
            
            3,837
            
            
            
            17,922Property
      and Equipment, at costOil
      and gas properties under full cost method, net
            
            
            1,427
            
            
            
            97,352Furniture
      and equipment, net
            
            
            122
            
            
            
            7371,549
            
            
            
            98,089Other
      AssetsRestricted
      cash
            
            
            101
            
            
            
            524Deposits
      and other assets
            
            
            50
            
            
            
            130Deferred
      financing costs
            
            
            —
            
            
            
            1,388Contingent
      asset
            
            
            —
            
            
            
            4,832TOTAL
      ASSETS
            
            $
            5,537
            
            
            $
            122,885LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      LiabilitiesAccounts
      payable and accrued expenses
            
            $
            4,104
            
            
            $
            11,981Notes
      payable – short term
            
            
            81
            
            
            
            329Convertible
      notes payable – net
            
            
            6,956
            
            
            
            —Note
      payable –related party –net
            
            
            43,479
            
            
            
            3,572Accrued
      interest payable
            
            
            457
            
            
            
            166Accrued
      interest and fees payable  – related party
            
            
            5,409
            
            
            
            969Other
      accrued liabilities
            
            
            7,273
            
            
            
            4,832Asset
      retirement obligation
            
            
            1,012
            
            
            
            —TOTAL
      CURRENT LIABILITIES
            
            
            68,771
            
            
            
            21,849Notes
      payable  –  related party – net
            
            
            —
            
            
            
            38,035Convertible
      notes payable – net
            
            
            —
            
            
            
            325Asset
      retirement obligation
            
            
            —
            
            
            
            114Other
      long-term liabilities
            
            
            29
            
            
            
            —TOTAL
      LIABILITIES
            
            
            68,800
            
            
            
            60,323Stockholders’
      EquityPreferred
      stock, $0.001 par value; authorized 100,000,000 shares; none
      issued
            
            
            —
            
            
            
            —Common
      stock, $0.001 par value; authorized 1,000,000,000 shares;
      380,468,544 and
              373,343,544
      issued and outstanding at September 30, 2009 and 2008,
      respectively
            
            
            380
            
            
            
            374Additional
      paid-in-capital
            
            
            215,576
            
            
            
            212,308Accumulated
      other comprehensive loss
            
            
            —
            
            
            
            (632
            )Accumulated
      deficit
            
            
            (279,219
            )
            
            
            (149,488
            )TOTAL
      STOCKHOLDERS’ EQUITY
            
            
            (63,263)
            
            
            
            62,562TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            5,537
            
            
            $
            122,885


See
accompanying notes to consolidated financial statements.





25


PETROHUNTER
ENERGY CORPORATION


CONSOLIDATED
STATEMENTS OF OPERATIONS





Year
      Ended
              September 30,
              2009
            
            
            Year
      Ended
              September 30,
              2008($
      in thousands except per share and share data)RevenuesOil
      and gas revenues
            $
            127
            
            
            $
            1,993Other
      revenues
            
            1
            
            
            
            187Total
      Revenues
            
            128
            
            
            
            2,180Costs
      and ExpensesLease
      operating expense
            
            587
            
            
            
            805General
      and administrative
            
            7,759
            
            
            
            10,742Impairment
      of contingent asset
            
            6,805
            
            
            
            —Impairment
      of oil and gas properties
            
            90,404
            
            
            
            30,847Depreciation,
      depletion, amortization and accretion
            
            244
            
            
            
            1,230Total
      operating expenses
            
            105,799
            
            
            
            43,624Loss
      from Operations
            
            (105,671
            )
            
            
            (41,444
            )Other
      Income (Expense)Gain
      (Loss) on property conveyances – net
            
            2,492
            
            
            
            (20,469
            )Foreign
      currency exchange gain
            
            —
            
            
            
            11Interest
      income
            
            14
            
            
            
            65Interest
      expense
            
            (16,241
            )
            
            
            (11,242
            )Loss
      on sale of securities
            
            (1,156
            )
            
            
            (2,987
            )Impairment
      of marketable securities
            
            (8,537
            )
            
            
            (800
            )Other
            
            (303
            )
            
            
            —Loss
      on abandonment
            
            (329
            )
            
            
            —Total
      other expense
            
            (24,060
            )
            
            
            (35,422
            )Net
      Loss
            $
            (129,731
            )
            
            $
            (76,866
            )Net
      loss per common share — basic anddiluted
            $
            (0.35)
            
            
            $
            (0.24
            )Weighted
      average number of common
              shares
      outstanding — basic and diluted
            
            375,850,141
            
            
            
            322,902,152





See
accompanying notes to consolidated financial statements





26
 
 PETROHUNTER
ENERGY CORPORATION
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
  CommonStockShares
                    
                    
                    Amount
                    
                    
                    Additional Paid-In
      Capital
                    
                    
                    Accumulated Deficit
                    
                    
                    Accumulated Other
      comprehensive Loss
                    
                    
                    Total Stockholders’
      Equity
                    
                    
                    Total Comprehensive
      Loss($
      in thousands)(Balance,
      October 1, 2007
                    
                    
                    278,948,841
                    
                    
                    $
                    279
                    
                    
                    $
                    172,672
                    
                    
                    $
                    (72,622
                    )
                    
                    $
                    (5
                    )
                    
                    $
                    100,324
                    
                    
                    $
                    (49,816
                    )Shares returned  for property conveyance at  $0.22 per
      share
                    
                    
                    (6,400,000
                    )
                    
                    
                    (6
                    )
                    
                    
                    (1,402
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (1,408
                    )
                    
                    
                    —Shares issued for property interests at $0.31 per share - related
      party
                    
                    
                    25,000,000
                    
                    
                    
                    25
                    
                    
                    
                    7,725
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    7,750
                    
                    
                    
                    —Shares issued in connection with debt conversion  at $0.23 per
      share – related party
                    
                    
                    16,000,000
                    
                    
                    
                    16
                    
                    
                    
                    3,664
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    3,680
                    
                    
                    
                    —Shares issued for property conveyance at $0.25  per
      share
                    
                    
                    5,000,000
                    
                    
                    
                    5
                    
                    
                    
                    1,245
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,250
                    
                    
                    
                    —Shares issued for finance costs at $0.28 per share
                    
                    
                    200,000
                    
                    
                    
                    —
                    
                    
                    
                    56
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    56
                    
                    
                    
                    —Shares issued for conversion of convertible debt at $0.20 per
      share
                    
                    
                    2,677,519
                    
                    
                    
                    3
                    
                    
                    
                    533
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    536
                    
                    
                    
                    —Common shares issued for conversion of accrued   interest –
      related party at $0.20 per share
                    
                    
                    32,600,075
                    
                    
                    
                    33
                    
                    
                    
                    6,487
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    6,520
                    
                    
                    
                    —Shares issued for vendor settlements at $0.20 per share
                    
                    
                    16,879,219
                    
                    
                    
                    17
                    
                    
                    
                    3,359
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    3,376
                    
                    
                    
                    —Shares issued for finance costs at $0.18 per share
                    
                    
                    2,037,890
                    
                    
                    
                    2
                    
                    
                    
                    365
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    367
                    
                    
                    
                    —Shares issued for purchase option at $0.20
      per  share
                    
                    
                    400,000
                    
                    
                    
                    —
                    
                    
                    
                    80
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    80
                    
                    
                    
                    —Discount associated with beneficial conversion feature and detachable
      warrants on convertible debenture issuance
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    6,956
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    6,956
                    
                    
                    
                    —Warrant value associated with convertible  debenture
      issuance
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    21
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    21
                    
                    
                    
                    —Warrant value associated with debt conversion – related
    party
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,841
                    
                    
                    
                    —
                    
                    
                    
                    
                    
                    
                    
                    1,841Debt conversion - related party
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2,704
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2,704
                    
                    
                    
                    —Recognition of warrant value associated with amendment & waiver on
      convertible debt
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    495
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    495
                    
                    
                    
                    —Discount on notes payable
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    336
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    336
                    
                    
                    
                    —Stock - based compensation
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    3,276
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    3,276
                    
                    
                    
                    —
  27
  Origination
      fees associated with debt issuance
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,895
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,895
                    
                    
                    
                    —Foreign currency translation adjustment
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (627
                    )
                    
                    
                    (627
                    )
                    
                    
                    (627
                    )Net
      loss
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (76,866
                    )
                    
                    
                    —
                    
                    
                    
                    (76,866
                    )
                    
                    
                    (76,866
                    )Balance,
      September 30, 2008
                    
                    
                    373,343,544
                    
                    
                    $
                    374
                    
                    
                    $
                    212,308
                    
                    
                    $
                    (149,488
                    )
                    
                    $
                    (632
                    )
                    
                    $
                    62,562
                    
                    
                    $
                    (77,493
                    )Common
      Stock issued in connection with property option agreement
                    
                    
                    1,875,000
                    
                    
                    
                    1
                    
                    
                    
                    148
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    149
                    
                    
                    
                    —Additional
      paid in capital associated with the issuance of RenCap Penalty
      warrants
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    51
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    51
                    
                    
                    
                    —Additional
      paid in capital associated with the issuance of warrants in connection
      with debenture agreements
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    9
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    9
                    
                    
                    
                    —Common
      Stock issued in connection with investor relations
                    
                    
                    250,000
                    
                    
                    
                    —
                    
                    
                    
                    23
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    23
                    
                    
                    
                    —Common
      Stock issued to officer
                    
                    
                    5,000,000
                    
                    
                    
                    5
                    
                    
                    
                    95
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    100
                    
                    
                    
                    —Foreign
      currency translation adjustment
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    
                    
                    
                    
                    —
                    
                    
                    
                    632
                    
                    
                    
                    632
                    
                    
                    
                    632Stock
      - based
                      compensation
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2,942
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2,942
                    
                    
                    
                    —Net
      loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (129,731
                    )
                    
                    
                    
                    
                    
                    
                    (129,731
                    )
                    
                    
                    (129,731
                    )Balance,
      September 30, 2009
                    
                    
                    380,468,544
                    
                    
                    $
                    380
                    
                    
                    $
                    215,576
                    
                    
                    $
                    (279,219
                    )
                    
                    $
                    —
                    
                    
                    $
                    (63,263
                    )
                    
                    $
                    (76,861
                    )





See
accompanying notes to consolidated financial statements.


28


PETROHUNTER
ENERGY CORPORATION


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Year Ended
              September 30,
              2009
            
            
            Year Ended
              September 30,
              2008($
      in thousands)Cash
      flows used in operating activitiesNet
      loss
            
            $
            (129,731
            )
            
            $
            (76,866
            )Adjustments
      used to reconcile net loss to net cash used in operating
      activities:Stock
      based compensation
            
            
            2,942
            
            
            
            3,276Depreciation,
      depletion, amortization and accretion
            
            
            244
            
            
            
            1,230Impairment
      of oil and gas properties
            
            
            90,404
            
            
            
            30,847Warrants
      issued to settle interest costs
            
            
            60
            
            
            
            495Loss
      on abandonment
            
            
            329
            
            
            
            —Impairment
      of contingent asset
            
            
            6,805
            
            
            
            —Amortization
      of deferred financing costs
            
            
            1,388
            
            
            
            1,575Amortization
      of debt discount and beneficial conversion feature
            
            
            8,648
            
            
            
            2,419(Gain)
      Loss on conveyance of properties
            
            
            (2,492)
            
            
            
            20,469Losses
      on sale of marketable securities
            
            
            1,156
            
            
            
            2,987Impairment
      of marketable securities
            
            
            8,537
            
            
            
            800Other,
      net
            
            
            —
            
            
            
            45Changes in operating assets and liabilities:Receivables
            
            
            680
            
            
            
            (163
            )Due
      from related party
            
            
            1,840
            
            
            
            —Prepaid expenses and other assets
            
            
            68
            
            
            
            (216
            )Accounts payable and accrued expenses
            
            
            222
            
            
            
            (7,161
            )Due to shareholder and related parties
            
            
            —
            
            
            
            (1,474
            )Net
      cash used in operating activities
            
            
            (8,900)
            
            
            
            (21,737
            )Cash
      flows provided by investing activitiesAdditions
      to oil and gas properties
            
            
            (1,495
            )
            
            
            (20,040
            )Proceeds
      from sale of oil and gas properties
            
            
            2,565
            
            
            
            31,922Proceeds
      from sale of marketable securities
            
            
            1,878
            
            
            
            2,541Additions
      to furniture and equipment
            
            
            (10)
            
            
            
            (353
            )Change
      in restricted cash
            
            
            423
            
            
            
            75Net
      cash provided by investing activities
            
            
            3,361
            
            
            
            14,145Cash
      flows from financing activitiesProceeds
      from the Global credit facility
            
            
            —
            
            
            
            8,250Borrowing
      on short-term notes payable
            
            
            —
            
            
            
            850Proceeds
      from related party borrowings
            
            
            5,210
            
            
            
            1,770Proceeds
      from issuance of convertible notes
            
            
            —
            
            
            
            6,330Payments
      on short-term notes payable
            
            
            (93
            )
            
            
            (6,163
            )Payments
      on related party borrowings
            
            
            (310
            )
            
            
            (2,598
            )Net
      cash provided by financing activities
            
            
            4,807
            
            
            
            8,439Effect
      of exchange rate changes on cash
            
            
            —
            
            
            
            —Net
      (decrease) increase in cash and cash equivalents
            
            
            (732)
            
            
            
            847Cash
      and cash equivalents, beginning of period
            
            
            967
            
            
            
            120Cash
      and cash equivalents, end of period
            
            $
            235
            
            
            $
            967


29


PETROHUNTER
ENERGY CORPORATION


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Year
      Ended
              September 30,
              2009
            
            
            Year
      Ended
              September 30,
              2008($
      in thousands)Supplemental
      schedule of cash flow informationCash
      paid for interest
            
            $
            315
            
            
            $
            2,698Cash
      paid for income taxes
            
            $
            —
            
            
            $
            —Supplemental
      disclosures of non-cash investing and
              financing
      activitiesContracts
      for oil and gas properties
            
            $
            —
            
            
            $
            (1,500)Shares
      issued for debt conversion
            
            $
            —
            
            
            $
            6,920Shares
      issued for commissions on offerings
            
            $
            —
            
            
            $
            56Shares
      issued for property
            
            $
            149
            
            
            $
            9,000Shares
      returned on property conveyances
            
            $
            —
            
            
            $
            (1,408)Shares
      issued for payment of accrued interest
            
            $
            —
            
            
            $
            6,520Shares
      issued for property and finder’s fee on property
            
            $
            —
            
            
            $
            367Shares
      issued for vendor settlements
            
            $
            —
            
            
            $
            3,376Warrants
      issued for debt
            
            $
            —
            
            
            $
            4,588Discount
      associated with beneficial conversion feature
              and detachable warrants
            
            $
            —
            
            
            $
            6,956Common
      stock subscriptions converted to notes and convertible
      debentures
            
            $
            —
            
            
            $
            2,858Marketable
      securities received from sale of oil and gas
    properties
            
            $
            14,133
            
            
            $
            20,461Acquisition
      of oil and gas properties by exchange of joint interest
              billings, oil and gas receivables and accounts payable
            
            $
            —
            
            
            $
            12,707Accounts
      payable relieved in connection with property conveyance
            
            $
            1,455
            
            
            $
            —Note
      payable relieved in connection with property conveyance
            
            $
            5,000
            
            
            $
            —











See
accompanying notes to consolidated financial statements.


30


PETROHUNTER
ENERGY CORPORATION


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Note 1 —
Organization and Basis of Presentation





We are an
oil and gas exploration and production company, and we currently own oil and gas
leasehold interests located in Australia (Beetaloo Basin) and in Western
Colorado (Piceance Basin).  We are incorporated in the State of
Maryland.





Our
predecessor, Digital Ecosystems Corp. (“Digital”), was incorporated on February
21, 2002 under the laws of the state of Nevada.  On February 10, 2006,
Digital entered into a Share Exchange Agreement (the “Exchange Agreement”) with
GSL Energy Corporation (“GSL”) and certain shareholders of GSL pursuant to which
Digital acquired more than 85% of the issued and outstanding shares of common
stock of GSL in exchange for shares of Digital’s common stock.  The
Exchange Agreement was completed on May 12, 2006.  At that time, GSL’s
business, which was formed in 2005 for the purpose of acquiring, exploring,
developing and operating oil and gas properties, became Digital’s business and
GSL became a subsidiary of Digital. Since this transaction resulted in the
former shareholders of GSL acquiring control of Digital, for financial reporting
purposes, the business combination was accounted for as an additional
capitalization of Digital (a reverse acquisition with GSL as the accounting
acquirer).





Subsequent
to the closing of the Exchange Agreement, Digital acquired all the remaining
outstanding stock of GSL, and effective August 14, 2006, Digital changed its
name to PetroHunter Energy Corporation (“PetroHunter”) and reincorporated under
the laws of the state of Maryland.  Likewise, in October 2006, GSL
changed its name to PetroHunter Operating Company.





Unless
otherwise noted in this report, any description of “us” or “we” refers to
PetroHunter Energy Corporation and our subsidiaries.





Financial
information in this report is presented in U.S. dollars.





Note 2 —
Summary of Significant Accounting Policies





Basis of Accounting - The
accompanying financial statements have been prepared on the basis of accounting
principles applicable to a going concern, which contemplates the realization of
assets and extinguishment of liabilities in the normal course of business. The
report of our independent registered public accounting firm on the financial
statements for the years ended September 30, 2009 and 2008 includes an
explanatory paragraph relating to substantial doubt or uncertainty of our
ability to continue as a going concern.  As shown in the accompanying
statements of operations, we have an accumulated deficit of $279.2 million and
net loss of $129.7 million for the year ending September 30, 2009, and as
of that date we have a working capital deficit of $64.9 million.





Cash and Cash Equivalents– We consider
investments in highly liquid financial instruments with an original stated
maturity of three months or less to be cash equivalents.





Comprehensive Loss – FASB ASC
220,“Comprehensive
Income”, establishes standards for reporting and display of comprehensive
income and its components in financial statements. It requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in the financial statement that is displayed
with the same prominence as other financial statements.  The Company’s
comprehensive loss consists of both net loss and foreign currency translation
adjustments and it is presented in the accompanying consolidated statements of
shareholders' equity and comprehensive loss.





Concentration of Credit Risk –
Financial instruments which potentially subject us to concentrations of credit
risk consist of cash and marketable securities. We periodically evaluate the
credit worthiness of financial institutions, and maintain cash accounts only
with major financial institutions, thereby minimizing exposure for deposits in
excess of federally insured amounts. On occasion, the Company may have cash in
banks in excess of federally insured amounts. We believe that credit risk
associated with cash is remote.  Marketable securities credit risk is
discussed later in Note 3 - Restricted Cash and Marketable
Securities.





31





Debt Issuance Costs – Debt
issuance costs represent direct costs incurred for the issuance of long-term
debt. These costs are amortized to interest expense over the lives of the
respective debt issues using the effective interest method. When debt is repaid
early or when it becomes apparent that underlying debt will not be held to
maturity, the portion of unamortized debt issue costs related to the principal
repayment is written off and included in interest expense.





Fair Value – We apply the
provisions of FASB ASC 820,”Fair Value Measurements”. The
carrying amounts reported in the consolidated balance sheets for cash,
receivables, marketable securities, prepaid assets, accounts payable and accrued
liabilities approximate fair value because of the immediate or short-term
maturity of these financial instruments. Fair values of assets and liabilities
measured on a recurring basis as of September 30, 2009 included restricted and
unrestricted marketable securities, recorded at fair values of $ $2.9 million
and $0.5 million, respectively, which had quoted prices in active markets for
identical assets (level 1) of $2.9 million and $0.5 million
respectively.





Impairment– We apply the
provisions of FASB ASC 360, “Property Plant and
Equipment”, which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets.  FASB ASC 360 requires a
long-lived asset to be sold to be classified as “held for sale” in the period in
which certain criteria are met, including that the sale of the asset within one
year is probable.  FASB ASC 360 also requires that the results of
operations of a component of an entity that either has been disposed of or is
classified as held for sale be reported in discontinued operations if the
operations and cash flows of the component have been or will be eliminated from
the Company’s ongoing operations.





The
Company periodically reviews the carrying value of its long-term assets in
relation to historical results, current business conditions and trends to
identify potential situations in which the carrying value of assets may not be
recoverable.  If such reviews indicate that the carrying value of such
assets may not be recoverable, the Company would estimate the undiscounted sum
of the expected cash flows of such assets to determine if such sum is less than
the carrying value of such assets to ascertain if an impairment exists. If an
impairment exists, the Company would determine the fair value by using quoted
market prices, if available for such assets, or if quoted market prices are not
available, the Company would discount the expected future cash flows of such
assets.





Income Taxes – We record
income taxes under the asset and liability method prescribed by FASB ASC 740,
“Income Taxes”. Under
this method, deferred tax assets and liabilities are recognized for temporary
differences between the financial statement amounts and the tax basis of certain
assets and liabilities by applying statutory rates in effect when the temporary
differences are expected to reverse.





Loss Per Common Share – We do
not report fully diluted loss per common share as the effect would be
anti-dilutive.





Marketable Securities –
We account for marketable securities with FASB ASC 320,“Accounting for Certain Investments
in Debt and Equity Securities”. We account for marketable securities by
marking to market with unrealized gains and losses reflected as a component of
Other Comprehensive Income, until such gains or losses become realized, at which
time they are then recognized in our statement of operations. In addition, in
circumstances where significant price declines are experienced subsequent to the
balance sheet date, we consider whether such declines are other than temporary.
After considering our expected holding period, we may record a provision for
impairment in the event we do not expect the value of the securities to recover
from such a decline in market value. We consider our accounting for marketable
securities to involve significant management judgment that is subject to
estimation.





Oil and Gas Properties – The
Company applies the full cost method of accounting for its oil and gas
properties. Under this method, subject to a limitation based on estimated value,
all costs associated with property acquisition, exploration and development,
including costs of unsuccessful exploration, are capitalized within a cost
center on a by country basis. No gain or loss is recognized upon the sale or
abandonment of undeveloped or producing oil and gas properties unless the sale
represents a significant portion of oil and gas properties and the gain
significantly alters the relationship between capitalized costs and proved oil
and gas reserves of the cost center. Depletion of oil





32





and gas
properties is computed on the units-of-production method based on proved
reserves. This includes estimates of future development costs of proved
undeveloped reserves.





Capitalized
costs of oil and gas properties may not exceed an amount equal to the present
value, discounted at 10%, of the estimated future net cash flows from proved oil
and gas reserves plus the cost, or estimated fair market value, if lower, of
unproved properties. Should capitalized costs exceed this ceiling, an impairment
is recognized. The present value of estimated future net cash flows is computed
by applying year-end prices of oil and natural gas to estimated future
production of proved oil and gas reserves as of year-end, less estimated future
expenditures to be incurred in developing and producing the proved reserves and
assuming continuation of existing economic conditions.





Operating Leases – We lease
our offices under operating leases, and our lease agreements generally include
rent escalation clauses. Most of the Company’s lease agreements include renewal
periods at the Company’s option. We recognize scheduled rent increases on a
straight-line basis over the lease term beginning with the date the Company
takes possession of the leased space. Deferred rent relates to certain of our
operating leases containing predetermined fixed increases of the base rental
rate during the lease term being recognized as rental expense on a straight-line
basis over the lease term. We have recorded the difference between the amounts
charged to operations and amounts payable under the leases as other liabilities
in the accompanying consolidated balance sheets.





Property and Equipment –
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets
approximating seven years. Leasehold improvements are amortized over the shorter
of the lease term or the estimated useful lives of the related assets using the
straight-line method. We have capitalized costs associated with various
equipment leases in accordance with FASB ASC 840, “Accounting for Leases.” These
amounts have been presented as components of our property and equipment in our
consolidated balance sheets.





Reclassifications – Certain
prior period amounts have been reclassified in the consolidated financial
statements to conform to the current period presentation.





Restricted Cash – Restricted
cash consists of certificates of deposit, underlying letters of credit for
exploration permits, state and local bonds and guarantees to
vendors.





Revenue Recognition – We
recognize revenues from the sale of natural gas and crude oil related to our
interests in producing wells when delivery to the customer has occurred and
title has transferred. We currently have no gas balancing arrangements in
place.  Revenue is presented on a gross basis, prior to deductions for
taxes and gathering expenses.





Share-Based Compensation – We
use the Black-Scholes option-pricing model and the straight-line attribution
approach to determine the fair-value of stock-based awards in accordance with
FASB ASC 718,“Stock
Compensation”.   The option-pricing model requires the input of
highly subjective assumptions, including the option’s expected life and the
price volatility of the underlying stock. The Company’s expected term represents
the period that stock-based awards are expected to be outstanding and is
determined based on historical experience of similar awards, giving
consideration to the contractual terms of the stock-based awards, vesting
schedules and expectations of future employee behavior as influenced by changes
to the terms of its stock-based awards. The expected stock price volatility is
based on the Company’s historical stock prices.





Use of Estimates – The
preparation of our consolidated financial statements in accordance with
Generally Accepted Accounting Principles (“GAAP”) requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ materially from those
estimates.  Our significant estimates include the estimated life of
long-lived assets, use of reserves in the estimation of depletion of oil and gas
properties, impairment of oil and gas properties, asset retirement obligation
liabilities and the market value of securities.





Asset Retirement Obligation –
Asset retirement obligations associated with tangible long-lived assets are
accounted for in accordance with FASB ASC 410,”Accounting for Asset Retirement
Obligations”. The estimated





33





fair
value of the future costs associated with dismantlement, abandonment and
restoration of oil and gas properties is recorded generally upon acquisition or
completion of a well. The net estimated costs are discounted to present values
using a risk adjusted rate over the estimated economic life of the oil and gas
properties. Such costs are capitalized as part of the related asset. The
liability is periodically adjusted to reflect (1) new liabilities incurred,
(2) liabilities settled during the period, (3) accretion expense, and
(4) revisions to estimated future cash flow requirements. Accretion expense
is recorded as a component of depreciation, depletion, amortization and
accretion expense.





Recently Issued Accounting
Pronouncements





In May
2009, the Financial Accounting Standards Board (“FASB”) issued FASB ASC 855
“Subsequent Events”. FASB ASC 855 incorporates accounting and disclosure
requirements related to subsequent events into U.S. GAAP. The requirements
of ASC 855 for subsequent-events accounting and disclosure are not significantly
different from those in existing auditing standards, which we have historically
followed for financial reporting purposes. As of June 30, 2009 we have adopted
ASC 855 and we do not believe this standard had any material impact on our
financial statements. We have evaluated subsequent events through the date of
issuance of these consolidated financial statements, which is January 13,
2010.





In July
2009, the FASB issued new guidance relating to the “FASB Accounting Standards
Codification” at FASB ASC 105, as the single source of authoritative
nongovernmental U.S. generally accepted accounting principles (GAAP). The
codification is effective for interim periods ending after September 15, 2009.
All existing accounting standards are superseded as described in ASC 105. All
other accounting literature not included in the Codification is
non-authoritative. As of September 30, 2009 we have adopted ASC 105 and believe
this did not impact our results of operations, financial position or cash
flows.





In
October 2009, we adopted certain accounting principles within FASB ASC 470,
“Debt with Conversion and
Other Options” that requires the proceeds from the issuance of certain
convertible debt instruments to be allocated between a liability component
(issued at a discount) and an equity component. The resulting debt discount is
amortized over the period the convertible debt is expected to be outstanding as
additional non-cash interest expense. The change in accounting treatment is
effective for us in fiscal 2010, and it is required to be applied
retrospectively to prior periods.  Management is currently assessing
the potential impact that the adoption of this new guidance could have on our
financial statements in fiscal 2010.





In
October 2009, we adopted certain accounting principles within FASB ASC 805,
“Business
Combinations,” which requires an acquirer to recognize the assets
acquired, the liabilities assumed, including those arising from contractual
contingencies, any contingent consideration, and any noncontrolling interest in
the acquiree at the acquisition date, measured at their fair values as of that
date, with limited exceptions specified in the statement.  It also
requires the acquirer in a business combination achieved in stages (sometimes
referred to as a step acquisition) to recognize the identifiable assets and
liabilities, as well as the noncontrolling interest in the acquiree, at the full
amounts of their fair values (or other amounts determined in accordance with
this accounting principle).  In addition, the accounting principle’s
requirement to measure the noncontrolling interest in the acquiree at fair value
will result in recognizing the goodwill attributable to the noncontrolling
interest in addition to that attributable to the acquirer. ASC 805 also requires
the acquirer to recognize changes in the amount of its deferred tax benefits
that are recognizable because of a business combination either in income from
continuing operations in the period of the combination or directly in
contributed capital, depending on the circumstances. It also provides guidance
on the impairment testing of acquired research and development intangible assets
and assets that the acquirer intends not to use.  ASC 805 applies
prospectively to business combinations for which the acquisition date on or
after October 1, 2009, therefore, the adoption of ASC 805 did not have any
impact on our historical financial statements.





In
October 2009, we adopted certain accounting principles within FASB ASC 810,
“Consolidation,” which
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. It also clarifies
that a noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements.  ASC 810 also changes the way the consolidated
income statement is presented by requiring consolidated net income to be
reported at amounts that include the amounts attributable to both the parent and
the noncontrolling interest. It also requires disclosure, on the face of the
consolidated statement of income, of the amounts of consolidated net income





34





attributable
to the parent and to the noncontrolling interest. ASC 810 requires that a parent
recognize a gain or loss in net income when a subsidiary is deconsolidated and
requires expanded disclosures in the consolidated financial statements that
clearly identify and distinguish between the interests of the parent owners and
the interests of the noncontrolling owners of a subsidiary.  The
adoption of ASC 810 did not have any impact on our historical financial
statements.




In
January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-03
“Oil and Gas Reserve
Estimation and Disclosures.”The ASU aligns the current oil and gas
reserve estimation and disclosure requirements of FASB Accounting Standards
Codification Topic 932, Extractive Activities — Oil and
Gas, with those in SEC Final Rule Release No. 33-8995, Modernization of
Oil and Gas Reporting. The ASU will be effective for reporting periods ending on
or after December 31, 2009. We are currently assessing the impact that adoption
of this rule will have on our financial statements.
  In
December 2008, the SEC issued revised reporting requirements for oil and natural
gas reserves that a company holds. Included in the new rule entitled “Modernization
of Oil and Gas Reporting Requirements”,are the following changes: 1) permitting use of new technologies to
determine proved reserves, if those technologies have been demonstrated
empirically to lead to reliable conclusions about reserve volumes; 2) enabling
companies to additionally disclose their probable and possible reserves to
investors, in addition to their proved reserves; 3) allowing previously excluded
resources, such as oil sands, to be classified as oil and natural gas reserves
rather than mining reserves; 4) requiring companies to report the independence
and qualifications of a preparer or auditor, based on current Society of
Petroleum Engineers criteria; 5) requiring the filing of reports for companies
that rely on a third party to prepare reserve estimates or conduct a reserve
audit; and 6) requiring companies to report oil and natural gas reserves using
an average price based upon the prior 12-month period, rather than year-end
prices. The new requirements are effective for registration statements filed on
or after January 1, 2010, and for annual reports on Form 10K for fiscal years
ending on or after December 31, 2009. Early adoption is not permitted. We are
currently assessing the impact that adoption of this rule will have on our
financial disclosures.


Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material impact on our present or future consolidated
financial statements.





Note
3 - Restricted Cash and Marketable Securities





As of
September 30, 2009, long term restricted cash consists of $0.1 million in
certificates of deposit underlying letters of credit for exploration permits,
state and local bonds and guarantees to vendors.





As of
September 30, 2009, we have recorded $3.4 million in restricted marketable
securities on our Consolidated Balance Sheet, representing the 23.1 million
shares of Falcon common stock that we held on this date. The Falcon shares are
restricted through an escrow agreement that restricts the timing of and quantity
of the sale of the common stock. As described in Note 2, we have accounted for
these securities in accordance with FASB ASC 320,“Accounting for Certain Investments
in Debt and Equity Securities”. Subsequent to September 30, 2009,
the Falcon shares experienced a significant decline in value which we deemed to
be an “other than temporary” decline. We determined that the decline in the
value of the Falcon shares to be other than temporary based on various factors,
including Falcon’s financial condition as well as our ability to hold these
securities. Accordingly, we have recorded impairment expense of $8.5 million for
the year ended September 30, 2009. We recorded impairment expense related to
these securities in the amount of $0.8 million for the year ended September 30,
2008.





Note 4 —
Oil and Gas Properties





Summary –Oil and gas
properties at September 30, 2009 and 2008 consisted of the following ($ in
thousands):





2009
            
            
            2008Oil
      and gas properties, at cost, full cost methodUnprovedUnited
      States
            
            $
            —
            
            
            $
            82,040Australia
            
            
            1,427
            
            
            
            2,536Proved
            
            
            —
            
            
            
            69,704Total
            
            
            1,427
            
            
            
            154,280Less
      accumulated depreciation, depletion, amortization and
      impairment
            
            
            —
            
            
            
            (56,928
            )Total
            
            $
            1,427
            
            
            $
            97,352





Included
in oil and gas properties above is capitalized interest of $0.0 million and
$0.3 million for the years ended September 30, 2009 and 2008,
respectively.





The
following is a summary of oil and gas property costs not subject to amortization
by prospect at September 30, 2009 and 2008 ($ in thousands):





2009
            
            
            2008United
      States
            
            $
            —
            
            
            $
            82,040Australia
            
            
            1,427
            
            
            
            (2,536
            )Total
            
            $
            1,427
            
            
            $
            84,576





The $1.4
million in oil and gas properties relates to a well in progress in our Beetaloo
Basin project in the Northern Territory of Australia as discussed
below.




35




Included
below is the description of significant oil and gas properties and their current
status.





Australia





During
fiscal 2007 we drilled the Shenandoah #1 well located in the Beetaloo Basin in
the Northern Territory of Australia. At this time we owned 100% of the working
interest in this well and related leasehold interest. This well is located on
oil and gas leasehold interest we held through four exploration permits that
included 7,000,000 acres. In periods subsequent, we sold 75% of our 100% working
interest in this well and the related acreage to Falcon Australia, who now
operates the project. During fiscal 2009, we participated in the deepening of
this well, the Shenandoah #1A, which is shut-in awaiting additional expenditure
that was deferred primarily due to seasonal weather conditions.





US
Projects – Piceance Basin





Buckskin Mesa Project– The
Buckskin Mesa Project area was purchased on September 17, 2005 from MAB
Resources, subject to certain agreements with Daniels Petroleum Company
("DPC").  The property is located in the northern part of the Piceance
Basin in Rio Blanco County, Colorado.  The acquisition included
20,000 net acres and five previously drilled that were shut-in. PetroHunter
has drilled five wells on this acreage and attempted to complete three of these
wells in the first quarter of 2009. All ten wells are shut-in.





Per the
agreement with DPC we were required to drill 5 additional wells by July 31,
2009, or pay DPC $2.0 million, or return these leases to DPC. We did not drill
these additional five wells. Global holds a first lien on this leasehold
interest as described in Note 8- Notes Payable. We are in the process of
negotiating a mutually agreeable alternative with Daniels in order to be able to
further explore for oil and gas on this leasehold interest.





During
the year ended September 30, 2009 we impaired the remaining value of our U.S.
full cost pool as we did not have the financial capacity to continue exploring
for oil and gas on this acreage.





US
Projects – Discontinued





Piceance II Project –The Piceance II Project was
acquired December 29, 2005 from MAB Resources.  The property is
located in the Piceance Basin, Garfield County, Colorado, and included eight
producing wells operated by Encana.





We sold
these eight wells in December 2008 for $2.3 million in cash, and we recorded a
loss on conveyance of approximately $0.2 million. The remaining Piceance II
Project undeveloped leasehold interest will be reassigned to the lessor as we
have failed to meet the contract terms for drilling wells. In addition, we have
accrued liquidating damages of $0.5 million associated this
contract.





The
following is a summary of depreciation, depletion, amortization and accretion,
as reflected in the consolidated statements of operations (including
depreciation, depletion and amortization of oil and gas properties per thousand
cubic feet of natural gas equivalent) for the years ended September 30 ($ in
thousands, except per thousand cubic feet):





2009
            
            
            2008
            
            
            2007Depletion
      of oil and gas properties
            
            $
            8
            
            
            $
            949
            
            
            $
            1,040Depreciation
      of furniture and equipment
            
            
            215
            
            
            
            273
            
            
            
            192Accretion
      of asset retirement obligation
            
            
            21
            
            
            
            8
            
            
            
            13Total
            
            
            244
            
            
            
            1,230
            
            
            
            1,245Depletion
      per thousand cubic feet of natural gas equivalent
            
            $
            2.50
            
            
            $
            2.45
            
            
            $
            2.27








36


Note 5 —
Furniture and Equipment





Furniture
and equipment at September 30, 2009 and September 30, 2008 is reported at cost,
net of accumulated depreciation and consisted of the following:





2009
            
            
            2008Furniture
      and equipment
            
            $
            157
            
            
            $
            1,073Less
      accumulated depreciation
            
            
            (35
            )
            
            
            (336
            )Total
            
            $
            122
            
            
            $
            737





Depreciation
expense associated with office furniture and equipment was $0.2 million and $0.3
million for the years ended September 30, 2009, and 2008, respectively. In
August 2009, we moved our office in Denver, Colorado.  As a component
of this move we abandoned furniture, fixtures, as well as tenant improvements.
We have recorded losses on abandonment of approximately $0.3 million in
connection with this office move.





Note 6 —
Other Accrued Liabilities





Other
accrued liabilities as of September 30, 2009 and 2008 are summarized and
described below:





2009
            
            
            2008Other
      accrued liabilities
            
            $
            7,273
            
            
            $
            4,832





On April
11, 2008, we closed the sale of certain natural gas gathering assets in our
Buckskin Mesa project, for $0.7 million in cash consideration, and
simultaneously entered into a gas gathering agreement with Clear Creek Energy
Services (“CCES”) relating to the initial phase of a gas gathering system at
Buckskin Mesa.  These agreements formalized and expanded upon a letter
of understanding between the parties which contemplated a dedicated relationship
with CCES in the development of a gas gathering system and the provision of gas
gathering services within our Buckskin Mesa Project area (the “CCES
Agreements”). In addition to customary terms and conditions, the CCES Agreements
included a guarantee (the “Guarantee”) from us to CCES regarding their
increasing financial commitments as they were incurred in relation to the
development of the gas gathering system, including our contingent repurchase of
the gas gathering assets we sold to CCES.  The triggering event for
the Guarantee was contingent upon our mutual failure to execute a formal
agreement for long-term gas gathering services in the future.  The
resolution of this contingency was dependent upon, among other things, gas
production levels from the initial phase gas gathering system for our Buckskin
Mesa Project. Per the agreement, should we fail to execute a mutually agreeable
long-term contract, CCES had the right to invoice us for their incurred costs
and demand repayment within 20 days of our receipt of the demand
invoice.  To secure our Guarantee, we executed a promissory note for
an amount up to $11.5 million, secured by second deeds of trust on
our Colorado properties.  The amount of the Guarantee is
variable, based upon the underlying incurred costs by CCES as defined in the
CCES Agreements. As of September 30, 2008, the Company has incurred a liability
of $4.8 million in respect to this agreement.





During
the year ended September 30, 2009, we deemed that the completion of this
gathering system was economically unfeasible for us we and ceased pursing its
completion.  As per our initial agreement with CCES, all amounts
payable came due within 20 days of demand. In May 2009, we received a demand
notice from CCES. We are currently in discussions with CCES management to
develop a mutually agreeable settlement in conjunction with our discussions with
DPC regarding the underlying leasehold interest, as well with Global who holds
the first lien on this property. CCES has a second lien on the Buckskin Mesa
acreage and wells.  As of September 30, 2009, the Company has incurred
a liability of $7.3 million in respect to this agreement.





37


Note 7 —
Asset Retirement Obligation





We
recognize an estimated liability for future costs associated with the
abandonment of our oil and gas properties. A liability for the fair value of an
asset retirement obligation and a corresponding increase to the carrying value
of the related long-lived asset are recorded at the time a well is completed or
acquired. The Company recognizes accretion expense in connection with the
discounted liability over the remaining estimated economic lives of the
respective oil and gas properties.





Our
estimated asset retirement obligation liability is based on estimated economic
lives, estimates as to the cost to abandon the wells in the future, and federal
and state regulatory requirements. The liability is discounted using a
credit-adjusted risk-free rate estimated at the time the liability is incurred
or revised. Revisions to the liability are due to increases in estimated
abandonment, changes in well economic lives, and changes to federal or state
regulations regarding the abandonment of wells.  We have recorded our
asset retirement obligation as a current liability in 2009, and in 2008 we
classified it as long term.





Our asset
retirement obligation liability as of September 30, 2009 and 2008 is
summarized below ($ in thousands):





2009
            
            
            2008Beginning
      asset retirement obligation
            
            $
            114
            
            
            $
            136Liabilities
      incurred
            
            
            —
            
            
            
            —Liabilities
      settled
            
            
            —
            
            
            
            (16
            )Revisions
      to estimates
            
            
            877
            
            
            
            (14
            )Accretion
      expense
            
            
            21
            
            
            
            8Ending
      asset retirement obligation
            
            $
            1,012
            
            
            $
            114





Note 8 —
Notes Payable





Notes
payable as of September 30, 2009 and 2008 are summarized below ($ in
thousands):





2009
            
            
            2008Short-term
      notes payableInstallment
      loan
            
            $
            —
            
            
            $
            199Vendor
            
            
            81
            
            
            
            130Notes
      payable – short-term
            
            $
            81
            
            
            $
            329Convertible notes
      payable
            
            $
            6,956
            
            
            $
            6,956Discount
      on convertible notes payable
            
            
            —
            
            
            
            (6,631)Convertible
      notes payable  — net
            
            $
            6,956
            
            
            $
            325Notes
      payable – related party – short-termBruner
      Family
      Trust
            
            $
            2,829
            
            
            $
            2,722Global
      Project Finance
      AG
            
            
            40,650
            
            
            
            850Notes
      payable – related party, short-term
            
            $
            43,479
            
            
            $
            3,572Long-term
      notes payable – related party — netGlobal
      Project Finance
      AG
            
            $
            —
            
            
            $
            39,800Bruner
      Family
      TrustTrustTrust
            
            
            —
            
            
            
            107Discount
      on notes payable
      payable
            
            
            —
            
            
            
            (2,017
            )Long-term
      notes payable – related party — net
            
            $
            —
            
            
            $
            38,035Other
      long – term liabilities, including capital lease
      obligations
            
            $
            29
            
            
            $
            —





38


Short-Term
Notes Payable





Installment loan –On June 6, 2008, we
entered into a promissory note with Flatiron Capital for the financing of
certain insurance policies in the amount of $0.2 million. The note bears
interest at a rate of 4.15% per annum. Payments are due in 11 equal installments
commencing on July 6, 2008 and maturing on May 6, 2009. The note is secured
by unearned premiums and the balance at September 30, 2008 was
$0.2 million.





Vendor –In August 2007, we
entered into an unsecured promissory note with a vendor for past due invoices
aggregating $0.3 million. The note bears interest at an annual rate of 8%.
Payments were originally due in 24 equal installments commencing on
October 1, 2007 and maturing on September 1, 2009.  At
September 30, 2009, we owed $0.1 million related to this
note.  We defaulted on our obligations under the terms of this note
prior to the maturity date and remained in default as of September 30,
2009.





Notes
Payable – Related Party Short-Term





Bruner Family Trust – At
various times during 2008, we entered into five promissory notes with the Bruner
Family Trust.  Each note accrues interest at LIBOR plus 3% per annum
and was originally due 12 months from each note’s respective date of
issuance.  A note for $2.4 million was originally due on November 13,
2008, but was extended by the lender.  The remaining four notes were
originally due in February, March (2) and August 2009.  We continue to
receive waivers from the lender on a quarterly basis related to our covenant
violations and in relation to our default and failure to make scheduled
principal and interest payments. The possibility exists that lender will call
all amounts due at the end of each ninety day reporting period. As of September
30, 2009, accrued interest relating to these notes was $ 0.3 million, and the
total note balance was $2.8 million.




Global Project Finance AG
– On October 10, 2007, we entered into a promissory note with Global
Project Finance, AG (“Global”).  The entire balance on the notes was
due and payable, on December 31, 2008, along with the accrued interest. We
received a waiver that extended the due date on these notes through July, 2009,
subsequent to that date we are considered to be in default, and the notes may be
called at any time. The note is unsecured and the note balance at September 30,
2009 was $0.8 million. Accrued interest is $0.2 million on this
note.





In
December 2008, we issued a promissory note in the amount of $0.1 million to
Global. This note bore interest at 15% per annum.  As of September 30,
2009 we have repaid this note and all accrued interest.





On
January 9, 2007, we entered into a Credit and Security Agreement (the
“January 2007 Credit Facility”) with Global in the amount of
$15.0 million.  As of September 30, 2009, and September 30, 2008,
amounts drawn against this facility were $15.0 million.





On
May 21, 2007, we entered into a second Credit and Security Agreement with
Global (the “May 2007 Credit Facility”) and we extended all the economic terms
from the May 2007 Credit Facility retroactively to the January 2007 Credit
Facility. Under the May 2007 Credit Facility, Global agreed to use its best
efforts to advance up to $60 million to us over the following
18 months. As of September 30, 2009 and 2008 amounts drawn against this
facility were $24.8 million.





In
connection with the May 2007 Credit Facility, Global received warrants to
purchase 2.0 million of our common shares at the date of execution and was to
receive 0.4 million warrants for each $1.0 million advanced under the
Facility.  We agreed to pay an advance fee of 2% on all amounts drawn
under the May 2007 Credit Facility.  Payments were to have been made
in such amounts as may be agreed upon by us and Global on the then outstanding
principal balance in order to repay the principal balance by the maturity date,
November 21, 2009. The loans are collateralized by a first perfected
security interest on certain oil and gas properties and other of our assets. In
the event that we sell any interest in the oil and gas properties that comprise
the collateral, a mandatory payment is due in the amount equal to such sales
proceeds.





As of
September 30, 2009 and 2008 the cash portion of the advance fees payable in the
amount of $0.8 million, incurred proportionately at 2% of each respective
draw, had been recorded as a deferred financing cost and these amounts have been
amortized to interest expense over the life of the Facilities.  The
fair value of the 4 million warrants issued in conjunction with the advances was
$1.9 million, valued using the Black-Scholes method, and was





39





initially
being amortized over the same time frame.  The fair value of the 28.5
million warrants issued in connection with the debt was $4.9 million valued
using the Black- Scholes Method.





In
September 30, 2008, the Company entered into a conversion and release agreement
wherein $6.5 million in accrued interest owed to Global related to these Credit
Facilities was converted into 32.6 million shares of our common stock at $0.20
per share, which was above the fair value of the shares at that
time.  The $2.6 million value of the interest obligation converted to
our common stock in excess of the fair value of the shares, and was recorded as
additional paid in capital.  Global agreed to accept the shares as
complete and total payment for the accrued interest. We deemed that as of the
date of this transaction and for all periods subsequent we would consider Global
to be a related party. The character of this relationship changed effective in
the fourth quarter of the year ended September 30, 2008.





As of
September 30, 2009, we were in default of payments in the amount of
$0.8 million, which consisted of unpaid advance fees on the Global
Facilities, but we obtained a comprehensive waiver from the lender that on
October 1, 2009.  As of September 30, 2009, we were in default in
respect to the $0.9 million promissory note as well as the associated accrued
interest of $0.2 million. As of September 30, 2009, we had received waivers
related to our failure to pay principal and interest and various covenant
violations related to the $39.8 million drawn on the two credit facilities.
These waivers expired on December 31, 2009.  We have accrued $4.1
million in interest related to this debt as of September 30, 2009.





As of
September 30, 2009, as we were in default with Global in respect to the
promissory notes of $0.9 million and credit facilities of $39.8, we have
accelerated the accretion and amortization of the debt discount, and deferred
financing costs related to these instruments and recognized $0.2 million in
interest expense related to this acceleration.





Falcon Loan –In October 2008,
we entered into a 10% secured loan agreement with Falcon (“Falcon Loan”). Under
the terms of the loan agreement, Falcon agreed to advance to us $5.0
million.  This loan was secured by 14.5 million shares of Falcon
common stock we had received as consideration in relation to the sale of a 50%
working interest in our four exploration permits in Australia to Falcon in
October 2008.   In addition the loan was also secured by a first
position security interest in our five well bores in our Buckskin Mesa project.
In June 2009, we sold an additional 25% interest in our exploration permits in
the Beetaloo Basin to Falcon. As a component of our consideration, the $5.0
million note was forgiven by Falcon.





Convertible Debentures –
In December 2008, we issued three subordinated convertible debentures totaling
$0.2 million to two related parties. These debentures bore interest at 15% per
annum and were due in May 2009. We issued 0.5 million warrants to purchase our
common stock at $0.15 per share in connection with these
debentures.  As of September 30, 2009 these debentures along with all
related accrued interest have been repaid.





Shareholder Loans – We issued
an 18% subordinated debenture in the amount of $0.03 million to a shareholder of
the Company in exchange for the relief of amounts due the shareholder. The
subordinated debenture is collateralized by an interest in .01 million shares of
Falcon common stock held by us as unrestricted marketable securities. In
connection with the issuance of the debenture we issued 0.07 million warrants to
purchase our common stock at $0.15 per share, which expire in January
2010.  The debenture was due on April 15, 2009. As of September 30,
2009 we have paid the balance on this loan down to $0.015 million and we
reclassified this loan to accounts payable as of September 30,
2009.





40


Convertible
Debt





Convertible
notes payable as of September 30, 2009 and 2008 are summarized below ($ in
thousands):





September
      30,
              2009
            
            
            September
      30, 2008Convertible
      debentures – face value at issuance
            
            $
            6,956
            
            
            $
            6,956Relative
      fair value assigned to warrants
            
            
            (3,532
            )
            
            
            (3,532
            )Relative
      fair value of beneficial conversion feature
            
            
            (3,424
            )
            
            
            (3,424
            )Net
      book value of convertible debentures at issuance
            
            
            —
            
            
            
            —Accumulated
      accretion
            
            
            6,956
            
            
            
            325Net
      book value
            
            $
            6,956
            
            
            $
            325





In
November 2007, we issued $7.0 million in convertible debentures (the
“Debentures”) to several accredited investors.  The debentures are due
November 2012 and are collateralized by shares in our Australian
subsidiary.  Debenture holders also received five-year warrants
allowing them to purchase a total of 46.4 million shares of common stock at
prices ranging from $0.24 to $0.28 per share.  We determined that the
relative fair value of the warrants was approximately $3.5 million at issuance,
under the Black-Scholes model. In connection with the placement of the
debentures, we paid a placement fee of $0.3 million and issued placement agent
warrants entitling the holders to purchase an aggregate of 0.2 million shares at
$0.25 to $0.28 per share for a period of five years. Interest payments related
to the debentures accrues at an annual rate of 8.5% and is payable in cash or in
shares of our common stock (at our option) quarterly, beginning upon our
successful registration of the warrant shares, as noted below.  All
overdue unpaid interest accrues a late fee of 18% per annum, calculated based on
the entire unpaid interest balance.





We
originally agreed to file a registration statement with the Securities and
Exchange Commission in order to register the shares issuable upon conversion of
the debentures and the shares issuable upon exercise of the warrants. According
to the Registration Rights Agreement, the registration statement was to be filed
by March 4, 2008 and declared effective by July 2, 2008. The following penalties
were to apply if filing deadlines were not met in compliance with the stated
rules: (i) we agreed to pay  1% of the purchase price in cash as
partial liquidated damages, subject to maximum aggregate liquidated damages of
18% of the aggregate subscription amount paid by the holder; (ii) if we were to
fail to pay liquidated damages in full within seven days of the date payable, we
agreed to pay interest of 18% per annum, accruing daily from the original due
date subject to proration related to any portion of a month prior to the cure
event; and (iii) all fees and expenses associated with compliance to the
agreement would be borne by the Company.





Similarly,
we have entered into various waiver agreements with respect to the interest
installments due.  As consideration for these waivers, we have been
able to delay and/or forego scheduled interest payments.





A waiver
was executed in relation to the payment of a scheduled interest installment due
July 1, 2008 by September 30, 2008, together with late fees of 18% per
annum.  In addition, warrants to purchase our common stock were issued
in an amount equal to 2% of the shares each purchaser received with the original
agreement.  On September 30, 2008, we paid all past due interest in
accordance with these waiver agreements.





A January
2009 waiver and amendment agreement with the purchasers extended the effective
date of the registration statement to February 28, 2009, waived the penalties
for not having the registration effective by the amended deadline of December
31, 2008, and waived as events of default under the debentures (i) the failure
to pay the January 1, 2009 interest installment, (ii) our sale of an interest in
our properties to Falcon, (iii) recent loans, and (iv) the placing of liens on
our Buckskin Mesa wells and properties and pledge of our shares of Falcon
stock.  We agreed to pay the interest installment due January 1, 2009
by April 1, 2009, together with late fees of 18% per annum, and to issue
warrants to purchase our common stock in an amount equal to 2% of the shares
each purchaser received with the original agreement.  A waiver and
amendment agreement relating to the above Registration Rights Agreement was
signed by all investors in May 2009 and the holder agreed that PetroHunter would
not have to register the shares underlying the warrants until the warrants were
“in the money”.  The waiver indicated that the trading price of the stock
must exceed the warrant exercise price for at least 20 consecutive trading days
before the





41





registration
commitment is triggered.  Once the warrants are “in the money”, we have 120
days to get a registration statement effective.





In May
2009, we received multiple waivers and releases of covenant violations and
default and failure to make interest payments from the holders of our 8.5%
convertible debentures.





In
connection with the receipt of these 8.5 % convertible debentures, we issued a
total of 2.77 million warrants to purchase our common stock at prices ranging
from $0.12 to $ 0.28 (See Note 11 - Common Stock Warrants).





The
debentures have a maturity date of November 2012 and are convertible at any time
by the holders into shares of our common stock at a price of $0.15 per share,
which was determined to be beneficial to the holders on the date of issuance. We
determined that the relative fair value of this beneficial conversion feature
was approximately $3.4 million at issuance, under the Black-Scholes
model.  Accordingly, we recorded discounts to the debentures equal to
their full cash value at issuance, which we are accreting to interest expense
over the term of the notes, using the effective interest method.





As of
September 30, 2009, as we were in default under the debentures, we have
classified this debt as a current liability and accelerated the accretion and
amortization of the debt discount, and deferred financing costs related to these
instruments. Included in interest expense as of September 30, 2009 is $6.0
million related to this acceleration.





In the
event of a default under the debentures, the maturity date of the debentures can
be accelerated and the 130% of the outstanding principal amount, plus accrued
but unpaid interest, liquidated damages and other amounts owing in respect
thereof through the date of acceleration, can become, at the holder’s election,
immediately due and payable.





Future
Principal Payments





The
aggregate amount of minimum principal payments required on notes payable, credit
facilities and long-term capital lease obligations in each of the years
indicated are as follows as of September 30 ($ in thousands):





2010
            
            $
            50,5162011
            
            
            29Total
            
            $
            50,545





Note 9 —
Stockholders’ Equity





Common Stock – We have
authorized 1 billion shares of common stock and 100 million shares of preferred
stock.  No preferred stock was issued or outstanding as of September 30,
2009 or 2008.





Fiscal 2009 Transactions –During the year ended September 30, 2009 we issued 7.1 million shares of
our common stock.





•
            In
      October 2008, we issued 1.9 million shares of our common stock at a price
      of $0.08 per share in connection with the receipt of an amendment to a
      letter of understanding between us and CCES. Under the terms of the
      agreement, CCES agreed to allow Falcon to exercise an additional option
      for and additional working interest in our Buckskin Mesa project, should
      Falcon choose to do so.




•
            In
      January 2009, we issued 0.25 million shares of our common stock at a price
      of $0.09 per share in connection with investor relation
      services.




•
            In
      August 2009, we issued 5.0 million shares of our common stock at a price
      of $0.02 per share to an officer of the
company.





42


Fiscal 2008 Transactions –During the fiscal year ended
September 30, 2008, we issued 100.8 million shares of our common stock and 6.4
million shares were returned to us:





•
            In
      October 2007, we issued 25.0 million shares of our common stock at a price
      of $0.31 per share to MAB, a related party, in exchange for MAB’s
      relinquishment of overriding royalty interests in certain of our
      properties.




•
            In
      November 2007, we issued 5.0 million shares of our common stock at $0.25
      per share to American Oil and Gas and Savannah Exploration in relation to
      the sale of our Heavy Oil assets to
Pearl.




•
            In
      November 2007, we issued 0.2 million shares of our common stock at $0.28
      per share to Clear Creek Energy Services in connection with the
      origination of a loan.




•
            In
      November 2007, we issued 16.0 million shares of our common stock at $0.23
      per share to MAB in exchange for a reduction of a note payable to
      MAB.




•
            In
      May 2008, we issued 0.4 million shares of our common stock at $0.20 per
      share to Clear Creek Energy Services in connection with the option to
      purchase up to 25% of the member shares of
CCES.




•
            In
      June 2008, we issued 16.9 million shares of our common stock at $0.20 per
      share to various creditors as settlements in connection with the sale of
      our assets in the Southern Piceance to Laramie
  Energy.




•
            In
      June 2008, we issued 2.0 million shares of our common stock at $0.18 per
      share in connection with finance costs in connection with the sale of our
      assets in the Southern Piceance to Laramie
  Energy.




•
            In
      July 2008, we issued 2.7 million shares of our common stock at $.20 per
      share in exchange for the conversion of $0.4 million in convertible notes
      payable.




•
            In
      September 2008, we issued 32.6 million shares of our common stock at $.20
      per share to Global, a related party, in exchange for the forgiveness of
      $6.5 million in accrued interest.




•
            In
      December 2007, 6.4 million shares of our common stock were returned to us
      at $.22 per share related to a property
  conveyance.





Note 10 — Stock-Based
Compensation





Stock Option Plan –On August 10, 2005, the
Company adopted the 2005 Stock Option Plan (the “Plan”), as amended. Stock
options under the Plan may be granted to key employees, non-employee directors
and other key individuals. Options may be granted at an exercise price not less
than the fair market value of the Company’s common stock at the date of grant.
Most options have a five-year life but may have a life up to 10 years as
designated by the compensation committee of the Board of Directors (the
“Compensation Committee”). Typically, options vest 20% on grant date and 20%
each year on the anniversary of the grant date but each vesting schedule is also
determined by the Compensation Committee. Most initial grants to Directors vest
50% on grant date and 50% on the one-year anniversary of the initial grant date.
Subsequent grants (subsequent to the initial grant) to Directors typically vest
100% at the grant date. In special circumstances, the Board may elect to modify
vesting schedules upon the termination of selected employees and contractors.
The Company has reserved 40.0 million shares of common stock for the Plan.
At September 30, 2009 and September 30, 2008, 10.6 million and 5.8 million
shares respectively remained available for grant pursuant to the
Plan.





43


A summary
of the activity under the Plan as of and for the years ended September 30, 2009
and 2008 are as follows (shares in thousands):


Number
      of
              Shares
            
            
            Weighted-
              Average
              Exercise
      PriceOptions
      outstanding — October 1, 2007
            
            
            24,965
            
            
            $
            1.31Granted
            
            
            12,285
            
            
            $
            0.21Forfeited
            
            
            (3,080
            )
            
            $
            0.92Expired
            
            
            —
            
            
            $
            —Options
      outstanding — September 30, 2008
            
            
            34,170
            
            
            $
            0.90Granted
            
            
            1,095
            
            
            $
            0.11Forfeited
            
            
            (5,845
            )
            
            $
            1.47Expired
            
            
            —
            
            
            $
            —Options
      outstanding — September 30, 2009
            
            
            29,420
            
            
            $
            0.76Options
      exercisable — September 30, 2008
            
            
            20,032
            
            
            $
            1.01Options
      exercisable — September 30, 2009
            
            
            21,773
            
            
            $
            0.85





There
have been no options exercised under the terms of the Plan since
inception.





A summary
of the activity and status of non-vested awards under the plan as of and for the
years ended and as of September 30, 2009 and 2008 are as follows (shares in
thousands):


Number
      of
              Shares
            
            
            Weighted
      Average Fair ValueNon-vested —
      October 1, 2007
            
            
            10,208
            
            
            $
            0.62Granted
            
            
            12,285
            
            
            $
            0.21Vested
            
            
            (5,814
            )
            
            $
            0.88Forfeited
            
            
            (2,532
            )
            
            $
            0.83Expired
            
            
            —
            
            
            $
            —Non-vested
      — September 30, 2008
            
            
            14,147
            
            
            $
            0.75Granted
            
            
            1,095
            
            
            $
            0.08Vested
            
            
            (5,139)
            
            
            $
            0.51Forfeited
            
            
            (2,456)
            
            
            $
            0.57Expired
            
            
            —
            
            
            $
            —Non-vested
      — September 30, 2009
            
            
            7,647
            
            
            $
            0.30





As of
September 30, 2009, there was $0.2 million of total deferred
compensation cost related to non-vested share-based compensation arrangements
granted under the Plan.  We anticipate that this expense will be
recognized over the fiscal years 2010 through 2013.  The total fair
value of shares vested during the years ended September 30, 2009, and 2008
was $2.6 million and $3.3 million, respectively.





Effective
October 1, 2006, we adopted the provisions of SFAS 123(R). In
accordance with SFAS 123(R) the fair value of each share-based award under
all plans is estimated on the date of grant using a Black-Scholes pricing model
that incorporates the assumptions noted in the following table for the years and
for the period ended September 30:





2009
            
            
            2008Expected
      option term — years
            
            1-5
            
            
            1-5Weighted-average
      risk-free interest rate
            
            1.0%-2.3%
            
            
            1.8%-4.0%Expected
      dividend yield
            
            0
            
            
            0Weighted-average
      volatility
            
            97%-129%
            
            
            72%-98%





Deferred Stock Based
Compensation –We
authorized and issued 10.1 million stock options to employees and non-employee
consultants outside the 2005 stock option plan in May 2007. The options were
granted at an exercise





44





price of
$0.50 per share and vest 60% at grant date and 20% per year at the first and
second anniversaries of the date of grant. These options expire on May 21,
2012.





A summary
of the activity as of and for the years ended September 30, 2009 and 2008 is
presented below (shares in thousands):


Number
      of
              Shares
            
            
            Weighted-
              Average
              Exercise
      PriceOptions
      outstanding – October 1, 2007
            
            
            9,895
            
            
            $
            0.50Options
      exercisable at October 1, 2007
            
            
            5,937
            
            
            $
            0.50Forfeited
            
            
            (2,300
            )
            
            $
            0.50Options
      outstanding – September 30, 2008
            
            
            7,595
            
            
            $
            0.50





Options
      exercisable – September 30, 2008
            
            
            6,176
            
            
            $
            0.50Forfeited
            
            
            (3,835)
            
            
            $
            0.50Options
      outstanding – September 30, 2009
            
            
            3,760
            
            
            $
            0.50Options
      exercisable – September 30, 2009
            
            
            3,760
            
            
            $
            0.50





A summary
of the status and activity of non-vested awards not under the Plan for the years
ended September 30, 2009 and 2008 is as follows (shares in
thousands):





Number
      of
              Shares
            
            
            Weighted-
              Average
              Fair
      ValueNon-vested
      — October 1, 2007
            
            
            3,958
            
            
            $
            0.21Granted
            
            
            —
            
            
            $
            —Vested
            
            
            (1,419
            )
            
            $
            0.38Forfeited
            
            
            (1,120
            )
            
            $
            0.38Non-vested
      — September 30, 2008
            
            
            1,419
            
            
            $
            0.38Granted
            
            
            —
            
            
            $
            —Vested
            
            
            (1,389)
            
            
            $
            0.38Forfeited
            
            
            (30)
            
            
            $
            0.38Non-vested
      — September 30, 2009
            
            
            —
            
            
            $
            —





As of
September 30, 2009 there was $0.0 million in unrecognized compensation cost
related to non-vested share based compensation arrangements not granted under
the Plan. The total fair value of the shares vested during the year ended
September 30, 2009 was $0.5 million.





Compensation Expense – for the
fiscal years ended September 30, 2009 and 2008 stock-based compensation expense
of $2.9 and $3.2 million was charged to operations,
respectively.





Note
11 – Common Stock Warrants





Warrants –The following stock purchase
warrants were outstanding at September 30, 2009 and 2008 (warrants in
thousands):




2009
            2008Number
      of warrants
            139,136
            135,754Exercise
      price
            $0.12-$2.10
            $0.22
      - $2.10Expiration
      date
            2010
      - 2012
            2011
      - 2012





45


Fiscal
2009 Transactions





During
the year ended September 30, 2009 we issued 0.5 million warrants to purchase our
common stock at $0.15 per share to three related parties, in connection with
sale of $0.2 million in convertible debentures (See Note 8). The warrants issued
have a one-year term had a total value of $0.0 million as calculated under the
Black-Scholes method.





During
the year ended September 30, 2009, we issued a total of 2.77 million warrants to
purchase our common stock at prices ranging $0.12 to $0.28 per share to the
holders of our Series A 8.5% convertible debentures in connection with our
default and failure to make scheduled interest payments. In addition these
warrants were issued as consideration for the receipt of waivers related to our
violation of certain debt covenants. These warrants expire in November 2012, and
had a total value of $0.05 million as calculated under the Black-Scholes
method.





During
the year ended September 30, 2009, we issued .07 million warrants to purchase
our common stock at $0.15 per share, which expire in January 2010 in connection
with a convertible debenture issued to a shareholder of the
Company.  These warrants expire in January 2010, and had a value of
$.001 as calculated under the Black Scholes method (See Note 8 - Notes
Payable).





Fiscal
2008 Transactions





During
the year ended September 30, 2008 we completed the sale of Series A 8.5%
convertible debentures. Debenture holders received five-year warrants that allow
them to purchase a total of 46.4 million shares of common stock at prices
ranging from $0.24 to $0.28 per share (see Note 8). As of September 30, 2008,
none of these warrants had been exercised and the total value of these warrants,
based on valuation under the Black-Scholes method, was $7.8 million. In
connection with the placement of the debentures, we paid a placement fee of $0.2
million and issued placement agent warrants entitling the holders to purchase an
aggregate of 0.2 million shares at $0.25 to $0.28 per share for a period of five
years. These warrants had a total valuation under the Black-Scholes method of
$0.0 million.





During
the year ended September 30, 2008, we entered into the Second Amendment of our
consulting agreement with MAB Resources, LLC and issued warrants to acquire 32
million shares of our common stock at $0.50 per share. These warrants expired on
November 14, 2009 and have a total value, based on the Black-Scholes method, of
$1.8 million.





During
the year ended September 30, 2008, we issued 3.3 million warrants in connection
with amounts borrowed against our credit facility. These warrants were valued at
$0.5 million, using the Black-Scholes method, and expire in May
2012.





During
the year ended September 30, 2008, we issued 2.8 million five-year warrants in
connection with penalties incurred related to defaults on scheduled interest
payments on our convertible debt. These warrants were valued at $0.5 million,
using the Black-Scholes method, and corresponding amounts have been reflected as
interest expense for the period.





During
the year ended September 30, 2008, we recorded $1.9 million in deferred
financing costs related to the issuance of 16.6 million warrants in connection
with our Global Credit Facility. Amounts recorded as deferred financing costs
have been calculated using the Black-Scholes method.  The associated
warrants will expire in January 2012.





Note 12 —
Related Party Transactions





Our
policy is to enter into transactions with related parties on terms that, on the
whole, are more favorable, or no less favorable than those available from
unaffiliated third parties.  Based on our experience in oil and gas
exploration and development and considering the terms of our transactions with
unaffiliated third parties, we believe that all of the transactions described
below met this policy standard at the time they occurred.





46




Falcon Oil & Gas –On
August 25, 2008, we entered into an agreement for the sale of a 25% working
interest in five wells located within our Buckskin Mesa project in the Piceance
Basin, Colorado.  We also entered into an agreement to sell a 50%
working interest in our Beetaloo Basin Project in the Northern Territory,
Australia for $5 million in cash, which was received on August 25, 2008, and $20
million of equity securities convertible into Falcon shares based on the closing
price on August 22, 2008.  This sale was completed on September 30,
2008, when the value of the Falcon shares was $14.9 million.  As of
September 30, 2008, we had recorded $1.8 million on our consolidated balance
sheet as a receivable from Falcon, relating to its GST refund which is payable
to us upon their receipt.





In
October 2008,we
entered into a 10% secured loan agreement with Falcon (“Falcon Loan”). Under the
terms of the loan agreement, Falcon agreed to advance to us $5.0
million.  This loan was secured by 14.5 million shares of Falcon
common stock we had received as consideration in relation to the sale of a 50%
working interest in our four exploration permits in Australia to Falcon in
October 2008.   In addition the loan was also secured by a first
position security interest in our five well bores in our Buckskin Mesa project.
In June 2009, we sold an additional 25% interest in our exploration permits in
the Beetaloo Basin to Falcon. As a component of our consideration, the $5.0
million note was forgiven by Falcon.





During
the year ended September 30, 2009, we participated with Falcon in the deepening
of the Shenandoah #1 (Shenandoah #1A), a well we initially drilled, located in
the Beetaloo Basin in Australia. Our estimated share of the costs to deepen this
well as of September 30, 2009 was $1.4 million.





Marc A.
Bruner, our largest beneficial shareholder, is the Chief Executive Officer and a
Director of Falcon.  Falcon advised PetroHunter and announced that Mr.
Bruner did not participate in the vote by the Falcon Board of Directors when the
Falcon Board voted to approve the agreements with respect to the sale of the
working interests in the Buckskin Mesa and Beetaloo Basin
Projects.  We obtained a fairness opinion from an independent and
qualified third party with respect to transactions contemplated by these
agreements.





MAB –During the year ended
September 30, 2008, pursuant to an agreement with MAB, we converted a
$13.5 million promissory note to common stock. We recorded interest expense
of $0.1 million for that period and made principal payments of $1.0 million
during that period.





Bruner Family Trust –At September 30, 2009, we
have nine notes outstanding from the Bruner Family Trust for $2.9 million in
principal and with $0.2 million in accrued interest.





Officer and Director - In
2008, Charles Crowell, our former Chairman and CEO, assigned the right to
receive $0.2 million from Galaxy to us as consideration in payment of this
note.  No other payments of principal or interest were made on these
notes in 2008.





Officers and Directors –In December 2008, three
officers made short-term loans to the Company aggregating $0.2 million
dollars.  These loans were repaid in January 2009.





Note
13 – Income Taxes





Income
tax expense (benefit) consists of the following as of September 30, 2009 and
2008 ($ in thousands):





2009
            
            
            2008Current
      taxes
            
            $
            —
            
            
            $
            —Deferred
      taxes
            
            
            (47,672
            )
            
            
            (24,325
            )Less:
      valuation allowance
            
            
            47,672
            
            
            
            24,325Net
      income tax provision (benefit)
            
            $
            —
            
            
            $
            —





47


The
effective income tax rate for the years ended September 30, 2009 and 2008
differs from the U.S. Federal statutory income tax rate due to the
following:


2009
            
            
            2008Federal
      statutory income tax rate
            
            
            -35.00
            %
            
            
            -35.00
            %State
      income taxes, net of federal benefit
            
            
            -3.06
            %
            
            
            -2.99
            %Permanent differences — disallowed interest on convertible
      debt
            
            
            2.47
            %
            
            
            2.51
            %Increase
      in valuation allowance
            
            
            35.59
            %
            
            
            35.49
            %Net
      income tax provision (benefit)
            
            
            —
            
            
            
            —





The
components of the deferred tax assets and liabilities as of September 30, 2009
and 2008 are as follows ($ in thousands):


September
      30,2009
            
            
            2008Deferred
      tax assets:Federal
      and state net operating loss carryovers
            
            $
            66,923
            
            
            $
            46,007Capital
      loss carryovers
            
            
            1,577
            
            
            
            1,135Investments
            
            
            3,554
            
            
            
            304Asset
      retirement obligation
            
            
            385
            
            
            
            43Stock
      compensation
            
            
            9,285
            
            
            
            8,154Accrued
      vacation
            
            
            10
            
            
            
            34Transfer
      fees
            
            
            3
            
            
            
            3Oil
      and gas properties and property and equipment
            
            
            13,640
            
            
            
            —Accrued
      Interest
            
            
            2,244
            
            
            
            129Deferred
      tax asset
            
            $
            97,621
            
            
            $
            55,809Deferred
      tax liabilities:Oil
      and gas properties and property and equipment
            
            
            —
            
            
            
            (5,861
            )Net
      deferred tax asset
            
            
            97,621
            
            
            
            49,948Less:
      valuation allowance
            
            
            (97,621
            )
            
            
            (49,948
            )Deferred
      tax liability
            
            $
            —
            
            
            $
            —





The
Company has approximately a $176 million net operating loss carryover and a $4.1
million capital loss carryover as of September 30, 2009.  The net
operating losses may offset against taxable income through the year ended
September 2029.  A portion of the net operating loss carryovers begin
expiring in 2025 and may be subject to U.S. Internal Revenue Code Section 382
limitations.  The capital loss carryover may only offset against
future capital gains through the year ended September 2014, of which a portion
will expire in 2013.





The
Company has provided a valuation allowance for the deferred tax asset at
September 30, 2009, as the likelihood of the realization of the tax benefit of
the net operating loss carry forward cannot be determined.  The
valuation allowance increased by approximately $47.7 million and $24.3 million
for the years ended September 30, 2009 and 2008, respectively.





Note
14 —Subsequent Events (Unaudited)





Subsequent
to September 30, 2009





We have
evaluated subsequent events through January 8, 2010, the date the financial
statements were available to be issued.





In
December 2009, we and our wholly owned subsidiary, Sweetpea, entered into a
binding letter of intent with Falcon Oil and Gas Ltd and its wholly owned
subsidiary, Falcon Australia, where Sweetpea will purchase shares of Falcon
Australia in exchange for its remaining undivided 25% interest in four
exploration permits in the Beetaloo





48





Basin, in
the Northern Territory, Australia. The closing of this transaction is subject to
Sweetpea obtaining an independent valuation analysis, and other criterion being
met by both parties. The result of this potential transaction would be a
re-consolidation of the interests in the exploration permits in one entity and
the creation of a vehicle for fundraising and exploration and development
activities in the Beetaloo Basin. We anticipate that the closing of this
transaction may bring us some relief to our ongoing liquidity
issues.





In
December 2009, in a continuing effort to reduce costs and overhead, we
terminated our Executive Vice President and Secretary, effective December 1,
2009. Our Chief Financial Officer will serve as Secretary.





As of
December 31, 2009, the waivers we had received from our largest secured
creditor, Global, expired and we are in default in respect to repayment, payment
of interest, and various other debt covenants.  We are renegotiating
with Global and the holders of our convertible debentures to restructure some of
the terms of the debt instruments.





Note 15 —
Disclosures about Oil and Gas Producing Activities (Unaudited)





Costs Incurred in Oil and Gas
Producing Activities–Costs incurred in oil and
gas property acquisition, exploration and development activities are summarized
as follows ($ in thousands):





Year
      Ended September 30,2009
            
            
            2008Exploration
            
            $
            2,922
            
            
            $
            12,524Acquisition
            
            
            —
            
            
            
            —Proved
            
            
            —
            
            
            
            —Unproved
            
            
            —
            
            
            
            30,952Total
            
            $
            2,922
            
            
            $
            43,476Capitalized
      costs associated with asset retirement obligation
            
            $
            —
            
            
            $
            96





Oil and Gas Reserve
Quantities–For the fiscal year ended September 30, 2008 and 2007, Gustavson
Associates (“Gustavson”) prepared the reserve information for the Company’s
properties located in the Piceance Basin of Western Colorado, and for the
properties located in the Fiddler Creek Heavy Oil Project located in Montana. We
do not have any proved reserves at September 30, 2009.





The
Company emphasizes that reserve estimates are inherently imprecise and that
estimates of new discoveries and undeveloped locations are more imprecise than
estimates of established proved producing oil and gas properties. Accordingly,
these estimates are expected to change as additional information becomes
available.





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





49


Presented
below is a summary of the changes in estimated reserves of the
Company:





Year
      Ended September 30,2009
            
            
            2008
            
            
            2007Oil
      or
              Condensate
              (Bbl)
            
            
            Gas
              (Mcf)
            
            
            Oil
      or
              Condensate
              (Bbl)
            
            
            Gas
              (Mcf)
            
            
            Oil
      or
              Condensate
              (Bbl)
            
            
            Gas
              (Mcf)Developed
      and undeveloped:Beginning
      of year
            
            
            7,336
            
            
            
            19,814,414
            
            
            
            131,037
            
            
            
            13,699,421
            
            
            
            —
            
            
            
            —Extensions
      and discoveries
            
            
            —
            
            
            
            —
            
            
            
            3,436
            
            
            
            11,417,393
            
            
            
            131,174
            
            
            
            10,820,228Purchases
      of minerals in place
            
            
            —
            
            
            
            —
            
            
            
            621
            
            
            
            2,020,869
            
            
            
            —
            
            
            
            3,335,933Production
            
            
            (160
            )
            
            
            (44,971
            )
            
            
            (22
            )
            
            
            (286,474
            )
            
            
            (137
            )
            
            
            (456,740
            )Sales
      of reserves
            
            
            (1,993
            )
            
            
            (2,063
            )
            
            
            (130,379
            )
            
            
            (9,512,575
            )
            
            
            —
            
            
            
            —Revisions
      to previous estimates
            
            
            (5,183
            )
            
            
            (17,707
            )
            
            
            2,643
            
            
            
            2,475,960
            
            
            
            —
            
            
            
            —End
      of year
            
            
            —
            
            
            
            —
            
            
            
            7,336
            
            
            
            19,814,414
            
            
            
            131,037
            
            
            
            13,699,421Proved
      developed reserves:Beginning
      of year
            
            
            2,353
            
            
            
            3,310.350
            
            
            
            8,873
            
            
            
            13,699,421
            
            
            
            —
            
            
            
            —End
      of year
            
            
            —
            
            
            
            —
            
            
            
            2,353
            
            
            
            3,310,350
            
            
            
            8,873
            
            
            
            13,699,421





Standardized Measure of Discounted
Future Net Cash Flows.  SFAS 69, Disclosures about Oil and
Gas Producing Activities (“SFAS 69”) prescribes guidelines for computing a
standardized measure of future net cash flows and changes therein relating to
estimated proved reserves. The Company has followed these guidelines, which are
briefly described below.





Future
cash inflows and future production and development costs are determined by
applying benchmark prices and costs, including transportation, quality, and
basis differentials, in effect at year-end to the year-end estimated quantities
of oil and gas to be produced in the future. Each property we operate is also
charged with field-level  overhead in the estimated reserve calculation.
Estimated future income taxes are computed using current statutory income tax
rates, including consideration for estimated future statutory depletion. The
resulting future net cash flows are reduced to present value amounts by applying
a 10% annual discount factor.





Future
operating costs are determined based on estimates of expenditures to be incurred
in developing and producing the proved oil and gas reserves in place at the end
of the period, using year-end costs and assuming continuation of existing
economic conditions.  In the case of the Company, future development
costs for its proven reserves, particularly gas reserves, are relatively high
because these reserves are unconventional gas resources.  As such,
while wells have been drilled, multiple hydraulic fracturing operations are
needed to maximize the production of gas.  These multiple fracturing
operations are the primary reason for higher costs.





The
assumptions used to compute the standardized measure are those prescribed by the
FASB and the Securities and Exchange Commission. These assumptions do not
necessarily reflect our expectations of actual revenues to be derived from those
reserves, nor their present value. The limitations inherent in the reserve
quantity estimation process as discussed previously, are equally applicable to
the standardized measure computations since these estimates are the basis for
the valuation process.  At September 30, 2009 the Company does not
have any proved reserves. The following prices, as adjusted for transportation,
quality, and basis differentials, were used in the calculation of the
standardized measure:





As
      of September 30,2009
            
            
            2008
            
            
            2007Gas
      (per Mcf)
            
            $
            —
            
            
            $
            3.36
            
            
            $
            4.80Oil
      (per Bbl)
            
            $
            —
            
            
            $
            79.47
            
            
            $
            62.61





50


The
following summary sets forth the Company’s future net cash flows relating to
proved oil and gas reserves based on the standardized measure prescribed by
SFAS 69 ($ in thousands):





As
      of September 30,2009
            
            
            2008
            
            
            2007Future
      cash inflows
            
            $
            —
            
            
            $
            91,165
            
            
            $
            73,998Future
      production costs
            
            
            —
            
            
            
            (24,009
            )
            
            
            (18,394
            )Future
      development costs
            
            
            —
            
            
            
            (33,416
            )
            
            
            (10,648
            )Future
      net cash flows
            
            
            —
            
            
            
            33,740
            
            
            
            44,95610%
      annual discount
            
            
            —
            
            
            
            (25,383
            )
            
            
            (25,091
            )Standardized
      measure of discounted future net cash flows
            
            $
            —
            
            
            $
            8,357
            
            
            $
            19,865





The
primary sources of change in the standardized measure of discounted future net
cash flows are ($ in thousands):





Year
      Ended September 30,2009
            
            
            2008
            
            
            2007Standardized
      measure, beginning of year
            
            $
            8,357
            
            
            $
            19,865
            
            
            $
            —Changes
      in prices and production costs
            
            
            —
            
            
            
            (442
            )
            
            
            —Sales
      of oil and gas produced
            
            
            (51
            )
            
            
            (1,188
            )
            
            
            (2,027
            )Extensions
      of discoveries, net of production costs
            
            
            —
            
            
            
            368
            
            
            
            17,266Purchases
      of minerals in place
            
            
            —
            
            
            
            403
            
            
            
            4,626Sales
      of reserves
            
            
            (2,300
            )
            
            
            (13,043
            )
            
            
            —Revisions
      of previous quantity estimates
            
            
            (6,006
            )
            
            
            764
            
            
            
            —Accretion
      of discount
            
            
            —
            
            
            
            1,987
            
            
            
            —Other
            
            
            —
            
            
            
            (357
            )
            
            
            —Standardized
      measure, end of year
            
            $
            —
            
            
            $
            8,357
            
            
            $
            19,865





Note 16 —
Commitments and Contingencies (Unaudited)





As
reflected in Note 4 – Oil and Gas Properties and Note 8- Notes Payable, we are
negotiating with DPC and CCES in respect to our liabilities and or commitments
associated with these parties and our Buckskin Mesa property. These negotiations
include Global, who has a first lien on the Buckskin Mesa wells and leasehold
interest. We cannot determine if these negotiations will result in our ability
to further explore or develop this leasehold interest, as we are not currently
able to settle these liabilities and or commitments without compromise by all
parties.. The Company believes that the liabilities it has recorded are
sufficient to meet its contractual obligations in respect to these parties and
this property, as of September 30, 2009.





Minimum
future payments for office rent as of September 30, 2009 are as follows ($ in
thousands):





Year
      Ended
              September 30,2010
            
            $
            1762011
            
            $
            1522012
            
            $
            1032013
            
            $
            1042014
            
            $
            97





Rent
expense for the years ended September 30, 2009 and 2008 was $0.3 million
and $0.2 million, respectively.








51





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





On
January 29, 2008, Hein & Associates, LLP (“Hein”), which served as our
principal accountant to audit our financial statements, informed the Audit
Committee of our Board of Directors (“Audit Committee”) that they were resigning
as our independent registered public accounting firm. The reports of Hein on the
consolidated financial statements for the two most recent fiscal years ended
September 30, 2007 and 2006, did not contain an adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope, or
accounting principles, except that the audit reports for both years contained an
explanatory paragraph regarding the Company’s ability to continue as a going
concern.





During
the fiscal years ended September 30, 2007 and 2006 and through the subsequent
interim period ending January 29, 2008, there were no disagreements with Hein on
any matter of accounting principles or practices, financial statement disclosure
or auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Hein, would have caused Hein to make reference thereto in its
report on our financial statements for such years.  Further, except as
described above, there were no other reportable events as described in Item
304(a)(1)(v) of Regulation S-K occurring within our two most recent fiscal years
and the subsequent interim period ending January 29, 2008.





We
requested Hein to furnish us with a letter addressed to the SEC stating whether
or not it agreed with the above statements.  We received that letter
and filed it with the SEC as required by Regulation S-K Item
304(a)(3).





On
January 31, 2008, the Audit Committee approved the engagement of Gordon, Hughes
& Banks, LLP (“GHB”) to serve as our principal accountant to audit our
financial statements for the fiscal year ending September 30, 2008 and to
perform procedures related to the financial statements to be included in our
quarterly reports on Form 10-Q, beginning with and including the quarter ending
December 31, 2007. That decision was approved and ratified by our Board of
Directors on January 31, 2008.





We
requested that GHB review the Current Report on Form 8-K and provided GHB with
the opportunity to furnish a letter addressed to the SEC containing any new
information, clarification of our reviews, or the respects in which it did agree
with our statements. GHB advised us that it had reviewed the Form 8-K and did
not have any need to submit a letter in accordance with Item 304 of Regulation
S-K.





On
November 3, 2008, GHB resigned as our independent registered public accounting
firm.  GHB had entered into an agreement with Eide Bailly LLP (“Eide
Bailly”), pursuant to which Eide Bailly acquired the operations of GHB and
certain of the professional staff and shareholders of GHB joined Eide Bailly
either as employees or partners of Eide Bailly and will continue to practice as
members of Eide Bailly.  Concurrent with the resignation of GHB, we,
through and with the approval of our Audit Committee, engaged Eide Bailly as its
independent registered public accounting firm.





During
the period from January 31, 2008 through November 3, 2008, there were no
disagreements with GHB on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of GHB, would have caused it
to make reference to the subject matter of the disagreements in connection with
its report.  Further, there were no reportable events as described in
Item 304(a)(1)(v) of Regulation S-K occurring from January 31, 2008 through
November 3, 2008.





During
the period prior to the engagement of Eide Bailly, neither we nor anyone on our
behalf consulted Eide Bailly regarding the application of accounting principles
to a specific completed or contemplated transaction, the type of audit opinion
that might be rendered on our financial statements, or any matter that was
either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of
Regulation S-K) or a reportable event as described in Item 304(a)(1)(v) of
Regulation S-K.  Further, Eide Bailly has not provided written or oral
advice to us that were an important factor considered by us in reaching a
decision as to any accounting, auditing or financial reporting
issues.





We
provided a copy of the foregoing disclosures to GH&B prior to the date of
the filing our report on Form 8-K and requested that GH&B furnish us with a
letter addressed to the Securities and Exchange Commission stating whether





52





or not it
agreed with the statements in the 8-K. A copy of the letter furnished in
response to that request was filed as an exhibit to the Form 8-K.





ITEM
9A(T).CONTROLS AND
PROCEDURES





Background





As part
of management's ongoing review of our accounting policies and internal control
over financial reporting, on November 14, 2008, management identified a material
weakness in the operating effectiveness of our internal control over financial
reporting and determined that the unaudited financial statements included in our
Quarterly Reports on Form 10-Q for the quarters ended December 31, 2007, March
31, 2008 and June 30, 2008 would be restated.





In our
Form 10-Ks for our years ended September 30, 2007 and September 30, 2006, we
disclosed that our disclosure controls and procedures were not effective, and
that we had material weaknesses in our internal control over financial reporting
in relation to (a) our lack of adequate processes for monitoring our financial
reporting and accounting processes and we had not conducted a comprehensive
review of our account balances and transactions; (b) we lacked adequate staff
and procedures, and we had inadequate segregation of duties; and (c)
we lacked appropriate processes and procedures in relation to the timely review
of material documents and transactions for accounting and disclosure
purposes.





Evaluation
of Disclosure Controls and Procedures





We
maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended) that are
designed to reasonably ensure that information required to be disclosed by us in
the reports we file under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s (“SEC’s”) rules and forms, and that
such information is accumulated and communicated to management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosures. Our management necessarily
applied its judgment in assessing the costs and benefits of such controls and
procedures, which, by their nature, can provide only reasonable assurance
regarding management's control objectives.





Our
management evaluated, with the participation of our Chief Executive Officer and
Chief Financial Officer, the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
report. Based on this evaluation, we have determined that material weaknesses in
internal control over financial reporting related to the operating effectiveness
of internal control over financial reporting existed as of September 30, 2009
and 2008. Based upon this evaluation, our Chief Executive Officer and Interim
Chief Financial Officer concluded that our disclosure controls and procedures
were not effective to reasonably ensure that information required
to be disclosed is included in the reports that we file with the
SEC.





Management's Report on Internal
Control over Financial Reporting





Our
management, under the supervision of our Chief Executive Officer and Interim
Chief Financial Officer, is responsible for establishing and maintaining
adequate internal control over financial reporting for the Company. Internal
control over financial reporting is a process to provide reasonable assurance
regarding the reliability of our financial reporting for external purposes in
accordance with accounting principles generally accepted in the United States of
America (“GAAP”). Internal control over financial reporting includes maintaining
records that in reasonable detail accurately and fairly reflect our
transactions; provide reasonable assurance that transactions are recorded as
necessary for preparation of our financial statements; provide reasonable
assurance that receipts and expenditures of Company assets are made in
accordance with management’s authorization; and provide reasonable assurance
that unauthorized acquisition, use or disposition of Company assets that could
have a material effect on our financial statements would be prevented or
detected on a timely basis. Because of the inherent limitations of internal
control over financial reporting, misstatements may not be prevented or detected
on a timely basis. Also, projections of any evaluation of the effectiveness of
our internal control over financial reporting to future periods are





53





subject
to the risk that the controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.





Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, assessed the effectiveness of our internal control over
financial reporting as of September 30, 2009. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control—Integrated
Framework. Based on this assessment, our management, with the participation of
the Chief Executive Officer and Interim Chief Financial Officer, has determined
that we did not maintain effective internal control over financial reporting as
of September 30, 2009. In connection with the preparation of our Annual Report
on Form 10-K, we identified certain material weaknesses that led us to
conclude that our internal control over financial reporting was not operating
effectively as of September 30, 2009.





A
material weakness is a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis. In our assessment, management identified the
following material weaknesses: (1) our controls over industry specific
accounting transactions did not operate effectively to appropriately calculate
losses on our oil and gas property conveyances in the consolidated statements of
operations; (2) we lacked segregation of duties; and (3) our controls over
the foreign currency translation process for transactions in
Australia.





This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of
the SEC that permit the Company to provide only management’s report in this
annual report.





Remediation
of Material Weaknesses in Internal Control Over Financial Reporting





As
previously disclosed in our past filings with the SEC, management identified
material weaknesses in our internal control over financial reporting for the
years ended September 30, 2007 and 2006. The weaknesses that the Company
previously disclosed related to (a) our lack of adequate processes for
monitoring our financial reporting and accounting processes and we had not
conducted a comprehensive review of our account balances and transactions; (b)
we lacked adequate staff and procedures, including inadequate segregation
of duties; and (c) we lacked appropriate processes and procedures in relation to
the timely review of material documents and transactions for accounting and
disclosure purposes. In order to remediate these material weaknesses management
retained additional senior accounting staff and financial consultants and,
during the third and fourth quarters of fiscal 2008, the Company designed and
implemented improved processes and controls to ensure that (a) all material
transactions are properly recorded, reviewed and approved; (b) all significant
accounts are reconciled on a timely basis; (c) duties are properly segregated;
and, (c) complex accounting issues are properly evaluated and accounted for in
accordance with GAAP.





Management
believes we now have sufficient individuals that collectively possess a strong
background, experience and expertise related to accounting, SEC reporting and
other finance functions. However, due to the material weaknesses in our internal
control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act, and as described in this Item 9A(T), and
the fact that the significant scope and timing of these remediation steps did
not permit observation over an appropriate period of time for us to adequately
test their effectiveness, our disclosure controls and procedures were not
effective as of September 30, 2009 or 2008 to assure that the information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is appropriately recorded, processed, summarized and reported
within the periods specified in the SEC's rules.





Notwithstanding
the existence of these material weaknesses in internal control, we believe that
the consolidated financial statements fairly present, in all material respects,
our consolidated balance sheets as of September 30, 2009 and 2008 and the
related consolidated statements of operations, stockholders’ equity, and cash
flows for the years then ended September 30, 2009 and 2008, in conformity with
GAAP.





54


Changes
in Internal Control over Financial Reporting





Other
than as described above, there have been no significant changes in our internal
control over financial reporting during the quarter ended September 30, 2009
that has materially affected, or is reasonably likely to materially affect our
internal control over financial reporting.








ITEM 9B.
            OTHER
      INFORMATION





None.




PART III





ITEM 10.
            DIRECTORS, EXECUTIVE
      OFFICERS AND CORPORATE
GOVERNANCE





The
names, ages and titles of the Company’s directors and executive officers are
listed below, along with a description of their business experience during the
last five years.





Name
            Age
            PositionMartin
      B. Oring
            64
            Chairman
      of the Board, President and Chief Executive OfficerWilliam
      P. Brand, Jr.
            54
            Chief
      Financial Officer (Principal Financial Officer and Principal Accounting
      Officer)Erich
      Hofer
            49
            DirectorCarmen
      J. Lotito
            65
            DirectorMatthew
      R. Silverman
            56
            DirectorDr.
      Anthony K. Yeats
            63
            Director





·
            Martin B.
      Oring became a director in July 2007, the Chairman of the Board in
      April 2009 and the President and Chief Executive Officer in May
      2009.  Mr. Oring is an executive in the financial services and
      energy industries.  Prior to forming his current business in
      2001, Wealth Preservation, LLC, he had extensive experience as a member of
      management in several companies, including Prudential Securities (Managing
      Director of Executive Services), Chase Manhattan Corporation (Manager of
      Capital Planning), and Mobil Corporation (Manager, Capital Markets &
      Investment Banking).  He has served as a director of Parallel
      Petroleum Corporation, located in Midland, Texas, and currently serves as
      a director of Searchlight Minerals Corp., located in Henderson,
      Nevada.  Mr. Oring received a B.S. degree in mechanical
      engineering from the Carnegie Institute of Technology in 1966 and an
      M.B.A. degree from in production management, finance and marketing from
      Columbia University in 1968.  Mr. Oring chairs the audit,
      compensation and nominating committees of our board of directors and is a
      qualified financial expert.




·
            William P.
      Brand, Jr. became our Chief Financial Officer in July 2009. 
      Since February 2009, he has served as Manager of HR Energy, LLC, a
      privately-owned oil and gas exploration company. From June 2008 until
      December 2008, he served as Interim Chief Financial Officer, Interim
      Secretary and Interim Treasurer of Galaxy Energy Corporation, and on
      October 1, 2008 joined Galaxy on a full time basis.  From
      December 2006 through April 2007, he served as Controller and Chief
      Accounting Office of Teton Energy Corporation in Denver, Colorado. From
      August 2005 through July 2006 he was Vice President Finance for PRB Energy
      Inc., in Denver, Colorado. From November 2003 through July 2005 he served
      as a project Consultant and worked on several projects in the Denver area,
      including the restatement team for Qwest Communications International as
      well as several SOX 404 compliance projects, in Denver, Colorado. He
      served as Controller and Finance Director from January 2001 until August
      2003 for Orica USA Inc., an international manufacturer of mining services
      products, and from November 1994 through December 2000, he served as
      Finance Manager/Director for US West International and successor
      companies, MediaOne Inc. and AT&T Wireless International, in Denver,
      Colorado and Seattle, Washington. Prior to that he served in several
      capacities with Monsanto Company, Monsanto Oil Company, and successor, BHP
      Petroleum Americas Inc., in St. Louis, Missouri, Denver, Colorado and
      Houston, Texas. He holds a Bachelor of Science degree and an MBA degree
      from Southern Illinois University, Carbondale Illinois, and is a CPA,
      inactive, State of Texas.




55





·
            Erich
      Hofer has been a director since April 2009.  Mr. Hofer
      has been a director of Arkanova Energy Corporation since March
      2007.  Arkanova Energy is a publicly-traded oil and gas company
      with property interests located in Arkansas, Colorado and
      Montana.  From January 2005 to September 2007, he served as
      group CFO for Argo-Hytos Ltd., a mobile hydraulic application
      manufacturer, headquartered in Baar, Switzerland.  From
      September 2001 to March 2004, he served as chief of staff and deputy of
      the group CEO at Schneeberger Ltd., a linear technology manufacturer,
      located in Roggwil, Switzerland.  Mr. Hofer holds an MBA degree
      from the University of Chicago and a B.S. degree in economics and
      management from the University for Applied Science for Business and
      Administration in Zurich.  He is also a certified management
      accountant in Switzerland.





·
            Carmen J.
      Lotito has been a director of the Company since May 2006 and served
      as the Executive Vice President – Business Development from October 2007
      to March 2009.  He previously served as the Executive Vice
      President, Chief Financial Officer, Treasurer, and Secretary of the
      Company at various times from May 2006 to October
      2007.  Mr. Lotito has been a Director and chairman of the
      audit and compensation committees of Gasco Energy, Inc. since
      April 2001, and was a director of Galaxy Energy Corporation from
      November 2002 to August 2006.  He served as Chief Financial
      Officer and Treasurer of Galaxy Energy Corporation from November 2002
      to July 2005, and as Executive Vice President from August 2004
      to July 2005.  Gasco Energy is subject to the reporting
      requirements of the Securities Exchange Act of
  1934.





·
            Matthew R.
      Silverman became a director in February 2007.  Mr.
      Silverman is Exploration Manager with Robert L. Bayless, Producer LLC, an
      oil and gas company that is active in the central and southern Rocky
      Mountain regions.  Such projects have included exploration for
      conventional oil and natural gas, tight gas, and coalbed methane
      development in several basins.  Mr. Silverman directs Bayless's
      geology and land departments in its Denver offices.  From 1989
      to 2000, he was employed by Gustavson Associates, Inc., an international
      oil and gas consulting group, where he was responsible for technical
      evaluation and capital formation for exploration and production
      opportunities around the world.  His work included appraising
      oil and gas assets (producing and exploratory), preparing on-site oil and
      gas field feasibility studies, and
      business development.  Mr. Silverman was previously employed by
      TOTAL Minatome and its predecessors, CSX Oil & Gas and Texas Gas
      Exploration, from 1982 to 1989 in Denver, Colorado, and by Evans Energy
      from 1976 to 1982.  He received an A.B. degree from Brown
      University in 1975 and an M.S. degree in Geological Sciences from the
      University of Colorado in 1983.  Mr. Silverman is a Certified
      Petroleum Geologist.





·
            Dr. Anthony
      K. Yeats became a director in February 2006.  Dr. Yeats
      has participated in the development of numerous exploration ventures in
      oil and gas opportunities around the world.  His career has
      included the role of Chief Geologist, Geophysicist and Team Leader for
      Royal Dutch Shell in the Middle East, Africa and the Far East, Exploration
      Coordinator for BP’s Global Basin Group, and Chief Geologist for a number
      of regional acquisitions undertaken by British Petroleum at a variety of
      locations throughout the Middle East, Africa, Canada and
      Europe.  Before joining the Company, in 1999 Dr. Yeats
      started Cambridge Earth Sciences Limited, which provides private research
      and consulting services for companies engaging in geology and exploration
      management, which Dr. Yeats continues to run.  Prior to
      1999, Dr. Yeats was Co-coordinator for World Wide New Ventures for
      Total in Paris and finally Exploration Manager for Total in the Former
      Soviet Union where he managed teams undertaking hydrocarbon exploration in
      Kazakhstan, Azerbaijan, and Russia.  In this post he was
      responsible for the generation of new ventures, including the acquisition
      of already existing discoveries.  Over the years he has
      developed extensive contacts with the financial community in Edinburgh and
      London, which specialize in the raising of capital for oil and gas
      ventures particularly from UK, French, Canadian and Middle East
      sources.




Section
16(a) Beneficial Ownership Reporting Compliance




Section
16(a) of the Securities Exchange Act of 1934 requires our officers, directors,
and persons who beneficially own more than 10% of our common stock to file
reports of securities ownership and changes in such ownership with the
Securities and Exchange Commission (“SEC”).  Officers, directors and
greater than 10% beneficial owners are also required by rules promulgated by the
SEC to furnish us with copies of all Section 16(a) forms they file.





56


Based
solely upon a review of the copies of such forms furnished to us, or written
representations that no Form 5 filings were required, we believe that during the
fiscal year ended September 30, 2009, there was compliance with all Section
16(a) filing requirements applicable to our officers, directors and greater than
10% beneficial owners, except for the following:  a Form 4 report due
December 3, 2008 for Martin B. Oring was filed on February 5, 2009 and a Form 4
report due May 15, 2009 for Mr. Oring was filed on August 17, 2009.





ITEM 11.
            EXECUTIVE
      COMPENSATION





Summary
Compensation




The
following table sets forth the compensation paid to our Chief Executive Officer
and our two most highly compensated executive officers, other than the Chief
Executive Officer.





Name
      and principal position
            Year
            Salary
      ($)
            Bonus
      ($)
            Stock
      Awards ($)
            Option
      Awards ($)
            All
      Other Compensation
              ($)
            Total
      ($)Martin
      B. Oring(1)
            2009
            $66,442
            $0
            $82,500
            $0
            $17,046
            $165,988Charles
      B. Crowell(2)
              Chief
      Executive Officer
            2009
              2008
            $292,731
              $469,750
      (3)
            $0
              $0
            $0
              $0
            $0
              $144,400
      (4)(5)
            $52,916
      (6)
              $65,985
      (6)
            $345,647
              $680,135Lyle
      R. Nelson
              Senior
      Vice President of Operations and Production
            2009
              2008
            $157,541
              $193,333
            $0
              $0
            $0
              $0
            $0
              $2,800
      (5)
            $4,421(6)
              $31,663
      (6)
            $161,962
              $227,796Kyle
      L. WhiteJohnson
              Vice
      President of Administration
            2009
              2008
            $150,000
              $131,667
            $40,000
              $0
            $0
              $0
            $0
              $2,600
      (5)
            $0
              $0
            $190,000
              $134,267








(1)
            Mr.
      Oring began serving as our Chief Executive Officer in May
      2009.




(2)
            Mr.
      Crowell was our Chief Executive Officer until May
  2009.




(3)
            Includes
      $105,750 in consulting fees before Mr. Crowell became an
      employee.




(4)
            The
      Company granted options to purchase 5,000,000 shares under its 2005 Stock
      Option Plan on January 1, 2008 upon Mr. Crowell’s transition from
      consultant to employee status and formally assuming the office of Chairman
      of the Board and Chief Executive Officer.  The FAS 123(R) value
      of the option on for the grant date was $0.13 per share, using the
      Black-Scholes option valuation model and the following assumptions:
      volatility rate of 84.81%; risk-free interest rate of 3.07% based on a
      U.S. Treasury rate of three years; and a 3.5-year expected option
      life.  The options vest 20% at grant date and 20% on each
      anniversary of the grant date until fully vested.  The options
      are exercisable at $0.22 per share and expire on January 1,
      2013.




(5)
            The
      Company granted options under its 2005 Stock Option Plan on August 25,
      2008 that were valued at $0.14 per share which represents the FAS 123(R)
      value of the option on that date.  Under FAS 123(R), the grant
      date fair value of each stock option award is calculated on the date of
      grant using the Black-Scholes option valuation model.  The
      Black-Scholes model was used with the following assumptions: volatility
      rate of 96.14%; risk-free interest rate of 2.62% based on a U.S. Treasury
      rate of three years; and a 3.5-year expected option life.  The
      options vest 20% at grant date and 20% on each anniversary of the grant
      date until fully vested.  The options are exercisable at $0.22
      per share and expire on August 25,
2013.




(6)
            All
      other compensation consists of temporary living, lodging and commuting
      expense.




57


Outstanding
Equity Awards at Fiscal Year-End





OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR-ENDName
            OPTION
      AWARDSNumber
      of Securities Underlying Unexercised Options (#)
            Number
      of Securities Underlying Unexercised Options (#) Unexercisable (1)
            Equity
      Incentive Plan Awards: Number of Securities Underlying Unexercised
      Unearned Options (#)
            Option
      Exercise Price ($)
            Option
      Expiration DateMartin
      B. Oring
            750,000
              100,000
              200,000
            --
              --
              --
            --
              --
              --
            $0.19
              $0.20
              $0.22
            9/21/2012
              10/17/2012
              8/25/2013Charles
      B. Crowell
            500,000
              600,000
              2,000,000
              200,000
            --
              400,000
              3,000,000
              300,000
            --
              --
              --
              --
            $1.38
              $0.49
              $0.22
              $0.22
            5/8/2010
              5/8/2010
              5/8/2010
              5/8/2010Lyle
      R. Nelson
            600,000
              250,000
              159,000
              110,000
            150,000
              --
              106,000
              165,000
            --
              --
              --
              --
            $2.10
              $0.50
              $0.20
              $0.22
            6/1/2010
              6/1/2010
              6/1/2010
              6/1/2010Kyle
      L. WhiteJohnson
            80,000
              100,000
              210,000
              80,000
            20,000
              --
              140,000
              120,000
            --
              --
              --
              --
            $2.10
              $0.50
              $0.20
              $0.22
            12/1/2010
              12/1/2010
              12/1/2010
              12/1/2010







(1)
            The
      unexercisable stock options with a strike price of $2.10 vest 20% on
      8/11/06 and 20% on each anniversary of that date.  The
      unexercisable stock options with a strike price of $.49 vest 20% on 7/2/07
      and 20% on each anniversary of that date.  The unexercisable
      stock options granted on 1/1/08 with a strike price of $0.22 vest 20% on
      1/1/2008 and 20% on each anniversary of that date.  The
      unexercisable stock options with a strike price of $0.20 vest 20% on
      10/17/07 and 20% on each anniversary of that date. The unexercisable stock
      options with a strike price of $0.22 vest 20% on 8/25/08 and 20% on each
      anniversary of that date.




Compensation of
Directors





Each
director was entitled to reimbursement for reasonable travel expenses incurred
in connection with such director’s attendance at Board of Directors and
Committee meetings.  We grant directors options under our 2005 Stock
Option Plan.  Vesting schedules are determined by the Board; however,
most initial grants to directors vest 50% on grant date and 50% on the one-year
anniversary of the initial grant date.  Subsequent grants (subsequent
to the initial grant) to directors typically vest 100% at the grant
date.  The following table sets forth the compensation paid to our non
employee Directors for services rendered during the year ended September 30,
2009.





DIRECTOR
      COMPENSATIONName
            Fees
      Earned or Paid in
              Cash
      ($)
            Option
      Awards ($)
            All
      Other
              Compensation
      ($)
            Total
      ($)Martin
      B. Oring
            $60,000
            $0
            $0
            $60,000Matthew
      R. Silverman
            $60,000
            $0
            $0
            $60,000Anthony
      K. Yeats
            $60,000
            $0
            $0
            $60,000








58


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





The
following table indicates the beneficial ownership, as of December 31, 2009, of
the Company’s Common Stock by (i) each director and director nominee, (ii) each
officer, (iii) each person known by the Company to own more than 5% of the
outstanding shares of the Company’s Common Stock, and (iv) all directors and
executive officers of the Company as a group.  Except as otherwise
indicated below, all shares indicated as beneficially owned are held with sole
voting and investment power.


Name and Address of Beneficial Owner(1)
            Amount
      and Nature of Beneficial
      Ownership
            Percent of Class(2)Marc
      A. Bruner
              29
      Blauenweg
              Metzerlen,
      Switzerland 4116
            97,175,000
      (3)
            25.3%MAB
      Resources LLC
              1875
      Lawrence Street, Suite 1400
              Denver,
      CO 80202
            95,175,000
      (4)
            24.8%Christian
      Russenberger
              Meierhofrain
      35
              Wadenswil
      8820, Switzerland
            57,937,577
      (5)
            14.5%Global
      Project Finance AG
              Sunnaerai
      1
              Sachsein
      6072, Switzerland
            52,937,577
      (6)
            13.2%Nobu
      Ventures, Inc.
              Austrasse
      15
              Vaduz
      9490, Switzerland
            30,000,000
            7.9%Bruner
      Family Trust
              8484
      Westpark Drive, Suite 900
              McLean,
      Virginia 22102
            25,000,000
            6.6%Martin
      B. Oring
            9,583,334
      (7)
            2.5%Carmen
      J. Lotito
            3,550,000
      (8)
            0.9%Erich
      Hofer
            2,500,000
            0.7%Matthew
      R. Silverman
            1,000,000
      (9)
            0.3%Anthony
      K. Yeats
            800,000
      (10)
            0.2%William
      P. Brand, Jr.
            -0-
            --All
      officers and directors as a group  (6 persons)
            17,433,334
      (11)
            4.5%




(1)
            To
      our knowledge, except as set forth in the footnotes to this table and
      subject to applicable community property laws, each person named in the
      table has sole voting and investment power with respect to the shares set
      forth opposite such person’s name.




(2)
            This
      table is based on 380,468,544 shares of Common Stock outstanding as of
      December 31, 2009.  If a person listed on this table has the
      right to obtain additional shares of Common Stock within sixty (60) days
      from December 31, 2009, the additional shares are deemed to be outstanding
      for the purpose of computing




59


the percentage of class owned by such person, but are
      not deemed to be outstanding for the purpose of computing the percentage
      of any other person.


(3)
            Included
      in Mr. Bruner’s share ownership are 92,175,000 shares owned of record by
      MAB Resources LLC and 2,000,000 shares owned of record by BioFibre
      Technology International, Inc.  Mr. Bruner is a control person
      of both these entities.  Also included in Mr. Bruner’s share
      ownership are 34,400,000 shares issuable upon exercise of vested stock
      options and warrants held by MAB Resources
LLC.




(4)
            Includes
      2,400,000 shares issuable upon exercise of vested stock options and
      32,000,000 shares issuable upon exercise of
  warrants.




(5)
            Includes
      5,000,000 shares held of record by Mr. Russenberger, 29,017,577 shares
      held of record by Global Project Finance AG, an entity controlled by Mr.
      Russenberger, and 19,920,000 shares issuable upon exercise of warrants
      held by Global Project Finance AG.




(6)
            Includes
      29,017,577 shares held of record by Global Project Finance AG and
      19,920,000 shares issuable upon exercise of warrants held by Global
      Project Finance AG.




(7)
            Includes
      1,050,000 shares issuable upon exercise of vested stock options, 1,666,667
      shares issuable upon conversion of debentures and 1,866,667 shares
      issuable upon exercise of warrants.




(8)
            Includes
      200,000 shares held of record by Mr. Lotito’s wife and 3,350,000 shares
      issuable upon exercise of vested stock
options.




(9)
            Includes
      154,000 shares held of record by Mr. Silverman’s IRA, 46,000 shares held
      of record by Mr. Silverman, and 800,000 shares issuable upon exercise of
      vested stock options.




(10)
            Includes
      800,000 shares issuable upon exercise of vested stock
    options.




(11)
            Includes
      7,900,000 shares held of record or on account, 6,000,000 shares issuable
      upon exercise vested stock options, 1,666,667 shares issuable upon
      conversion of debentures, and 1,866,667 shares issuable upon exercise of
      warrants.




Equity
Compensation Plan Information





The
following table sets forth information as of the end of the most recently
completed fiscal year, September 30, 2009:





Plan
      category
            Number
      of securities to be
              issued
      upon exercise of outstanding
              options,
      warrants and rights
            Weighted
      average exercise
              price
      of outstanding options,
              warrants
      and rights
            Number
      of securities remaining
              available
      for future issuanceEquity
      compensation plans approved by security holders
            29,420,000
      (a)
            $0.76
            10,580,000Equity
      compensation plans not approved by security holders
            3,760,000
            $0.50
            (b)Total
            33,180,000
            
            10,580,000




(a)
            Typically,
      options vest 20% on grant date and 20% each year on the anniversary of the
      grant date but each vesting schedule is also determined by the
      Compensation Committee.  Most initial grants to directors vest
      50% on grant date and 50% on the one-year anniversary of the initial grant
      date.  Subsequent grants (subsequent to the initial grant) to
      directors typically vest 100% at the grant date.  In special
      circumstances, the board may elect to modify vesting schedules upon the
      termination of selected employees and
  contractors.




(b)
            The
      equity compensation plan not approved by stockholders is comprised of
      non-qualified stock options granted to employees and non-employee
      consultants on May 21, 2007.  The options were granted at an
      exercise price of $0.50 per share and vest 60% at grant date and 20% per
      year at the one- and two-year anniversaries of the grant
      date.  The options expire on May 21,
  2012.





60


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





Our “Code
of Conduct and Standard of Ethics” addresses our policy for dealing with
transactions with affiliates and as a matter of procedure we obtain Board of
Director approval for any transaction with a director, executive officer or
other affiliate of PetroHunter.  A complete description of the
transaction including the services or products to be provided, the financial
components related to the services or products, the nature of the relationship
of the entity involved in the transaction, and any other contractual obligations
related to the transaction is presented to the Board of Directors for their
review.  The Board of Directors indicates their approval of the
transaction with a written resolution.





Other
than the transactions described below, none of our present directors, officers
or principal shareholders, nor any family member of the foregoing, nor, to the
best of our information and belief, any of our former directors, officers or
principal shareholders, nor any family member of such former directors, officers
or principal shareholders, has or had any material interest, direct or indirect,
in any transaction, or in any proposed transaction which has materially affected
or will materially affect us.





MAB
Resources LLC/Marc A. Bruner





Marc A.
Bruner, our largest beneficial shareholder, is the Chief Executive Officer and a
Director of Falcon.  Falcon advised PetroHunter and announced that Mr.
Bruner did not participate in the vote by the Falcon Board of Directors when the
Falcon board voted to approve the agreements with respect to the sale of the
working interests in the Buckskin Mesa and Beetaloo Basin
Projects.  We obtained a fairness opinion from an independent and
qualified third party with respect to transactions contemplated by these
agreements.





MAB –During the years ended
September 30, 2009 and 2008 pursuant to an agreement with MAB and a
$13.5 million promissory note that converted to common stock in 2008, we
incurred interest expense of $nil and $0.1 million and  made principal
payments of $nil million and $1.0 million for the years the
ended




At
September 30, 2008, MAB owed us $28,363, for reimbursement of interest on
Certificates of Deposit associated with bonds placed for operations on
properties assigned to the Company by MAB. This amount has been paid as of
September 30, 2009.


Bruner Family Trust –At September 30, 2009, we
have seven notes outstanding from the Bruner Family Trust totaling $2.8
million.





Officers
and Directors




During
the years ended September 30, 2009 and 2008, we incurred consulting fees related
to services provided by persons who were officers at the time in the aggregate
amounts of $0.47 million and $0.35 million, respectively, as
follows:  David E. Brody ($0 – 2009; $200,000 – 2008), Charles B.
Crowell ($0 - 2009; $105,750 – 2008), and Charles A. Josenhans, New Vector
Partners ($127,812 – 2009 - $167,915 - 2008).  Amounts paid to Mr.
Crowell are reflected as “Salary” in the Summary Compensation
Table.




Pursuant
to the sale of our convertible debentures in November 2007, Charles B. Crowell,
David E. Brody and Martin Oring participated in the transaction, representing a
total of $0.5 million of the total $7.0 million offering. During December 2008,
Messrs. Crowell, Brody and Nelson made short-term loans to the Company
aggregating $0.2 million.  These loans were repaid in January
2009.





Falcon
Oil & Gas Ltd.





On August
25, 2008, we entered into an agreement for the sale of a 25% working interest in
five wells located within our Buckskin Mesa project in the Piceance Basin,
Colorado.  We also entered into an agreement to sell a 50% working
interest in our Beetaloo Basin Project in the Northern Territory, Australia for
$5 million in cash, which was received on August 25, 2008, and $20 million of
equity securities convertible into Falcon shares based on the





61





closing
price on August 22, 2008.  This sale was completed on September 30,
2008, when the value of the Falcon shares was $14.9 million.  As of
September 30, 2008, we had recorded $1.8 million on our consolidated balance
sheet as a receivable from Falcon, relating to its GST refund which is payable
to us upon their receipt.





In
October 2008,we
entered into a 10% secured loan agreement with Falcon (“Falcon Loan”). Under the
terms of the loan agreement, Falcon agreed to advance to us $5.0
million.  This loan was secured by 14.5 million shares of Falcon
common stock we had received as consideration in relation to the sale of a 50%
working interest in our four exploration permits in Australia to Falcon in
October 2008.   In addition the loan was also secured by a first
position security interest in our five well bores in our Buckskin Mesa project.
In June 2009, we sold an additional 25% interest in our exploration permits in
the Beetaloo Basin to Falcon. As a component of our consideration, the $5.0
million note was forgiven by Falcon.  The Falcon shares were released
as collateral, but are held pursuant to an escrow arrangement.





During
the year ended September 30, 2009, we participated with Falcon in the deepening
of the Shenandoah #1A, a well we initially drilled, located in the Beetaloo
Basin in Australia. Our estimated share of the costs as of September 30, 2009
was $1.4 million.





Marc A.
Bruner, our largest beneficial shareholder, is the Chief Executive Officer and a
Director of Falcon.  Falcon advised PetroHunter and announced that Mr.
Bruner did not participate in the vote by the Falcon Board of Directors when the
Falcon board voted to approve the agreements with respect to the sale of the
working interests in the Buckskin Mesa and Beetaloo Basin
Projects.  We obtained a fairness opinion from an independent and
qualified third party with respect to transactions contemplated by these
agreements.





Global
Project Finance AG





On
October 10, 2007, we entered into a promissory note with Global Project Finance,
AG (“Global”).  The entire balance on the notes was due and payable on
December 31, 2008, along with the accrued interest. We received a waiver
that extended the due date on these notes through July 2009, subsequent to that
date we are considered to be in default, and the notes may be called at any
time. The note is unsecured and the note balance at September 30, 2009 was $0.7
million. Accrued interest is $0.2 million on this note.





In
December 2008, we issued a promissory note in the amount of $0.1 million to
Global. This note bore interest at 15% per annum.  As of September 30,
2009 we have repaid this note and all accrued interest.





On
January 9, 2007, we entered into a Credit and Security Agreement (the
“January 2007 Credit Facility”) with Global in the amount of
$15.0 million.  As of September 30, 2009, and September 30, 2008,
amounts drawn against this facility were $15.0 million.





On
May 21, 2007, we entered into a second Credit and Security Agreement with
Global (the “May 2007 Credit Facility”) and we extended all the economic terms
from the May 2007 Credit Facility retroactively to the January 2007 Credit
Facility. Under the May 2007 Credit Facility, Global agreed to use its best
efforts to advance up to $60 million to us over the following
18 months. As of September 30, 2009 and 2008 amounts drawn against this
facility were $24.8 million.





In
connection with the May 2007 Credit Facility, Global received warrants to
purchase 2.0 million of our common shares at the date of execution and was to
receive 0.4 million warrants for each $1.0 million advanced under the
Facility.  We agreed to pay an advance fee of 2% on all amounts drawn
under the May 2007 Credit Facility.  Payments were to have been made
in such amounts as may be agreed upon by us and Global on the then outstanding
principal balance in order to repay the principal balance by the maturity date,
November 21, 2009. The loans are collateralized by a first perfected
security interest on certain oil and gas properties and other of our assets. In
the event that we sell any interest in the oil and gas properties that comprise
the collateral, a mandatory payment is due in the amount equal to such sales
proceeds.





As of
September 30, 2009 and 2008 the cash portion of the advance fees payable in the
amount of $0.8 million, incurred proportionately at 2% of each respective
draw, had been recorded as a deferred financing cost and these amounts have been
amortized to interest expense over the life of the Facilities.  The
fair value of the 4 million





62





warrants
issued in conjunction with the advances was $1.9 million, valued using the
Black-Scholes method, and was initially being amortized over the same time
frame.  The fair value of the 28.5 million warrants issued in
connection with the debt was $4.9 million valued using the Black- Scholes
Method.





In
September 30, 2008, the Company entered into a conversion and release agreement
wherein $6.5 million in accrued interest owed to Global related to these Credit
Facilities was converted into 32.6 million shares of our common stock at $0.20
per share, which was above the fair value of the shares at that
time.  The $2.6 million value of the interest obligation converted to
our common stock in excess of the fair value of the shares, and was recorded as
additional paid in capital.  Global agreed to accept the shares as
complete and total payment for the accrued interest. We deemed that as of the
date of this transaction and for all periods subsequent we would consider Global
to be a related party. The character of this relationship changed effective in
the fourth quarter of the year ended September 30, 2008.





As of
September 30, 2009, we were in default of payments in the amount of
$0.8 million, which consisted of unpaid advance fees on the Global
Facilities, but we obtained a comprehensive waiver from the lender that on
October 1, 2009.  As of September 30, 2009, we were in default in
respect to the $0.9 million promissory note as well as the associated accrued
interest of $0.2 million. As of September 30, 2009, we had received waivers
related to our failure to pay principal and interest and various covenant
violations related to the $39.8 million drawn on the two credit facilities.
These waivers expired on December 31, 2009.  We have accrued $4.1
million in interest related to this debt as of September 30, 2009.





As of
September 30, 2009, as we were in default with Global in respect to the
promissory notes of $0.9 million and credit facilities of $39.8, we have
accelerated the accretion and amortization of the debt discount, and deferred
financing costs related to these instruments and recognized $0.2 million in
interest expense related to this acceleration.





David
E. Brody





David E.
Brody served as our Vice President, General Counsel and Secretary from September
2006 to March 2009. Mr. Brody is a partner in the law firm of Patton Boggs
LLP, where he has represented the Company since its
inception.  During the years ended September 30, 2009 and 2008, we
incurred legal fees with Patton Boggs of $4,979 and $912,410,
respectively.  Mr. Brody does not receive any part of the fees we pay
to Patton Boggs.





Charles
A. Josenhans





Charles
A. Josenhans, is the Managing Partner of New Vector Partners LLC, a consulting
firm that has provided the services of Mr. Josenhans as Interim Chief Financial
Officer from May 20, 2008 through January 23, 2009, and the services of other
temporary accounting consultants.   During the fiscal year ended
September 30, 2009, we incurred consulting fees with New Vector Partners of
$227,305.  During the fiscal year ended September 30, 2008, we
incurred consulting fees with New Vector Partners of $320,060, paid a $12,500
bonus, and issued 250,000 stock options.   Mr. Josenhans elected
to defer payment of $10,000 of fee and $15,000 of bonus under the terms of an
18% secured subordinated debenture.  We issued 66,667 warrants to New
Vector Partners LLC under the terms of the debenture agreement.





Future
Transactions





All
future affiliated transactions will be made or entered into on terms that are no
less favorable to us than those that can be obtained from any unaffiliated third
party.  A majority of the independent, disinterested members of our
board of directors will approve future affiliated transactions.





ITEM 14.
            PRINCIPAL ACCOUNTING FEES AND
      SERVICES





Audit
and Non-Audit Services Pre-Approval Policy





The Audit
Committee is responsible for the approval of all fees and other significant
compensation to be paid to the independent auditors.  The Audit
Committee regularly reviews audit related and tax services provided by Eide
Bailly





63





and the
associated fees and considers whether the provision of such services is
compatible with maintaining the independence of Eide Bailly.  See
report of the Audit Committee above.  All of the fees described below
were pre-approved by the Audit Committee.





Audit,
Audit-Related, Tax and Other Fees





The
following is a breakout of aggregate fees billed by Eide Bailly and Hein and
Associates (“Hein”) to the Company for the last two fiscal years for (i) the
audit of its annual financial statements and review of financial statements
included in Form 10-Q (“Audit Fees”), (ii) assurance and related services
provided that are reasonably related to the audit (“Audit-Related Fees”), (iii)
tax compliance, advice, and planning (“Tax Fees”), and (iv) other products or
services provided by Eide Bailly and Hein (“Other Fees”):





2009
            
            
            2008Audit
      Fees
            
            $
            248,000
            
            
            $
            270,000Tax
      Fees
            
            
            29,900
            
            
            
            19,000Other
      Fees
            
            
            2,080
            
            
            
            19,000
            (1)Total
            
            $
            279,980
            
            
            $
            308,000





(1)
            Other
      Fees is comprised of amounts paid to Hein, the Company’s predecessor
      independent auditor, related to the review and consent of the Company’s
      registration statement on Form S-1, filed June 30, 2008, and all
      amendments thereto, and the review and consent of the Company’s Form 10-K
      for fiscal year ended September 30,
2008.





64


PART IV





ITEM 15.EXHIBITS,
FINANCIAL STATEMENT SCHEDULES





Regulation
              S-K
      Number
            Exhibit2.1
            Stock
      Exchange Agreement dated February 10, 2006 by and among Digital
      Ecosystems Corp., GSL Energy Corporation, MABio Materials Corporation and
      MAB Resources LLC (incorporated by reference to Exhibit 10.8 to the
      Company’s quarterly report on Form 10-QSB for the quarter ended
      December 31, 2005, filed February 16, 2006)2.2
            Amendment
      No. 1 to Stock Exchange Agreement dated March 31, 2006
      (incorporated by reference from Exhibit 10.1 to the Company’s current
      report on Form 8-K dated March 31, 2006, filed April 7,
      2006)2.3
            Amendment
      No. 5 to Stock Exchange Agreement dated May 12, 2006
      (incorporated by reference from Exhibit 10.1 to the Company’s current
      report on Form 8-K dated May 12, 2006, filed May 15,
      2006)3.1
            Articles
      of Incorporation (incorporated by reference to Exhibit A to the
      Information Statement filed July 17, 2006)3.2
            Bylaws
      (incorporated by reference to Exhibit B to the Information Statement
      filed July 17, 2006)10.1
            2005
      Stock Option Plan (incorporated by reference from Exhibit 4.1 to the
      Company’s annual report Form 10-KSB for the fiscal year ending
      March 31, 2006, filed July 14, 2006)10.2
            Acquisition
      and Consulting Agreement between MAB Resources LLC and PetroHunter Energy
      Corporation effective January 1, 2007 (incorporated by reference to
      Exhibit 10.1 to the Company’s amended current report on Form 8-K
      dated January 9, 2007, filed May 4, 2007)10.3
            Credit
      and Security Agreement dated as of January 9, 2007 between
      PetroHunter Energy Corporation and PetroHunter Operating Company and
      Global Project Finance AG (incorporated by reference to Exhibit 10.2
      to the Company’s current report on Form 8-K dated January 9,
      2007, filed January 11, 2007)10.4
            Credit
      and Security Agreement dated as of May 21, 2007 between PetroHunter
      Energy Corporation and PetroHunter Operating Company and Global Project
      Finance AG (incorporated by reference to Exhibit 10.1 to the
      Company’s current report on Form 8-K dated May 21, 2007, filed
      May 22, 2007)10.5
            Subordinated
      Unsecured Promissory Note dated July 31, 2007 to Bruner Family
      Trust UTD March 28, 2005 (incorporated by reference to
      Exhibit 10.1 to the Company’s current report on Form 8-K dated
      July 31, 2007, filed August 1, 2007)10.6
            Subordinated
      Unsecured Promissory Note dated September 21, 2007 to Bruner Family
      Trust UTD March 28, 2005 (incorporated by reference to
      Exhibit 10.1 to the Company’s current report on Form 8-K dated
      September 21, 2007, filed September 27, 2007)10.7
            First
      Amendment to Acquisition and Consulting Agreement between MAB Resources
      LLC and PetroHunter Energy Corporation dated October 18, 2007
      (incorporated by reference to Exhibit 10.1 to the Company’s current
      report on Form 8-K dated October 17, 2007, filed
      October 23, 2007)  65
  Regulation
              S-K
      Number
            Exhibit10.8
            Securities
      Purchase Agreement (incorporated by reference to Exhibit 10.1 to the
      Company’s current report on Form 8-K dated November 13, 2007,
      filed November 15, 2007)10.9
            Form
      of Debenture (incorporated by reference to Exhibit 10.2 to the
      Company’s current report on Form 8-K dated November 13, 2007,
      filed November 15, 2007)10.10
            Registration
      Rights Agreement (incorporated by reference to Exhibit 10.3 to the
      Company’s current report on Form 8-K dated November 13, 2007,
      filed November 15, 2007)10.11
            Form
      of Warrant (incorporated by reference to Exhibit 10.4 to the
      Company’s current report on Form 8-K dated November 13, 2007,
      filed November 15, 2007)10.12
            Collateral
      Pledge and Security Agreement (incorporated by reference to
      Exhibit 10.5 to the Company’s current report on Form 8-K dated
      November 13, 2007, filed November 15, 2007)10.13
            Second
      Amendment to Acquisition and Consulting Agreement between MAB Resources
      LLC and PetroHunter Energy Corporation dated November 15, 2007
      (incorporated by reference to Exhibit 10.1 to the Company’s current
      report on Form 8-K dated November 15, 2007, filed
      November 16, 2007)10.14
            Third
      Amendment to Acquisition and Consulting Agreement between MAB Resources
      LLC and PetroHunter Energy Corporation (incorporated by reference to
      Exhibit 10.23 to the Company’s annual report on Form 10-K for the fiscal
      year ended September 30, 2007, filed January 15, 2008)10.15
            Promissory
      Note dated February 12, 2008 to Bruner Family Trust UTD
      March 28, 2005 (incorporated by reference to Exhibit 10.1 to the
      Company’s current report on Form 8-K dated February 12, 2008, filed
      February 19, 2008)10.16
            Promissory
      Note dated March 14, 2008 to Bruner Family Trust UTD March 28,
      2005 (incorporated by reference to Exhibit 10.1 to the Company’s
      current report on Form 8-K dated March 14, 2008, filed March 17,
      2008)10.17
            Promissory
      Note dated March 18, 2008 to Bruner Family Trust UTD March 28,
      2005 (incorporated by reference to Exhibit 10.1 to the Company’s
      current report on Form 8-K dated March 18, 2008, filed March 24,
      2008)10.18
            Purchase
      and Sale Agreement between PetroHunter Energy Corporation and PetroHunter
      Operating Company as Seller and Laramie Energy II, LLC as Buyer Dated
      Effective April 1, 2008 (incorporated by reference to Exhibit 10.1 to
      the Company’s current report on Form 8-K dated May 30, 2008, filed
      June 5, 2008)10.19
            Amendment
      to Purchase and Sale Agreement between PetroHunter Energy Corporation and
      PetroHunter Operating Company as Seller and Laramie Energy II, LLC as
      Buyer Dated May 23, 2008 (incorporated by reference to Exhibit 10.2
      to the Company’s current report on Form 8-K dated May 30, 2008, filed
      June 5, 2008)10.20
            Promissory
      Note dated August 12, 2008 to Bruner Family Trust UTD March 28,
      2005 (incorporated by reference to Exhibit 10.1 to the Company’s
      current report on Form 8-K dated August 12, 2008, filed August 18,
      2008)





66




Regulation
              S-K
      Number
            Exhibit10.21
            Purchase
      and Sale Agreement between PetroHunter Energy Corporation and Sweetpea
      Petroleum Pty Ltd. and Falcon Oil & Gas Ltd. and Falcon Oil & Gas
      Australia Pty Ltd. Dated August 22, 2008 (incorporated by reference to
      Exhibit 10.1 to the Company’s amended current report on Form 8-K dated
      August 25, 2008, filed November 20, 2008)10.22
            Purchase
      and Sale Agreement between PetroHunter Energy Corporation and PetroHunter
      Operating Company and Falcon Oil & Gas Ltd. and Falcon Oil & Gas
      USA, Inc. Dated August 22, 2008 (incorporated by reference to Exhibit 10.2
      to the Company’s amended current report on Form 8-K dated August 25, 2008,
      filed November 20, 2008)10.23
            Loan
      Agreement with Falcon Oil & Gas Ltd. dated October 1, 2008
      (incorporated by reference to Exhibit 10.1 to the Company’s current
      report on Form 8-K dated September 30, 2008, filed October 2,
      2008)10.24
            James
      C. Steinhauser Employment Agreement (incorporated by reference to Exhibit
      10.1 to the Company’s  current report on Form 8-K dated January
      26, 2009, filed January 28, 2009)10.25
            Purchase
      and Sale Agreement between PetroHunter Energy Corporation, PetroHunter
      Operating company and Sweetpea Petroleum Pty Ltd. and Falcon Oil & Gas
      Ltd., Falcon Oil & Gas USA, Inc. and Falcon Oil & Gas Australia
      Pty Ltd. dated May 26, 2009 (incorporated by reference to Exhibit 10.1 to
      the Company’s current report on Form 8-K dated May 26, 2009, filed May 27,
      2009)16.1
            Letter
      from Hein & Associates LLP (incorporated by reference to
      Exhibit 16.1 to the Company’s current report on Form 8-K dated
      January 29, 2008, filed February 4, 2008)16.2
            Letter
      from Gordon, Hughes & Banks, LLP (incorporated by reference to Exhibit
      16.1 to the Company’s current report on Form 8-K dated November 3, 2008,
      filed November 7, 2008)21.1
            Subsidiaries
      of the registrant (incorporated by reference to Exhibit 21.1 to the
      Company’s annual report on Form 10-K for the fiscal year ended September
      30, 2007, filed January 15, 2008)31.1
            Rule 13a-14(a)
      Certification of Martin B. Oring31.2
            Rule 13a-14(a)
      Certification of William P. Brand, Jr.32.1
            Certification
      of Martin B. Oring pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      200232.2
            Certification
      of William P. Brand, Jr. pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002










67








SIGNATURES





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





PETROHUNTER
      ENERGY CORPORATONDate:
      January 13, 2010
            By:
            /s/ Martin
      B. OringMartin
      B. OringChief
      Executive Officer





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





Signature
            
            Title
            
            Date/s/
      Martin B. Oring
            
            Chairman
      and Chief Executive Officer and Director
              (Principal
      Executive Officer)
            
            January
      13, 2010Martin
      B. Oring/s/
      William P. Brand, Jr.
            
            Chief
      Financial Officer
              (Principal
      Financial Officer and Principal Accounting Officer)
            
            January
      13, 2010William
      P. Brand, Jr./s/
      Carmen J. Lotito
            
            Director
            
            January
      13, 2010Carmen
      J. Lotito/s/
      Matthew R. Silverman
            
            Director
            
            January
      13, 2010Matthew
      R. Silverman/s/
      Anthony K. Yeats
            
            Director
            
            January
      13, 2010Anthony
      K. Yeats/s/
      Erich Hofer
            
            Director
            
            January
      13, 2010Erich
      Hofer














68


EXHIBIT
INDEX





Regulation
              S-K
      Number
            Exhibit2.1
            Stock
      Exchange Agreement dated February 10, 2006 by and among Digital
      Ecosystems Corp., GSL Energy Corporation, MABio Materials Corporation and
      MAB Resources LLC (incorporated by reference to Exhibit 10.8 to the
      Company’s quarterly report on Form 10-QSB for the quarter ended
      December 31, 2005, filed February 16, 2006)2.2
            Amendment
      No. 1 to Stock Exchange Agreement dated March 31, 2006
      (incorporated by reference from Exhibit 10.1 to the Company’s current
      report on Form 8-K dated March 31, 2006, filed April 7,
      2006)2.3
            Amendment
      No. 5 to Stock Exchange Agreement dated May 12, 2006
      (incorporated by reference from Exhibit 10.1 to the Company’s current
      report on Form 8-K dated May 12, 2006, filed May 15,
      2006)3.1
            Articles
      of Incorporation (incorporated by reference to Exhibit A to the
      Information Statement filed July 17, 2006)3.2
            Bylaws
      (incorporated by reference to Exhibit B to the Information Statement
      filed July 17, 2006)10.1
            2005
      Stock Option Plan (incorporated by reference from Exhibit 4.1 to the
      Company’s annual report Form 10-KSB for the fiscal year ending
      March 31, 2006, filed July 14, 2006)10.2
            Acquisition
      and Consulting Agreement between MAB Resources LLC and PetroHunter Energy
      Corporation effective January 1, 2007 (incorporated by reference to
      Exhibit 10.1 to the Company’s amended current report on Form 8-K
      dated January 9, 2007, filed May 4, 2007)10.3
            Credit
      and Security Agreement dated as of January 9, 2007 between
      PetroHunter Energy Corporation and PetroHunter Operating Company and
      Global Project Finance AG (incorporated by reference to Exhibit 10.2
      to the Company’s current report on Form 8-K dated January 9,
      2007, filed January 11, 2007)10.4
            Credit
      and Security Agreement dated as of May 21, 2007 between PetroHunter
      Energy Corporation and PetroHunter Operating Company and Global Project
      Finance AG (incorporated by reference to Exhibit 10.1 to the
      Company’s current report on Form 8-K dated May 21, 2007, filed
      May 22, 2007)10.5
            Subordinated
      Unsecured Promissory Note dated July 31, 2007 to Bruner Family
      Trust UTD March 28, 2005 (incorporated by reference to
      Exhibit 10.1 to the Company’s current report on Form 8-K dated
      July 31, 2007, filed August 1, 2007)10.6
            Subordinated
      Unsecured Promissory Note dated September 21, 2007 to Bruner Family
      Trust UTD March 28, 2005 (incorporated by reference to
      Exhibit 10.1 to the Company’s current report on Form 8-K dated
      September 21, 2007, filed September 27, 2007)10.7
            First
      Amendment to Acquisition and Consulting Agreement between MAB Resources
      LLC and PetroHunter Energy Corporation dated October 18, 2007
      (incorporated by reference to Exhibit 10.1 to the Company’s current
      report on Form 8-K dated October 17, 2007, filed
      October 23, 2007)  69
  Regulation
              S-K
      Number
            Exhibit10.8
            Securities
      Purchase Agreement (incorporated by reference to Exhibit 10.1 to the
      Company’s current report on Form 8-K dated November 13, 2007,
      filed November 15, 2007)10.9
            Form
      of Debenture (incorporated by reference to Exhibit 10.2 to the
      Company’s current report on Form 8-K dated November 13, 2007,
      filed November 15, 2007)10.10
            Registration
      Rights Agreement (incorporated by reference to Exhibit 10.3 to the
      Company’s current report on Form 8-K dated November 13, 2007,
      filed November 15, 2007)10.11
            Form
      of Warrant (incorporated by reference to Exhibit 10.4 to the
      Company’s current report on Form 8-K dated November 13, 2007,
      filed November 15, 2007)10.12
            Collateral
      Pledge and Security Agreement (incorporated by reference to
      Exhibit 10.5 to the Company’s current report on Form 8-K dated
      November 13, 2007, filed November 15, 2007)10.13
            Second
      Amendment to Acquisition and Consulting Agreement between MAB Resources
      LLC and PetroHunter Energy Corporation dated November 15, 2007
      (incorporated by reference to Exhibit 10.1 to the Company’s current
      report on Form 8-K dated November 15, 2007, filed
      November 16, 2007)10.14
            Third
      Amendment to Acquisition and Consulting Agreement between MAB Resources
      LLC and PetroHunter Energy Corporation (incorporated by reference to
      Exhibit 10.23 to the Company’s annual report on Form 10-K for the fiscal
      year ended September 30, 2007, filed January 15, 2008)10.15
            Promissory
      Note dated February 12, 2008 to Bruner Family Trust UTD
      March 28, 2005 (incorporated by reference to Exhibit 10.1 to the
      Company’s current report on Form 8-K dated February 12, 2008, filed
      February 19, 2008)10.16
            Promissory
      Note dated March 14, 2008 to Bruner Family Trust UTD March 28,
      2005 (incorporated by reference to Exhibit 10.1 to the Company’s
      current report on Form 8-K dated March 14, 2008, filed March 17,
      2008)10.17
            Promissory
      Note dated March 18, 2008 to Bruner Family Trust UTD March 28,
      2005 (incorporated by reference to Exhibit 10.1 to the Company’s
      current report on Form 8-K dated March 18, 2008, filed March 24,
      2008)10.18
            Purchase
      and Sale Agreement between PetroHunter Energy Corporation and PetroHunter
      Operating Company as Seller and Laramie Energy II, LLC as Buyer Dated
      Effective April 1, 2008 (incorporated by reference to Exhibit 10.1 to
      the Company’s current report on Form 8-K dated May 30, 2008, filed
      June 5, 2008)10.19
            Amendment
      to Purchase and Sale Agreement between PetroHunter Energy Corporation and
      PetroHunter Operating Company as Seller and Laramie Energy II, LLC as
      Buyer Dated May 23, 2008 (incorporated by reference to Exhibit 10.2
      to the Company’s current report on Form 8-K dated May 30, 2008, filed
      June 5, 2008)10.20
            Promissory
      Note dated August 12, 2008 to Bruner Family Trust UTD March 28,
      2005 (incorporated by reference to Exhibit 10.1 to the Company’s
      current report on Form 8-K dated August 12, 2008, filed August 18,
      2008)





70





Regulation
              S-K
      Number
            Exhibit10.21
            Purchase
      and Sale Agreement between PetroHunter Energy Corporation and Sweetpea
      Petroleum Pty Ltd. and Falcon Oil & Gas Ltd. and Falcon Oil & Gas
      Australia Pty Ltd. Dated August 22, 2008 (incorporated by reference to
      Exhibit 10.1 to the Company’s amended current report on Form 8-K dated
      August 25, 2008, filed November 20, 2008)10.22
            Purchase
      and Sale Agreement between PetroHunter Energy Corporation and PetroHunter
      Operating Company and Falcon Oil & Gas Ltd. and Falcon Oil & Gas
      USA, Inc. Dated August 22, 2008 (incorporated by reference to Exhibit 10.2
      to the Company’s amended current report on Form 8-K dated August 25, 2008,
      filed November 20, 2008)10.23
            Loan
      Agreement with Falcon Oil & Gas Ltd. dated October 1, 2008
      (incorporated by reference to Exhibit 10.1 to the Company’s current
      report on Form 8-K dated September 30, 2008, filed October 2,
      2008)10.24
            James
      C. Steinhauser Employment Agreement (incorporated by reference to Exhibit
      10.1 to the Company’s  current report on Form 8-K dated January
      26, 2009, filed January 28, 2009)10.25
            Purchase
      and Sale Agreement between PetroHunter Energy Corporation, PetroHunter
      Operating company and Sweetpea Petroleum Pty Ltd. and Falcon Oil & Gas
      Ltd., Falcon Oil & Gas USA, Inc. and Falcon Oil & Gas Australia
      Pty Ltd. dated May 26, 2009 (incorporated by reference to Exhibit 10.1 to
      the Company’s current report on Form 8-K dated May 26, 2009, filed May 27,
      2009)16.1
            Letter
      from Hein & Associates LLP (incorporated by reference to
      Exhibit 16.1 to the Company’s current report on Form 8-K dated
      January 29, 2008, filed February 4, 2008)16.2
            Letter
      from Gordon, Hughes & Banks, LLP (incorporated by reference to Exhibit
      16.1 to the Company’s current report on Form 8-K dated November 3, 2008,
      filed November 7, 2008)21.1
            Subsidiaries
      of the registrant (incorporated by reference to Exhibit 21.1 to the
      Company’s annual report on Form 10-K for the fiscal year ended September
      30, 2007, filed January 15, 2008)31.1
            Rule 13a-14(a)
      Certification of Martin B. Oring31.2
            Rule 13a-14(a)
      Certification of William P. Brand, Jr.32.1
            Certification
      of Martin B. Oring pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      200232.2
            Certification
      of William P. Brand, Jr. pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002