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, 2008oro
            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 2000
            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.  Yes o     No þ





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes o     No þ





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





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.  o





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 o
            Accelerated
      filer oNon-accelerated
      filer o
            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





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
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:
$25.8 million as of March 31, 2008.





As of
December 31, 2008, the registrant had 375,218,544 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 unless otherwise
indicated.








GLOSSARY





Certain
Definitions





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





•
            Bbl—
      One stock tank barrel, or 42 U.S. gallons liquid volume, of crude oil or
      other liquid hydrocarbons.





•
            Bcf— One billion
      cubic feet of natural gas.





•
            Bcfe— One billion
      cubic feet of natural gas
equivalent.





•
            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.





•
            BTU—British Thermal
      Unit.





•
            Condensate
      —An oil-like liquid produced in association with natural gas production
      that condenses from natural gas as it is produced and delivered into a
      separator or similar equipment and collected in tanks at each well prior
      to the delivery of such natural gas to the natural gas gathering pipeline
      system.





•
            MBbl
      —One thousand barrels.





2


•
            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.





•
            MMBbl
      —One million barrels of oil or other liquid
  hydrocarbons.





•
            MMcf
      —One million cubic feet of natural
gas.





•
            MBOE
      —One thousand BOE.





•
            MMBOE
      —One million BOE.





•
            MMBTU—One million
      British Thermal Units.





Terms
used to describe the Company’s interests in wells and acreage





•
            Gross
      oil and natural gas wells or acres—The
      Company’s gross wells or gross acres represent the total number of wells
      or acres in which the Company owns a working
  interest.





•
            Net
      oil and natural gas wells or acres—
      Determined by multiplying “gross” oil and natural gas wells or acres by
      the working interest that the Company owns in such wells or acres
      represented by the underlying
properties.





•
            Prospect—A
      location where hydrocarbons such as oil and gas are believed to be present
      in quantities which are economically feasible to
  produce.





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).  3
 Prices
      include consideration of changes in existing prices provided only by
      contractual arrangements, but not on escalations based upon future
      conditions.





(a)
            Reservoirs
      are considered proved if economic producibility is supported by either
      actual production or conclusive formation test. The area of a reservoir
      considered proved includes (1) that portion delineated by drilling and
      defined by gas-oil and/or oil-water contacts, if any; and (2) the
      immediately adjoining portions not yet drilled, but which can be
      reasonably judged as economically productive on the basis of available
      geological and engineering data. In the absence of information on fluid
      contacts, the lowest known structural occurrence of hydrocarbons controls
      the lower proved limit of the reservoir.(b)
            Reserves
      which can be produced economically through application of improved
      recovery techniques (such as fluid injection) are included in the proved
      classification when successful testing by a pilot project, or the
      operation of an installed program in the reservoir, provides support for
      the engineering analysis on which the project or program was
      based.(c)
            Estimates
      of proved reserves do not include the following: (1) oil that may become
      available from known reservoirs but is classified separately as “indicated
      additional reserves”; (2) crude oil, natural gas, and natural gas liquids,
      the recovery of which is subject to reasonable doubt because of
      uncertainty as to geology, reservoir characteristics, or economic factors;
      (3) crude oil, natural gas, and natural gas liquids, that may occur in
      undrilled prospects; and (4) crude oil, natural gas, and natural gas
      liquids, that may be recovered from oil shales, coal, gilsonite and other
      such sources.





•
            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.





Terms
used to describe seismic operations





•
            Seismic
      data—
      Oil and natural gas companies use seismic data as their principal source
      of information to locate oil and natural gas deposits, both to aid in
      exploration for new deposits and to manage or enhance production from
      known reservoirs. To gather seismic data, an energy source is used to send
      sound waves into the subsurface strata. These waves are reflected back to
      the surface by underground formations, where they are detected by
      geophones which digitize and record the reflected waves. Computers are
      then used to process the raw data to develop an image of underground
      formations.





•
            2-D
      seismic data—
      Until recently, 2-D seismic survey data has been the standard acquisition
      technique used to image geologic formations over a broad area. 2-D seismic
      data is collected by a single line of energy sources which reflect seismic
      waves to a single line of geophones. When processed, 2-D seismic data
      produces an image of a single vertical plane of sub-surface
      data.





•
              3-D
      seismic data— 3-D seismic data is collected using a grid of energy
      sources, which are generally spread over several miles. A 3-D survey
      produces a three dimensional image of the subsurface geology by collecting
      seismic data along parallel lines and creating a cube of information that
      can be divided into various planes,  4
 thus
      improving visualization. Consequently, 3-D seismic data is generally
      considered a more reliable indicator of potential oil and natural gas
      reservoirs in the area
evaluated.





Terms
used to describe certain property disclosures





•
            Compressional
      events—
      Earth forces that are horizontal, compressional (tectonic) forces causing
      rocks to compress or shorten commonly into anticlines (hills) with
      associated breakage of rocks (faults) in which one slab of rock is forced
      over another buckling the earth into a series of hills (anticlines) and
      associated faults.  These buckling forces can occur repeatedly
      throughout geologic time and any such time is referred to as a
      compressional event.  They are the opposite of extensional or
      tensional forces where rocks are pulled
apart.





•
            Drill
      stem tests—
      A test of a reservoir conducted within a well that has been drilled but
      not cased; i.e. in an open hole.  The test involves isolating
      the desired rock unit in the subsurface by a series of packers which
      separate the rock being investigated from fluids or gases from horizons
      above or below it.  The Drill Stem Test (or DST) is designed to
      allow the fluids and gases to flow into a string of pipe connected to the
      surface where the rates and volumes of the material from the reservoir are
      measured to determine commerciality of the
    well.





•
            Fractured
      shales and basin centered gas accumulations—
      Types of unconventional reservoirs being actively developed in the world
      in which hydrocarbons are stored within shales and low permeability
      sandstones in a continuous phase.  They generally produce little
      or no water.  They are different than conventional reservoirs
      where oil and gas are buoyed by water and hydrocarbons are pushed to the
      well due to the buoyancy of oil and gas relative to water (lighter and
      forced out of the formation).  Conventional accumulations
      typically are found on buried hills (anticlines) in the subsurface whereas
      fractured shales and basin centered gas accumulations are found in the
      central parts of central parts of basins
      (synclines).





•
            Gas
      window—
      Refers to the depth at which the process of turning kerogen into gas can
      occur – generally found in the 100-200+ degree Celsius interval (3-6 km
      depth).





•
            Imbricate
      thrust faults—
      When rocks are broken in the subsurface by compressional or tensional
      forces (tectonic) they are either pushed together or override adjacent
      rocks in a type of fault known as a reverse fault or thrust
      fault.  When several of these thrust or reverse faults are found
      in succession, they are said to be imbricated thrust
      faults.  Conversely, if the rocks are pulled apart by tectonic
      forces the faults where the rocks are broken are said to be normal
      (extensional) faults.





•
            Lenticular
      sand bodies—
      Conventional reservoirs that contain hydrocarbons are generally contained
      in either sandstones or carbonates.  Sandstone reservoirs come
      in many different geometries; some very widespread or blanket sand bodies,
      some in long ribbons or strips of sand or channelized sand bodies,
      sometimes they occur as a lense of sand; thinning in all directions from
      their thickest part and these are called lenticular sand bodies and
      describes the geometry of the sandstone
  reservoir.





•
            Mudlog— The record of a well that is
      being drilled that contains a description of the types of rocks being
      encountered in the subsurface and brought to the surface after being
      drilled by mud circulated in the borehole is called a
      mudlog.  Commonly, the presence of hydrocarbons is also
      indicated on the mudlog as recorded by a heated gas wire and recording
      device measuring the presence of hydrocarbons in the circulating mud at
      the surface.  The mudlog is generated to describe the rocks
      encountered, the presence or absence of hydrocarbons, and a variety of
      other measurements of the circulating mud parameters such as its weight,
      viscocity, drill bit size and type of
  bit.





•
            Oil
      window— Depth at which the process of turning kerogen into oil can
      occur – generally from 6,000-7,000 ft. to 13,000-15,000 ft.





•
              Petrophysical
      analyses — After a well has been drilled, most wells are logged
      with a series of devices that measure properties of the rock including its
      resistivity, its porosity as measured by it sonic properties or density
      properties.  The combination of all of the measurements is then
      evaluated by an expert in well log evaluations and this person is referred
      to as a petrophysicist.  A petrophysical analysis is the result
      of this  5
 investigation
      and is designed to evaluate the depth, thickness, presence and
      commerciality of hydrocarbons in the
well.





•
            Strike-slip
      movement—
      Strike-slip movement is the lateral movement of one slab of rock relative
      to an adjacent slab.  It is generated by earth (tectonic) forces
      where rocks break and are forced to move adjacent to each other in a
      generally horizontal direction.  Movement along the plane of the
      fault is said to be in the strike direction (as opposed to the dip
      direction--across the movement).  So a strike slip motion is
      motion along the fault parallel to the map direction of the fault when
      observed from the surface (or on a
map).





•
            Total
      Organic Content (“TOC”)—
      Oil and gas form from conversion of organic matter when buried, and
      converted into petroleum by the combined effects of heat and time. Buried
      organic matter is called kerogen, and a petroleum source is any rock that
      contains enough kerogen to generate oil or gas. Most good source rocks are
      shales with a TOC of at least 2% and can generate oil or natural gas
      depending on the type of kerogen and the pressure and
      temperature they are subjected
to.





•
            Unconventional
      fractured shale play—
      Unconventional reservoirs were described above as generally not having a
      water buoyancy component.  Oil and gas are mostly derived from a
      source bed generally an organically rich shale or coal.  Shales
      generally do not have as much storage capacity as more porous sand or
      carbonate reservoirs; however where they are broken up by earth (tectonic)
      forces they sometimes fracture and hydrocarbons are stored in these
      fractured spaces.  Hydrocarbons focused on a specific,
      hydrocarbon bearing, fractured shale are said to be in an unconventional
      fractured shale play.





•
            Under-balanced—
      In the subsurface, rocks experience different pressures and temperatures
      related to the fluids and gases present in response to increasing depth of
      burial.  If a well only encounters water bearing rock, it is
      said to be hydrostatic or normally pressured and pressures will reflect
      the weight of water or 0.43 psi (pounds per square inch) of pressure per
      foot drilled.  If however, pressures are encountered in the
      rocks in excess of this pressure they are said to be overpressured; i.e.
      greater than 0.43 psi per foot; or underpressured if less than 0.43 psi
      per foot.  Drilling operations vary considerably if among
      normally pressured, under-balance (under-pressured) and over-pressured
      rocks.





•
            Vitrinite
      reflectance—
      A measurement of the maturity of organic matter with respect to whether it
      has generated hydrocarbons or could be an effective source rock. The
      reflectivity of at least 30 individual grains of vitrinite from a rock
      sample is measured under a microscope. The measurement is given in units
      of reflectance, % Ro, with typical values ranging from 0% Ro to 3% Ro.
      Strictly speaking, the plant material that forms vitrinite did not occur
      prior to Ordovician time, although geochemists have established a scale of
      equivalent vitrinite reflectance for rocks older than
      Ordovician.








6





PETROHUNTER
ENERGY CORPORATION





FORM 10-K





FOR
THE FISCAL YEAR ENDED


SEPTEMBER
30, 2008


INDEX





PagePART IItem
      1.
                      Business
                      8Item
      1A.
                      Risk
      Factors
                      16Item
      1B.
                      Unresolved
      Staff Comments
                      29Item
      2.
                      Properties
                      29Item
      3.
                      Legal
      Proceedings
                      35Item
      4.
                      Submission
      of Matters to a Vote of Security Holders
                      35PART IIItem
      5.
                      Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                      35Item
      6.
                      Selected
      Financial Data
                      35Item
      7.
                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
                      36Item
      7A.
                      Quantitative
      and Qualitative Disclosures About Market Risk
                      47Item
      8.
                      Financial
      Statements and Supplementary Data.
                      47Item
      9.
                      Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure
                      87Item
      9A.
                      Controls
      and Procedures
                      89Item
      9B.
                      Other
      Information
                      91PART IIIItem
      10.
                      Directors,
      Executive Officers and Corporate Governance
                      91Item
      11.
                      Executive  Compensation
                      91Item
      12.
                      Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                      91Item
      13.
                      Certain
      Relationships and Related Transactions, and Director
      Independence
                      91Item
      14.
                      Principal
      Accounting Fees and Services
                      91PART IVItem
      15.
                      Exhibits,
      Financial Statement Schedules
                      92





7


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”), through the operations of its wholly-owned subsidiaries, is a
global oil and gas exploration and production company with primary assets
consisting of working interests in oil and gas leases and related assets in
various oil and natural gas prospects. We are a development stage global oil and
gas exploration and production company whose business consists principally of
acquiring and developing unconventional and conventional natural gas and oil
prospects that we believe have a high probability of economic success. Since our
inception in 2005, our business activities have been financed by raising capital
through the sale of common stock and convertible notes.  Currently, we
own property in Colorado, where we have drilled five wells on our Buckskin Mesa
property; in Australia, where we have drilled one well on our property in the
Northern Territory; and in Montana, where we hold a land position in the Bear
Creek area.  The wells on these properties have not yet commenced oil
and gas production. During the period ended September 30, 2008, we owned working
interests in eight additional wells in Colorado which were operated by EnCana
Oil & Gas USA (“EnCana”) and were producing gas as of September 30, 2008. In
December 2008, we sold our interests in these wells.  In November
2007, we sold 66,000 net acres of land and two wells in Montana and 173,738
acres of land in Utah and on May 30, 2008, we sold 605 net acres, 16 wells which
had been drilled and cased but not completed or connected to a pipeline and
rights to participate in an additional 8 wells in the Southern Piceance Basin in
Colorado. Our remaining properties are managed and operated in two geographic
areas: Piceance Basin, Colorado and Australia.





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).





On
November 8, 2005, GSL formed PaleoTechnology, Inc. (“Paleo”) as a
wholly-owned subsidiary for the purpose of exploring and developing new products
and processes using by-products of petroleum extraction environments. On
September 11, 2006, GSL formed Petronian Oil Corporation, now known as
PetroHunter Heavy Oil Ltd., as a wholly-owned subsidiary for the purpose of
holding and developing its heavy oil assets. 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., now 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.





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






8




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 2000, Denver, CO 80202. The telephone number is
(303) 572-8900, the facsimile number is (720) 889-8371. Our periodic
and current reports filed with the SEC can be found on our website and on the
SEC’s website atwww.sec.gov.





Business
Strategy





During
the period ended September 30, 2008 we continued to focus our property
development efforts in two core areas: Australia and the Piceance Basin,
Colorado. Accordingly, during the year ended September 30, 2008 we completed a
series of asset sale transactions, where we sold assets that we did not consider
central to our business plan, in order to reduce a substantial accumulated
working capital deficit and provide a path to achieve our future operating
objectives in our core development projects. In addition, we sold certain
working interests in our areas of focus in Australia and Colorado to Falcon Oil
& Gas Ltd. (“Falcon”), a related party, with whom we plan to develop those
properties. In August 2008, we entered into an agreement with Falcon to sell a
50% working interest in four exploration permits covering our 7 million-acre
prospect in the Northern Territory, Australia (the “Beetaloo Basin”), and closed
this transaction on September 30, 2008. We will continue to be the operator in
the Beetaloo Basin. We also entered into a binding agreement with Falcon to sell
a 25% working interest in five wells located within our 20,000-acre Buckskin
Mesa Project located in the Piceance Basin, Colorado, and to undertake a
completion and testing program with respect of these five wells, and closed this
transaction in November 2008. The agreement provides Falcon an option (“Buckskin
Option”) to purchase a 50% working interest in our entire Buckskin Mesa Project,
and also gives Falcon the option to become the operator if additional
consideration is paid upon the exercise of the Buckskin Option. The testing and
completion activities are underway and are expected to be completed early in
2009, at which time Falcon will have a limited window of time in order to
determine whether it will exercise the Buckskin Option. In the event Falcon
elects not to exercise the Buckskin Option for any reason, we will be free to
pursue other potential development partners in relation to our Buckskin Mesa
Project.





Marc A.
Bruner, our largest beneficial shareholder, is the Chairman, President, and
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 with respect
to transactions contemplated by these agreements.





Piceance
Basin, Colorado


Buckskin Mesa
Project.  As of September 30, 2008, we have drilled five
wells within our 20,000-acre Buckskin Mesa Project area. All five wells are
currently shut-in, awaiting the construction of a gas gathering system. The
first PetroHunter operated well, the Anderson 6-16, was drilled to a total depth
of 10,785 feet through the Williams Fork, Cozzette, Corcoran, and Sego sands
into the Cretaceous Mancos Shale. The initial well was followed in close
succession with the drilling of the Anderson 13-10, the Lake 16-21, Anderson
4-21, and the Lake 6-22 wells. Completion operations have begun on the Lake
16-21 and Lake 6-22. The remaining wells will commence as soon as possible after
the gathering system is in place, as discussed further in "Marketing and Pricing
- Natural Gas Marketing" later in this section. Future development drilling is
expected to follow thereafter.





Piceance Project.We also own
an additional 1,233 gross acres and 482 net acres in the Piceance Basin. As of
September 30, 2008, all of our producing wells are located in this area, along
with other proved undeveloped locations. We reasonably expect continued gas
production from the Williams Fork formation and from the deeper Cozzette,
Corcoran, and Sego sands, all of Cretaceous age.





Australia


Northwest Shelf Project.In
March 2007, Sweetpea Petroleum (“Sweetpea”) acquired Exploration Permit
#WA-393-P in the Barrow Sub-Basin of the Carnavon Basin on the Northwest Shelf
of Australia.  Subsequently, Sweetpea acquired the available
seismic on and adjacent to the permit and mapped four stratigraphic horizons.
Initial seismic mapping of the permit area demonstrates three structures: one
structure entirely on the block and two partially on the block in water depths
of approximately 600 feet. These structures are within about 80 kilometers of
the major discovery in the Triassic Mungaroo Formation at the Chevron Clio-1
well on the Northwest Shelf in this basin,






9




which
occur in deeper water depths of about 3,000 feet. Additional geophysical
analysis and mapping are ongoing on the block.





Beetaloo Basin Project.
Sweetpea also has four exploration permits in the Northern Territory, comprising
the Beetaloo Basin Project. In September 2007, Sweetpea drilled and cased one
well the Shenandoah #1 to a total depth of 1,555 meters (4,740 feet) in the area
covered by Exploration Permit (“EP”) 98 in the Beetaloo Basin. The test was a
twin (50 meter distance) from the Balmain #1 well and was designed to test the
Bessie Creek Formation at a depth of approximately 3,000 meters. The well was
completed to the drilled depth of 1,555 meters and cased, in anticipation of
later completing the well to the targeted total depth.  It is expected
that this well will be deepened to evaluate the petroleum potential
there.  Additionally, we plan to drill four wells prior to December
31, 2009 to fulfill our obligations under EP 98 and EP 117, with additional
activity planned for EP 76 and EP 99.  Evaluation of drilling results
in the Shenandoah #1 and seven other existing wells in the Beetaloo Basin
indicate oil and gas prospectivity in the Kyalla Shale and a drilling and
stimulation program to test these horizons is planned to commence in the Spring
of 2009.





In
addition to the Beetaloo Basin and Northwest Shelf Projects, we have also
applied for two additional exploration permits in the Northern Territory in
Australia covering an additional 1.5 million acres, which are adjacent to our
Beetaloo Basin Project acreage.





Montana
Assets


In
November 2007, we sold all of our interest in our Heavy Oil Projects, including
the West Rozel, Fiddler Creek, and Promised Land Projects in Utah and
Montana.  We continue to hold an acreage position of 15,990 net acres
where our objective is to produce methane from multiple thin coal lenses;
however this project is currently on hold.





Financing
Strategy


During
the year ended September 30, 2008, we completed a series of financing and asset
sale transactions that were intended to reduce a substantial accumulated working
capital deficit and provide a path to achieve our future operating objectives in
our core projects.  In addition, our transactions with Falcon to sell
significant working interests in our core properties were consummated in order
to reduce our aggregate capital requirements while increasing the probability of
overall success with our core development projects.





While we
have completed the sale of the majority of our non-core assets as of December
31, 2008, we currently hold a significant number of shares of Falcon stock,
which initially comprised $20.0 million of the total consideration of the
Beetaloo Basin transaction. Additionally, if Falcon exercises the Buckskin
Option, we expect to realize significant additional consideration and Falcon
will carry significant capital costs in our Buckskin Mesa Project. We also
believe we have viable debt and/or equity financing alternatives that together,
will allow us to achieve our operating plans and objectives.  However,
the value of the Falcon stock we have received from the Beetaloo Basin
transaction has been extremely volatile since we entered into the definitive
agreements with Falcon in August 2008, and the overall value of the stock had
declined to approximately one third of its transaction value as of December 31,
2008.  Further, we entered into a secured note agreement with Falcon
in October 2008 where we borrowed $5.0 million against the value of the Falcon
stock.   There can be no assurance we will be successful in
ultimately realizing sufficient net cash proceeds from the sale of the Falcon
stock, in order for this asset to become a meaningful source of financing
for the development of our properties and financing our ongoing operating
costs.  Similarly, there can be no assurance Falcon will exercise the
Buckskin Option, and we may be unable to successfully secure additional debt
and/or equity financing in amounts and under terms that will allow us to meet
our operating plans and objectives.





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 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.





10


Natural
Gas Marketing


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 is the operator of our 8 producing gas wells in production, which we
held until we sold our working interests in these wells on December 30, 2008,
effective December 1, 2008. As of September 30, 2008, our customers were
predominantly located in the western United States — primarily California and
the Pacific Northwest, as well as the Front Range area of Colorado and in Utah.
As the Rockies Express Pipeline, LLC (“REX”) becomes operational (as discussed
below), this customer base is expected to expand to include customers in the
mid-western and eastern United States. The sale of our natural gas was “as
produced”. As such, we did not maintain any significant inventories or
imbalances of natural gas. We did not have any outstanding, uncollectible
accounts for our natural gas sales at September 30, 2008.





We have
entered into a Gas Gathering Agreement with CCES Piceance Partners I, LLC
(“CCES”), a service provider that gathers, compresses and processes natural gas
owned or controlled by us from our producing wells in the Piceance Basin in
Colorado. Under this agreement, CCES will expand its facilities capacity in
Colorado to accommodate growing volumes from wells in which we own an interest.
As part of the Gas
Gathering Agreement, we have guaranteed that, should there be a mutual failure
to execute a formal agreement for long-term gas gathering services in the
future, we will repay CCES for certain costs they have incurred in relation to
the development of a gas gathering system and repurchase certain gas gathering
assets we sold to CCES.This agreement contains a multi-year
commitment for midstream services. These facilities remove natural gas liquids
from our gas (and gas of others) making it sufficient quality to be accepted
into the natural gas transmission pipelines serving the area.  We have
contractually secured capacity at this facility for the processing of our
natural gas. We believe that the capacity of the midstream infrastructure
related to our production will continue to be adequate to allow us to sell
essentially all of our available production.





Because
local natural gas production typically exceeds local demand for natural gas
during non-winter months, the Rocky Mountain Region is usually a net-exporter of
natural gas. As a result, natural gas production in Colorado has historically
sold at a discount relative to other U.S. natural gas production sources or
market areas. These regional pricing differentials or discounts are typically
referred to as “basis” or “basis differentials”. We have seen significant basis
differentials for our Colorado production versus the Henry Hub (“Henry Hub”)
pricing reference point in south Louisiana in the past. This trend continued and
actually became more pronounced in 2007 and 2008. As a result, we realized
prices that were significantly lower than those received by companies with
natural gas production in other regions of the U.S.





During
portions of the quarter ending September 30, 2008, we realized natural gas
prices that were lower than those seen in previous years in the Colorado region.
The market price for natural gas in the Rockies generally, and in Colorado
specifically, is influenced by a number of regional and national factors, all of
which are unpredictable and are beyond our ability to control. These factors
include, among others, weather, natural gas supplies, natural gas demand, and
natural gas pipeline capacity to export gas from the Rockies. Continued robust
growth in natural gas production from natural gas fields in Colorado during 2007
and 2008, coupled with a nearly 100% utilization of existing natural gas
pipeline export capacity, caused natural gas prices in the Rocky Mountain Region
to decrease dramatically during our fiscal fourth quarter ended September 30,
2008 and continuing into December 2008. In contrast, with the onset of colder
weather, and in response to voluntary producer shut-ins of natural gas
production by us and others, the widening basis differentials for Rockies
production became much less pronounced during the last calendar quarter of 2007.
For example, the differential between prevailing Colorado prices and the
benchmark Henry Hub price ranged from more than $5 per MMBtu discount in October
2007 to a narrower discount of approximately $1.20 per MMBtu in December 2007,
resulting in an increase in natural gas pricing during this period. In the years
past, increases in pipeline capacity to transport production from Rocky Mountain
production areas to markets in the west have served to improve (i.e. lower)
basis differentials for Colorado natural gas production. (Examples include: Kern
River Pipeline — in service May 2003; the Cheyenne Plains Pipeline — in service
February 2005; and Rockies Express Pipeline (“REX”) expansion to Cheyenne,
Wyoming placed into service on February 14, 2007). These expansions of pipeline
export capacity have historically reduced but not entirely eliminated the basis
differential for natural gas prices in Colorado when compared to prices at the
Henry Hub pricing reference point.





11


REX
begins at the Opal Processing Plant in Colorado and traverses Wyoming and
several other states to an ultimate terminus in eastern Ohio. This pipeline is
ultimately projected to cover more than 1,800 miles and is designed as a
large-diameter (42”), high-pressure natural gas pipeline. REX is an interstate
pipeline and is subject to the jurisdiction of the United States Federal Energy
Regulatory Commission (“FERC”).





There
have been and continue to be numerous other proposed pipeline projects that have
been announced to transport growing Rockies and Colorado natural gas production
to a variety of geographically diverse markets in different parts of North
America. There are numerous such proposals that have been presented to us in
recent months, which, if constructed, would provide us with additional outlets
and market access for our natural gas production from Colorado. We continuously
evaluate such proposals and may make additional commitments to one or more such
pipeline projects in the future in an effort to cause additional pipeline
infrastructure and capacity to be added to the pipeline network.





Oil
Marketing


We market
our Colorado condensate (which is an oil-like product that is produced
coincident to our natural gas production) from gas wells located in the Piceance
Basin to various purchasers. The pricing of our condensate production is based
on NYMEX crude futures daily settlement prices, less a negotiated location and
transportation discount and is denominated in U.S. dollars per barrel. Our
condensate production is gathered from our Colorado well locations by tanker
trucks and is then shipped to other locations for injection into crude oil
pipelines or other facilities.  Through September 30, 2008, revenue
from our condensate production in Colorado has been insignificant.





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, 2008, we had 20 total employees, all full time. In addition,
we utilized the services of 10 full time consultants.





Regulation





Oil
and Gas Regulation


The
availability of a ready market for oil and natural gas production depends upon
numerous factors beyond our control. These factors may include, among other
things, state and federal regulation of oil and natural gas production and
transportation, as well as regulations governing environmental quality and
pollution control, state limits on allowable rates of production by a well or
proration unit, the amount of oil and natural gas available for sale, the
availability of adequate pipeline and other transportation and processing
facilities and the marketing of competitive fuels. For example, a productive
natural gas well may be “shut-in” because of a lack of an available natural gas
pipeline in the areas in which we may conduct operations. State and federal
regulations are generally intended to prevent waste of oil and natural gas,
protect rights to produce oil and natural gas between owners in a common
reservoir, control the amount of oil and natural gas produced by assigning
allowable rates of production and control contamination of the environment.
Pipelines and natural gas plants operated by other companies that provide
midstream services to us are also subject to the jurisdiction of various
federal, state and local agencies.





Our sales
of natural gas are affected by the availability, terms and costs of
transportation both in the gathering systems that transport the natural gas from
the wellhead to the interstate pipelines and in the interstate pipelines
themselves. The rates, terms and conditions applicable to the interstate
transportation of natural gas by pipelines are regulated by the FERC under the
Natural Gas Act, as well as under Section 311 of the Natural Gas Policy Act.
Since 1985, the FERC has implemented regulations intended to increase
competition within the natural gas industry by making natural gas transportation
more accessible to natural gas buyers and sellers on an open access,
non-discriminatory basis. On February 25, 2000, the FERC issued a statement of
policy and a final rule concerning alternatives to its traditional
cost-of-service rate-making methodology to establish the rates interstate
pipelines may






12




charge
for services. The final rule revises the FERC’s pricing policy and current
regulatory framework to improve the efficiency of the market and further enhance
competition in natural gas markets. The FERC is also considering a number of
regulatory initiatives that could affect the terms and costs of interstate
transportation of natural gas by interstate pipelines on behalf of natural gas
shippers, including policy inquiries about natural gas quality and
interchangeability, selective discounting of transportation services by
pipelines to shippers, and proposed rules governing pipeline creditworthiness
and collateral standards. Because these regulatory initiatives have not been
made final, the approach the FERC will take and the potential impact on natural
gas suppliers remain unclear.





Sales of
oil are also affected by the availability, terms and costs of transportation.
The rates, terms, and conditions applicable to the interstate transportation of
oil by pipelines are regulated by the FERC under the Interstate Commerce Act.
The FERC has implemented a simplified and generally applicable ratemaking
methodology for interstate oil pipelines to fulfill the requirements of Title
XVIII of the Energy Policy Act of 1992 comprised of an indexing system to
establish ceilings on interstate oil pipeline rates.





If we
conduct operations on federal, tribal or state lands, such operations must
comply with numerous regulatory restrictions, including various operational
requirements and restrictions, nondiscrimination statutes and royalty and
related valuation requirements. In addition, some operations must be conducted
pursuant to certain on-site security regulations, bonding requirements and
applicable permits issued by the Bureau of Land Management ("BLM") or Minerals
Management Service, Bureau of Indian Affairs, tribal or other applicable
federal, state and/or Indian Tribal agencies.





The
Mineral Leasing Act of 1920 (“Mineral Act”) prohibits direct or indirect
ownership of any interest in federal onshore oil and gas leases by a foreign
citizen of a country that denies “similar or like privileges” to citizens of the
United States. Such restrictions on citizens of a non-reciprocal country include
ownership or holding or controlling stock in a corporation that holds a federal
onshore oil and gas lease. If this restriction is violated, the corporation’s
lease can be canceled in a proceeding instituted by the United States Attorney
General. Although the regulations of the BLM (which administers the Mineral Act)
provide for agency designations of non-reciprocal countries, there are presently
no such designations in effect. We own interests in numerous federal onshore oil
and gas leases. It is possible that holders of our equity interests may be
citizens of foreign countries, which could be determined to be citizens of a
non-reciprocal country under the Mineral Act.





See “Risk
Factors” for a discussion of the risks involved in our international
operations.





Environmental
Regulations


General.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. 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.





Solid
and Hazardous Waste.Legislation has been proposed in the past and
continues to be evaluated in Congress from time to time that would reclassify
certain oil and gas exploration and production wastes as “hazardous wastes”.
This reclassification would make these wastes subject to much more stringent
storage, treatment, disposal and clean-up requirements, which could have a
significant adverse impact on our operating costs. Initiatives to further
regulate the disposal of oil and gas wastes are also proposed in certain states
from time to time and may include initiatives at the county, municipal and local
government levels. These various initiatives could have a similar adverse impact
on our operating costs.





Although
oil and gas wastes generally are exempt from regulation as hazardous wastes
(“Hazardous Wastes”), under the federal Resource Conservation and Recovery Act
(“RCRA”) and comparable state statutes, it is possible some wastes the Company
generates presently or in the future may be subject to regulation under RCRA and
state analogs. The Environmental Protection Agency (“EPA”) and various state
agencies have limited the disposal options






13




for
certain wastes, including hazardous wastes and is considering adopting stricter
disposal standards for non-hazardous wastes. Furthermore, certain wastes
generated by our oil and natural gas operations that are currently exempt from
treatment as Hazardous Wastes may in the future be designated as Hazardous
Wastes under the RCRA or other applicable statutes, and therefore be subject to
more rigorous and costly operating and disposal requirements.





Superfund.The regulatory burden of environmental laws and regulations increases our
cost and risk of doing business and consequently affects our profitability. The
Federal Comprehensive Environmental Response, Compensation and Liability Act
(“CERCLA”), also known as the “Superfund” law, imposes liability, without regard
to fault, on certain classes of persons with respect to the release of a
“hazardous substance” into the environment. These persons include the current or
prior owner or operator of the disposal site or sites where the release occurred
and companies that transported, disposed or arranged for the transport or
disposal of the hazardous substances found at the site. Persons who are or were
responsible for releases of hazardous substances under CERCLA may be subject to
joint and several liability for the costs of cleaning up the hazardous
substances that have been released into the environment and for damages to
natural resources, and it is not uncommon for the federal or state governments
to pursue such claims. CERCLA also authorizes the
EPA and, in some cases, third parties to take actions in response
to threats to the public health or the environment and to seek to recover from
the potentially responsible parties (“PRP”) the costs of such action.
Although CERCLA generally exempts “petroleum” from the definition of
Hazardous Substance, in the course
of its operations, we have generated and will generate wastes that fall
within CERCLA’s definition of
Hazardous Substances. We may also be an owner or operator of facilities
on which
Hazardous Substances have been released. We may be responsible under CERCLA for
all or part of the costs to clean up
facilities at which such substances have been released and for natural resource
damages, as a past or present owner or
operator or as an arranger. To our knowledge, we have not been named a PRP
under CERCLA
nor have any prior owners or operators of its properties been named as PRP’s
related to their ownership or operation of such
property.





National
Environmental Policy Act.As noted, the federal National Environmental
Policy Act (“NEPA”) provides that, for major federal actions significantly
affecting the quality of the human environment, the federal agency taking such
action must prepare an Environmental Impact Statement (“EIS”). In the EIS, the
agency is required to evaluate alternatives to the proposed action and the
environmental impacts of the proposed action and of such alternatives. Our
actions, such as drilling on federal lands, to the extent the drilling requires
federal approval, may trigger the requirements of the NEPA, and may trigger the
requirement that an EIS be prepared. The requirements of the NEPA may result in
increased costs, significant delays and the imposition of restrictions or
obligations, including but not limited to the restricting or prohibiting of
drilling on our properties.





Oil
Pollution Act.The Oil Pollution Act of 1990 (“OPA”), which amends and
augments oil spill provisions of the Clean Water Act (“CWA”), imposes certain
duties and liabilities on certain “responsible parties” related to the
prevention of oil spills and damages resulting from such spills in or
threatening United States waters or adjoining shorelines. A liable “responsible
party” includes the owner or operator of a facility, vessel or pipeline that is
a source of an oil discharge or that poses the substantial threat of discharge
or, in the case of offshore facilities, the lessee or permittee of the area in
which a discharging facility is located. The OPA assigns liability, which
generally is joint and several, without regard to fault, to each liable party
for oil removal costs and a variety of public and private damages. Although
defenses and limitations exist to the liability imposed by OPA, they are
limited. In the event of an oil discharge or substantial threat of discharge, we
could be liable for costs and damages.





Air
Emissions.Our operations are subject to local, state and federal
regulations for the control of emissions from sources of air pollution. Federal
and state laws generally require new and modified sources of air pollutants to
obtain permits prior to commencing construction, which may require, among other
things, stringent, technical controls. Other federal and state laws designed to
control hazardous (toxic) air pollutants, might require installation of
additional controls. Administrative enforcement agencies can bring actions for
failure to strictly comply with air pollution regulations or permits and
generally enforce compliance through administrative, civil or criminal
enforcement actions, resulting in fines, injunctive relief and
imprisonment.





Clean
Water Act.The CWA restricts the discharge of wastes, including produced
waters and other oil and natural gas wastes, into waters of the United States, a
term broadly defined. Under the Clean Water Act, permits must be obtained for
the routine discharge pollutants into waters of the United States. The CWA
provides for administrative,






14




civil and
criminal penalties for unauthorized discharges, both routine and accidental, of
pollutants and of oil and hazardous substances. It imposes substantial potential
liability for the costs of removal or remediation associated with discharges of
oil or hazardous substances. State laws governing discharges to water also
provide varying civil, criminal and administrative penalties and impose
liabilities in the case of a discharge of petroleum or its derivatives, or other
hazardous substances, into state waters. In addition, the EPA has promulgated
regulations that may require permits to discharge storm water runoff, including
discharges associated with construction activities.





Endangered
Species Act.The Endangered Species Act (“ESA”) was established to
protect endangered and threatened species. Pursuant to that act, if a species is
listed as threatened or endangered, restrictions may be imputed on activities
adversely affecting that species’ habitat. Similar protections are offered to
migratory birds under the Migratory Bird Treaty Act. We conduct operations on
federal oil and natural gas leases that have species, such as raptors that are
listed as threatened or endangered and also sage grouse or other sensitive
species, that potentially could be listed as threatened or endangered under the
ESA. The U.S. Fish and Wildlife Service must also designate the species’
critical habitat and suitable habitat as part of the effort to ensure survival
of the species. A critical habitat or suitable habitat designation could result
in further material restrictions to federal land use and may materially delay or
prohibit land access for oil and natural gas development. If we were to have a
portion of our leases designated as critical or suitable habitat, it may
adversely impact the value of the affected leases.





OSHA
and other Regulations.We are subject to the requirements of the federal
Occupational Safety and Health Act (“OSHA”) and comparable state statutes. The
OSHA hazard communication standard, the EPA community right-to-know regulations
under Title III of CERCLA and similar state statutes require a company to
organize and/or disclose information about hazardous materials used or produced
in its operations.





We believe that we are in
substantial compliance with current applicable environmental laws and
regulations and that continued compliance with existing requirements will not
have a material adverse impact on us. We believe that the operators of
the properties in which we have an interest are in substantial compliance with
applicable laws, rules and regulations relating to the control of air emissions
at all facilities on those properties. Although we maintain insurance against
some, but not all, of the risks described above, including insuring the costs of
clean-up operations, public liability and physical damage, there is no assurance
that the insurance will be adequate to cover all such costs, that the insurance
will continue to be available in the future or that the insurance will be
available at premium levels that justify our purchase. The occurrence of a
significant event not fully insured or indemnified against could have a material
adverse effect on our financial condition and operations. Compliance with
environmental requirements, including financial assurance requirements and the
costs associated with the cleanup of any spill, could have a material adverse
effect on capital expenditures, earnings or competitive position. We do believe,
however, that our operators are in substantial compliance with current
applicable environmental laws and regulations. Nevertheless, changes in
environmental laws have the potential to adversely affect operations. At this
time, we have no plans to make any material capital expenditures for
environmental control facilities.





Environmental
Matters


While we
are not currently subject to environmental-related litigation, the nature of our
business is such that we are subject to constantly changing environmental laws
and regulations adopted by federal, state and local governmental authorities in
both the U.S. and Australia.  We would face significant liabilities to
the government and/or other third parties for discharges of oil, natural gas,
produced water or other pollutants into the air, oil, or water, and the cost to
investigate, litigate and remediate such a discharge could materially adversely
affect our business, results of operations and financial
condition.  We encourage readers of this filing to review our risk
factors disclosed in our Item 1A of this Form 10-K for the year ended September
30, 2008 for further discussion of our environmental risks.








15


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.





We are a
development stage oil and gas company and have limited operating history and
production revenue. Our principal activities have been oil and gas drilling and
development activities, raising capital through the sale of our securities and
identifying and evaluating potential oil and gas properties.





The
report of our independent registered public accounting firm on the financial
statements for the year ended September 30, 2008, includes an explanatory
paragraph relating to significant doubt or uncertainty of our ability to
continue as a going concern.  From our inception to September 30,
2008, we have generated a cumulative net loss of $149.5 million. For the 2009
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 or that we acquire 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 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 significant proven reserves, which
increases our difficulties in obtaining traditional financing. During the year
ended September 30, 2008 we have also obtained debt financing from related
parties which we expect will not continue on any meaningful level in the near
future. Although we have made substantial progress in reducing our reported
$37.9 million dollar working capital deficit as of September 30, 2007,
substantially all of our current assets are concentrated in marketable equity
securities we received in conjunction with the sale of a 50% working interest in
certain of our Australian assets. Those securities have experienced a dramatic
decline in value and remain highly volatile.  Further, some of these
securities remain restricted from our use.  Finally, we continue to
have significant lease commitments and drilling obligations to meet, along with
an absence of any meaningful revenue and continue to experience a significant
operating cash burn rate. These and other risks we are facing may cause us to
experience material adverse business consequences, including our inability to
continue in existence.





We
will have difficulty meeting our short-term cash commitments.





As of
September 30, 2008, we had significant contractual obligations to meet
certain drilling commitments during our fiscal year ending September 30,
2009, aggregating $25.8 million.  We plan to raise additional funds to
meet these obligations by selling debt and/or equity securities, by selling our
marketable equity securities, or by entering into farm-out agreements or other
similar types of arrangements. Financing obtained through the sale of our equity
will result in significant dilution to our shareholders.  We have
granted security interests in our assets to lenders, industry partners and
holders of our debentures which limits our ability to sell debt securities since
they will be subordinated to our other security interest holders. As of January
2009, substantially all of our assets are pledged. The existence of security
interests in our assets restricts our ability to sell those assets. We may be
forced to sell assets below market value, and therefore we may not realize the
market value or even the carrying value of those assets upon their
disposition.





On
December 30, 2008, we sold our only revenue producing natural gas properties to
a third party in order to address our immediate cash needs. As a result,
our ongoing cash burn rate has increased, and our overhead structure remains
high, in light of our lack of production revenue.





16


Our
cash flow shortages have created numerous problems for us, and are expected to
create further challenges.





From time
to time, our ongoing cash shortages have created problems such as liens and
foreclosure actions, delays in meeting our debt obligations requiring that we
obtain waivers at further cost to us, and have forced us to undertake several
asset sale transactions that have resulted in significant losses upon their
conveyance.  We expect these conditions to continue in the short term;
however, we have fewer asset sale options available to us, which adds
significant risks to our ability to finance our planned operations.





Our
historical results of operations, along with current economic conditions in our
industry and in the overall global economy, all serve to increase the difficulty
we expect to encounter as we continue to pursue adequate financing for our
planned operations through the sale of debt and/or equity
securities.  In addition, the terms of such sales of securities are
not expected to be favorable, and could result in substantial dilution to our
shareholders and/or extremely high financing costs.





We
continue to carry significant past due vendor obligations, and our inability to
pay our vendors on a timely basis may have an adverse effect on our ability to
secure their future services.





Although
we have made substantial progress in paying down our past due vendor obligations
in the U.S. and in Australia during the year ended September 30, 2008,
significant past due amounts remain outstanding and the satisfaction of these
obligations increases our immediate cash needs.  Until all of our past
due vendor obligations are fully satisfied and we become current, there remains
significant risk that these vendors could take formal collection actions against
us, pursue liens or other legal actions, or potentially force us into
involuntary bankruptcy.  Additionally, our inability to satisfy our
vendor obligations on a timely basis may result in irreparable harm to our
relationship with them and their willingness to continue to do business with us
in the future, under terms that would be acceptable to us.  We may be
required to make advance payments for services, and some critical and/or
uniquely qualified vendors may refuse to continue to do business for us, which
would worsen our liquidity challenges and potentially prevent us from meeting
our drilling and other operating obligations, and could result in material
adverse consequences to us.





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





During
the year ended September 30, 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 have minimal
proved reserves associated with them.  Should one or both of these
projects prove to be economically infeasible, either due to market conditions or
the absence of sufficient oil and/or natural gas discoveries, this could result
in material adverse consequences to our operations and financial
condition.





Our
farm-out transactions with Falcon Oil & Gas, Ltd. (“Falcon”) have created
significant additional commitments for us and have reduced our operating
flexibility.





On
September 30, 2008, we closed the sale of a 50% working interest in four
exploration permits in the Beetaloo Basin in Australia, covering our 7.0 million
acre prospect in the Northern Territory in Australia to Falcon Oil & Gas
Ltd., a related party.  Although we remain the operator of this project, we
are obligated to work with Falcon to reach joint decisions on all significant
operating matters, many of which require substantial judgment. In addition, the
transaction did not involve a carried interest and consequently, we are
obligated to pay our proportionate share of the project’s capital requirements
immediately upon commencing our operating plan in 2009. There can be no
assurance we will be successful in consistently reaching joint decisions with
Falcon on all significant operating matters, including matters involving our
respective economic obligations, or that the outcomes of these decisions will
always be consistent with decisions we would have made solely on our own
accord.





In
addition, on November 10, 2008 we closed the sale of a 25% working interest in
five wells in our 20,000 acre Buckskin Mesa Project area in Colorado to
Falcon.  The agreement also gives Falcon the option to acquire a 50%






17




working
interest in the entire project. In addition, Falcon has the option to
become the operator upon payment of additional consideration at the time the
option is exercised.





The
securities of Falcon received in the sale of a 50% working interest in four
exploration permits in Australia are 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.





Of the
$25.0 million of total consideration in the Beetaloo Basin transaction, only
$5.0 million was cash and $20.0 million was in the form of the common stock of
Falcon which was initially delivered to us in the form of a special warrant,
pending registration of the underlying shares. Falcon is a related party and is
a publicly traded company on the Toronto Venture Exchange. Although the
transaction provided 20% downside price protection, the value of the shares has
fallen much further since the transaction was consummated due to global economic
conditions and rapidly falling energy prices.  Further, since the
shares are traded on the Toronto Venture Exchange, they are priced in Canadian
Dollars, and the strengthening of the U.S. Dollar in relation to the Canadian
Dollar during the fourth quarter of 2008 has exacerbated the erosion of the
market value of these securities.





The
common stock of Falcon was ultimately delivered to us on January 5, 2009 and
currently 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 as a result of our entering into a
secured loan agreement with Falcon on October 1, 2008, they are now subject to
significant restrictions.  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.





Our
secured note agreement with Falcon places multiple restrictions and requirements
on us, some of which could result in adverse consequences to us.





The terms
of the $5.0 million secured note agreement with Falcon, among other things,
requires that we escrow a significant portion of the Falcon common stock
received in the Beetaloo Basin transaction, maintain certain covenants, and pay
interest currently until the note matures on April 30, 2009. As of December 31,
2008, the value of the Falcon shares pledged as collateral against the note is
substantially less than the outstanding value on the note. The note is also
secured by our five wells on the Buckskin Mesa property. In addition, one of
Falcon’s remedies in the event of our default is for us to relinquish
operatorship on our Beetaloo Basin Project.  Should we fail to perform
on the note, or otherwise incur an event of Default, the pledged Falcon shares
may be insufficient to fully satisfy the balance owed under the note, which
could result in material adverse consequences to us.





We
have entered into multiple amendments with the former lessee in relation to our
Buckskin Mesa Project, which have resulted in a significant expansion in our
drilling commitment obligations.





During
the year ended September 30, 2008, we entered into several amendments with our
assignor related to our property underlying our Buckskin Mesa Project. Although
the most recent amendment we executed in September 2008 relieved us of several
near term drilling commitments, our total drilling commitments increased
substantially. These additional drilling commitments, along with other terms of
the amendments, have increased our overall cash requirements. Should we be
unable to meet these commitments on a timely basis, we could experience material
adverse consequences, including the loss of a substantial portion of the
leasehold for our Buckskin Mesa Project.





We
are contingently liable to a third party for significant costs they have
expended in relation to the development of a gas gathering system in
Colorado.





We have
entered into a Gas Gathering Agreement with CCES for a Phase I gas gathering
system for our Buckskin Mesa Project. We also intend to reach agreement with
CCES on a Phase II system, which will address our longer term gas gathering
needs, sometime in 2009. Should we be unable to reach a mutual agreement with
CCES on the Phase II system, we will be obligated to reimburse CCES for
approximately $4.8 million of costs they have expended on the gathering system
as of September 30, 2008. This contingent liability is increasing as work
continues on the gathering system, and in the event we become liable to
reimburse CCES for these costs, it could result in material adverse consequences
to us.





18


The lack of
production and established reserves for our properties impairs our ability to raise
capital.





As of
September 30, 2008, we have established very limited production of natural
gas from a limited number of wells, and have had a limited number of properties
for which reserves have been established, making it more difficult to raise the
amount of capital needed to fully exploit the production potential of our
properties.  In addition, we have sold substantial assets during the
year and subsequent to our fiscal year end, including our only revenue producing
properties, which has substantially diminished our reserve base and increased
our ongoing operating cash needs.  These factors make it more likely
we will have to raise capital on terms less favorable than we would desire,
which may result in increased dilution to existing stockholders and high
financing costs.





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 33.2% and 13.4%, respectively, of our common stock as of December
31, 2008.  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 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 is the 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 current 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, we issued five-year warrants to the holders of the convertible
debentures.  The warrant holders are entitled to purchase an aggregate
of 46.4 million shares of our common stock at exercise prices ranging from $0.24
to $0.28 per share, inclusive of warrants issued in consideration of certain
waivers and amendments during our fiscal year ended September 30,
2008.  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






19




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 under our credit facilities.





As of
September 30, 2008, we have drawn down $39.8million on our credit
facility with Global Project Finance AG.  Interest on the credit
facility borrowings accrues at 6.75% over the prime rate and is payable
quarterly.  If the prime rate remains at 4.00% and we take no
additional draws, our required interest payment will be $4.3 million during the
2009 fiscal year. As of September 30, 2008, we were in default of payments
in the amount of $0.8 million, consisting of fees owed to the lender.
 All unpaid and accrued interest was converted into our common shares at
September 30, 2008, totaling $6.5 million.  The lender has waived and
released us from any and all defaults, failures to perform, and any other
failures to meet our obligations through October 1, 2009.  If we
default on our payment obligations in the future, the lender will have all
rights available under the instrument, including acceleration, termination and
enforcement of its security interest in our Buckskin Mesa Project in the
Piceance Basin, Colorado.





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, 2008, we have issued warrants and options to purchase a total
of 177.5 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.





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 other 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.





Reserve estimates
depend on many assumptions that may turn out to be inconclusive, subject to
varying interpretations or inaccurate.





Estimates
of natural gas and oil reserves are based upon various assumptions, including
assumptions relating to natural gas and oil prices, drilling and operating
expenses, capital expenditures, ownership and title, taxes and the availability
of funds. The process of estimating natural gas and oil reserves is complex. It
requires interpretations of available geological, geophysical, engineering and
economic data for each reservoir. Therefore, these estimates are inherently
imprecise.  In addition, the global energy markets have experienced an
extraordinary period of pricing volatility during the last six months of the
2008 calendar year.  There can be no assurance that this pricing
volatility will not continue into the future, or possibly worsen as the global
economy experiences the current global recession.





Actual
natural gas and oil prices, future production, revenues, operating expenses,
taxes, development expenditures and quantities of recoverable natural gas will
most likely vary from those estimated. Any significant variance could materially
affect the estimated quantities and present value of future net revenues at any
time. A reduction in natural gas and oil prices, for example, would reduce the
value of reserves and reduce the amount of natural gas and oil that could be
economically produced, thereby reducing the quantity of reserves. At any time,
there might be adjustments






20




of
estimates of reserves to reflect production history, results of exploration and
development, prevailing natural gas prices and other factors, many of which are
beyond our control.





Undeveloped
reserves, by their nature, are less certain. Recovery of undeveloped reserves
requires significant capital expenditures and successful drilling operations.
Any reserve data assumes that we will make these capital expenditures necessary
to develop our reserves. To the extent that we have prepared estimates of our
natural gas and oil reserves and of the costs associated with these reserves in
accordance with industry standards, we cannot assure you that the estimated
costs are accurate, that development will occur as scheduled or that the actual
results will be as estimated.





Our identified
drilling location inventories are scheduled out over several years, making them
susceptible to uncertainties that could materially alter the occurrence
or timing
of their drilling.





Our
management has specifically identified and scheduled drilling locations as an
estimation of our future multi-year drilling activities on our existing acreage.
These identified drilling locations represent a significant part of our growth
strategy. Our ability to drill and develop these locations depends on a number
of uncertainties, including the availability of capital, seasonal conditions,
regulatory approvals, natural gas and oil prices, costs and drilling results.
Because of these uncertainties, we do not know if the numerous potential
drilling locations we have identified will ever be drilled or if we will be able
to produce natural gas or oil from these or any other potential drilling
locations. As such, our actual drilling activities may materially differ from
those presently identified, which could adversely affect our
business.





Our use of 2-D
and 3-D seismic data is subject to interpretation and may not accurately
identify the presence of natural gas and oil-bearing structures or favorable
stratigraphy, which could adversely affect the results of our drilling
operations.





Even when
properly used and interpreted, 2-D and 3-D seismic data and visualization
techniques are only tools used to assist geoscientists in identifying subsurface
structures and hydrocarbon indicators and do not enable geoscientists to know
whether hydrocarbons are, in fact, present in those structures. We are employing
2-D and 3-D seismic technology for certain of our projects. The use of 2-D and
3-D seismic and other advanced technologies requires greater pre-drilling
expenditures than traditional drilling strategies, and the profitability of our
ventures may be adversely affected. Even with the use of advanced seismic
applications, our drilling activities may not be successful or economical, and
our overall drilling success rate or our drilling success rate for activities in
a particular area could decline.





We often
gather 2-D and 3-D seismic over large areas. Our interpretation of seismic data
delineates those portions of an area that we believe are desirable for drilling.
Therefore, we may choose not to acquire option or lease rights prior to
acquiring seismic data and, in many cases, we may identify hydrocarbon
indicators before seeking option or lease rights in a prospective area. If we
are unable to lease those locations on acceptable terms, we will have made
substantial expenditures to acquire and analyze 2-D and 3-D data without having
an opportunity to attempt to benefit from those expenditures.





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





As the
result of significant dispositions of assets during the year ended September 30,
2008, and the sale of our only producing gas wells in December, 2008,
substantially all of our remaining oil and gas resources and operations are
located in Buckskin Mesa, Colorado and the Northern Territory, Australia. As a
result, we may be disproportionately exposed to the effect of 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.





21


Seasonal weather
conditions and lease stipulations adversely affect our ability to conduct drilling
activities in some of the areas where we operate.





Oil and
natural gas operations in the Rocky Mountains and in Australia are adversely
affected by seasonal weather conditions and lease stipulations designed to
regulate land use, including operating guidelines for designated wildlife
habitats and areas with scenic resource value. In certain areas in Australia and
on federal lands in the U.S., drilling and other oil and natural gas activities
can only be conducted during limited times of the year. This limits our ability
to operate in those areas and can intensify competition during those times for
drilling rigs, oil field equipment, services, supplies and qualified personnel,
which may lead to periodic shortages. These constraints and the resulting
shortages or high costs could delay our operations and materially increase our
operating and capital costs, or cause us to fail to meet our drilling
commitments on a timely basis.





Acquisitions are
a part of our business strategy and are subject to the risks and uncertainties of
evaluating recoverable reserves and potential liabilities. Properties that
we buy may not produce as projected and we may be unable to determine
reserve
potential, identify liabilities associated with the properties or obtain
protection
from sellers against them.





One of
our growth strategies is to capitalize on opportunistic acquisitions of oil and
natural gas reserves. The successful acquisition of producing and non-producing
properties requires an assessment of a number of factors. These factors include
recoverable reserves, future oil and gas prices, operating costs, potential
environmental and other liabilities, title issues and other factors. Our reviews
of acquired properties are inherently incomplete, because it generally is not
feasible to perform an in depth review of every individual property involved in
each acquisition. Ordinarily, we focus our review efforts on the higher value
properties and sample the remainder. However, even a detailed review of records
and properties may not necessarily reveal existing or potential problems, nor
will it permit a buyer to become sufficiently familiar with the properties to
fully assess their deficiencies or their potential. Inspections may not always
be performed on every well, and environmental problems, such as ground water
contamination, are not necessarily observable even when an inspection is
undertaken. We sometimes knowingly assume certain environmental and other risks
and liabilities in connection with acquired properties. It is possible that our
future acquisition activity will result in disappointing results. We could be
subject to significant liabilities related to acquisitions.





In
addition, there is strong competition for acquisition opportunities in our
industry. Competition for acquisitions may increase the cost of, or cause us to
refrain from, completing acquisitions. Our strategy of completing acquisitions
is dependent upon, among other things, our ability to obtain debt and equity
financing and, in some cases, regulatory approvals. Our ability to pursue our
acquisition strategy may be hindered if we are unable to obtain financing or
regulatory approvals.





Acquisitions
often pose integration risks and difficulties. In connection with future
acquisitions, the process of integrating acquired operations into our existing
operations may result in unforeseen operating difficulties and may require
significant management attention and financial resources that would otherwise be
available for the ongoing development or expansion of existing operations.
Possible future acquisitions could result in our incurring additional debt,
contingent liabilities and expenses, all of which could have a material adverse
effect on our financial condition and operating results.





We have limited
control over activities on properties we do not operate, which could
reduce our
production and revenues.





A portion
of our business activities has been conducted through joint operating agreements
under which we own partial interests in oil and natural gas properties. If 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. The failure of an operator of our wells to adequately
perform operations or an operator’s breach of the applicable agreements could
reduce our production and revenues. The success and timing of our drilling and
development activities on properties operated by others, therefore, depends upon
a number of factors outside of our control, including the operator’s deployment
of capital expenditures, expertise and financial resources, inclusion of other
participants in drilling wells and use of technology. Because we do not have a
majority interest in certain wells we do not operate, we may not be in a
position to remove the operator in the event of poor performance.





22


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





The
marketability of our production depends in part upon the availability, proximity
and capacity of pipelines, natural gas gathering systems and processing
facilities. The dependence is heightened where the infrastructure is less
developed. Therefore, if drilling results are positive in certain areas, a new
gathering system may need to be built to handle the potential volume of gas
produced. We might be required to shut in wells, at least temporarily, for lack
of a market or because of the inadequacy or unavailability of transportation
facilities. If that were to occur, we would be unable to realize revenue from
those wells until arrangements were made to deliver production to the
market.





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




•
            the
      lack of pipeline transmission facilities or carrying
    capacity;




•
            government
      regulation of natural gas and oil
production;




•
            government
      transportation, tax and energy
policies;




•
            changes
      in supply and demand; and




•
            general
      economic conditions.





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





If we
incur indebtedness, our ability to meet our debt obligations and reduce our
level of indebtedness will depend on future performance. General economic
conditions, oil and gas prices and financial, business and other factors affect
our operations and future performance; many of these factors are beyond our
control. We cannot assure you that we will be able to generate sufficient cash
flow to pay the interest on our debt or that future working capital, borrowings
or equity financing will be available to pay for or refinance such debt. Factors
that will affect our ability to raise cash through an offering of our capital
stock or a refinancing of our debt include financial market conditions, the
value of our assets and performance at the time we need capital. We cannot
assure you that we will have sufficient funds to make our debt payments. Lack of
sufficient funds and/or the inability to negotiate new borrowing terms may cause
us to sell significant assets which could have a material adverse effect on our
business and financial results.





We have found
material weaknesses in our internal controls that require remediation
and
concluded that our internal controls over financial reporting at September 30,
2008, 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, 2008. In addition, we have discovered material errors
in our Form 10-Q filings during 2008 and 2007, requiring us to restate those
filings.




Although
we are fully committed to remediating our material weaknesses, and we believe we
have made progress in making sustainable improvements in our internal controls,
we have not completed our remediation efforts in relation to the design and
testing of our internal controls, and further remediation may be
required.




While we
are taking immediate steps and dedicating substantial resources to correct these
material weaknesses, they will not be considered fully remediated until the new
and improved internal controls operate for a period of time, are tested and are
found to be operating effectively.




Our
remediation efforts may not be sufficient to maintain effective internal
controls in the future. We may not be able to implement and maintain adequate
controls over our financial processes and reporting, which may require us to
restate our financial statements again in the future. In addition, we may
discover additional material weaknesses or significant deficiencies in our
financial reporting system in the future. Any failure to implement new controls,
or difficulty encountered in their implementation, could cause us to fail to
meet our reporting obligations or result in






23




material
misstatements in our financial statements. Inferior internal controls could also
cause investors to lose confidence in our reported financial information, which
could result in a lower trading price of our common shares.




Pending
the successful implementation and testing of new controls, we will continue to
perform mitigating procedures. If we fail to remediate our material
weaknesses, we could be unable to provide timely and reliable financial
information, which could have a material adverse effect on our business, results
of operations or financial condition.





We have
significant future capital requirements. If these obligations are not
met, our growth and
operations could be limited or suspended indefinitely.





Our
future growth depends on our ability to cause the development of the working
interests we have acquired, and such development will require the expenditure of
significant capital either by us or by third parties through additional farm-out
agreements. In addition, we may acquire interests in additional oil and gas
leases where we will be required to pay for a specific amount of the initial
costs and expenses related to the development of those leases. We intend to
finance our foreseeable capital expenditures through additional farm-out
agreements, private placements of debt or equity, and additional funding for
which we have no commitments at this time. Future cash flow and the availability
of financing will be subject to a number of variables such as; the success of
exploration and development on our leases, success in locating and producing
reserves, and the prices of natural gas and oil.





Additional
financing sources will be required in the future to fund developmental and
exploratory drilling. Issuing equity securities to satisfy our financing
requirements could cause substantial dilution to our existing stockholders.
Additional debt financing could lead to a substantial portion of operating cash
flow being dedicated to the payment of principal and interest, the Company being
more vulnerable to competitive pressures and economic downturns and restrictions
on our operations.





Financing
may not be available in the future, or we might not be able to obtain necessary
financing on acceptable terms, if at all. If sufficient capital resources are
not available, we might be forced to curtail drilling and other activities or be
forced to sell assets on an unfavorable basis, which would have an adverse
effect on our business, financial condition and results of
operations.





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





Although
we have reviewed and evaluated our leases in a manner consistent with standard
industry practices, our review and evaluation may not reveal all existing or
potential problems. These same factors apply to future acquisitions to be made
by us. We may not perform inspections on every well, and environmental issues
may not be observable during an inspection. When problems are identified, a
seller may be unwilling or unable to provide effective contractual protection
against those problems, and we may assume environmental and other risks and
liabilities in connection with the acquired properties.





We do not plan to
insure against all potential operating risks. We might incur substantial
losses and be subject to substantial liability claims as a result of our
natural gas
and oil operations.





We do not
intend to insure against all risks. We intend to maintain insurance against
various losses and liabilities arising from operations in accordance with
customary industry practices and in amounts that management believes to be
prudent. Losses and liabilities arising from uninsured and underinsured events
or in amounts in excess of existing insurance coverage could have a material
adverse effect on our business, financial condition or results of operations.
Our natural gas and oil exploration and production activities are subject to
hazards and risks associated with drilling for, producing and transporting
natural gas and oil, and any of these risks can cause substantial losses
resulting from:




•
            environmental
      hazards, such as uncontrollable flows of natural gas, oil, brine, well
      fluids, toxic gas or other pollution into the environment, including
      groundwater and shoreline
contamination;




•
            abnormally
      pressured formations;




24


•
            mechanical
      difficulties, such as stuck oil field drilling and service tools and
      casing collapse;




•
            fires
      and explosions;




•
            personal
      injuries and death;




•
            regulatory
      investigations and
penalties; and




•
            natural
      disasters.





Any of
these hazards could have a material adverse effect on our ability to conduct
operations and may result in substantial losses. We may elect not to obtain
insurance in the event that the cost of available insurance is excessive
relative to the risks presented. In addition, pollution and environmental risks
generally are not fully insurable. If a significant accident or other event
occurs and is not fully covered by insurance, it could have a material adverse
effect on our business, financial condition and results of
operations.





We
are subject to various risks associated with our international
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.





The
incurrence of these kinds of circumstances are principally beyond our control,
and could result in material adverse consequences to us.





Risks
Relating to the Oil and Gas Industry





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.





Our
revenues, operating results and future rate of growth are substantially
dependent upon the prevailing prices of, and demand for, natural gas and oil.
Declines in the prices of, or demand for, natural gas and oil may adversely
affect our financial condition, liquidity, ability to finance planned capital
expenditures and results of operations. Lower natural gas and oil prices may
also reduce the amount of natural gas and oil that we can produce economically.
During the last six months of the 2008 calendar year, natural gas and oil prices
and markets have experienced extraordinary volatility, and they are likely to
continue to be volatile in the future. A decrease in natural gas or oil prices
will not only reduce revenues and profits, but will also reduce the quantities
of reserves that are commercially recoverable and may result in charges to
earnings for impairment in the value of assets. If natural gas or oil prices
decline significantly for extended periods of time in the future, we might not
be able to generate enough cash flow from operations to meet our obligations and
make planned capital expenditures. Natural gas and oil prices are subject to
wide fluctuations in response to relatively minor changes in the supply of, and
demand for, natural gas and oil, market uncertainty and a variety of additional
factors that are beyond our control. Among the factors that could cause this
fluctuation are:




•
            changes
      in supply and demand for natural gas and
oil;




•
            general
      global economic conditions, and regional economic conditions in the U.S.
      and Australia;




•
            levels
      of production and other activities of the Organization of Petroleum
      Exporting Countries, or OPEC, and other natural gas and oil producing
      nations;




•
            market
      expectations about future prices;




•
            the
      level of global natural gas and oil exploration, production activity and
      inventories;




25


•
            political
      conditions, including embargoes, in or affecting other oil producing
      activity; and




•
            the
      price and availability of alternative
fuels.





Lower
natural gas and oil prices may not only decrease our revenues on a per unit
basis, but also may reduce the amount of natural gas and oil that we are able to
produce economically. A substantial or extended decline in oil or natural gas
prices may materially and adversely affect our business, financial condition and
results of operations.





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.





Our
future success depends on the success of our exploration, development and
production activities. Such activities are subject to numerous risks beyond our
control, including the risk that we will not find commercially productive
natural gas or oil reservoirs. Our decisions to purchase, explore, develop or
otherwise exploit prospects or properties will depend in part on the evaluation
of data obtained through geophysical and geological analyses, production data
and engineering studies, the results of which are often inconclusive or subject
to varying interpretation. The cost of drilling, completing and operating wells
is often uncertain before drilling commences. Overruns in budgeted expenditures
are common risks that can make a particular project uneconomical. Further, many
factors may curtail, delay or prevent drilling operations,
including:




•
            unexpected
      drilling conditions;




•
            pressure
      or irregularities in geological
formations;




•
            equipment
      failures or accidents;




•
            pipeline
      and processing interruptions or
unavailability;




•
            title
      problems;




•
            adverse
      weather conditions;




•
            lack
      of market demand for natural gas and
oil;




•
            delays
      imposed by or resulting from compliance with environmental and other
      regulatory requirements;




•
            shortages
      of or delays in the availability of drilling rigs and the delivery of
      equipment; and




•
            reductions
      in natural gas and oil prices.





Our
future drilling activities might not be successful, and the drilling success
rate overall or within a particular area could decline. We could incur losses by
drilling unproductive wells. Although we have identified numerous potential
drilling locations, we cannot be sure that we will ever drill them or will
produce natural gas or oil from them or from any other potential drilling
locations. Shut-in wells, curtailed production and other production
interruptions may negatively impact our business and result in decreased
revenues.





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.





We
operate in the highly competitive areas of oil and gas exploration, development
and acquisition with a substantial number of other companies. We face intense
competition from independent, technology-driven companies as well as from both
major and other independent oil and gas companies in each of the following
areas:




•
            seeking
      oil and gas exploration licenses and production
  licenses;




•
            acquiring
      desirable producing properties or new leases for future
      exploration;




•
            marketing
      natural gas and oil production;




•
            integrating
      new technologies;




•
            acquiring
      the equipment and expertise necessary to develop and operate
      properties; and




•
            hiring
      and retaining a staff of competent technical and administrative
      professionals.





26


Many of
our competitors have substantially greater financial, managerial, technological
and other resources. These companies might be able to pay more for exploratory
prospects and productive oil and gas properties and may be able to define,
evaluate, bid for and purchase a greater number of properties and prospects than
our financial or human resources permit. To the extent competitors are able to
pay more for properties than we are able to afford, we will be at a competitive
disadvantage. Further, many competitors may enjoy technological advantages and
may be able to implement new technologies more rapidly. Our ability to explore
for natural gas and oil prospects and to acquire additional properties in the
future will depend upon our ability to successfully conduct operations,
implement advanced technologies, evaluate and select suitable properties and
consummate transactions in this highly competitive environment.





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





In
periods of increased drilling activity, shortages of drilling and completion
rigs, field equipment and qualified personnel could develop. From time to time,
these costs have sharply increased in various areas around the world and could
do so again. The demand for and wage rates of qualified drilling rig crews
generally rise in response to the increasing number of active rigs in service
and could increase sharply in the event of a shortage. Shortages of drilling and
completion rigs, field equipment or qualified personnel could delay, restrict or
curtail our exploration and development operations, which could in turn harm our
operating results.





Unless we replace
our oil and natural gas reserves, our reserves and production will decline, which
would adversely affect our business, financial condition and results
of
operations.





Producing
oil and natural gas reservoirs generally are characterized by declining
production rates that vary depending upon reservoir characteristics and other
factors. Because total estimated proved reserves include our proved undeveloped
reserves at September 30, 2008, production will decline even if those
proved undeveloped reserves are developed and the wells produce as expected. The
rate of decline will change if production from our existing wells declines in a
different manner than we have estimated. The rate of decline may change under
other circumstances as well. As a result, our future oil and natural gas
reserves, and our production are highly dependent upon our success in
efficiently developing and exploiting our current reserves. In addition, our
potential oil and gas revenues and production depend on us finding or acquiring
additional recoverable reserves economically. Our cash flow and results of
operations are also dependent upon these factors. We may not be able to develop,
find or acquire additional reserves to replace our current and future production
at acceptable costs.





Assets
may be impaired due to full cost accounting rules.





Under
full cost accounting rules, capitalized costs of proved oil and gas properties
may not exceed the present value of estimated future net revenues from proved
reserves, discounted at 10%. Application of the “Ceiling Test” generally
requires pricing future revenue at the unescalated prices in effect as of the
end of each fiscal quarter and requires an impairment charge for accounting
purposes if the ceiling is exceeded. While an impairment does not impact cash
flow from operating activities, it still results in a charge to earnings. Once
incurred, an impairment of oil and gas properties is not reversible at a later
date. As with any charge to earnings, the market price for our stock may decline
as a result.





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





U.S. and
Australian federal, state and local authorities regulate the oil and gas
industry. Legislation and regulations affecting the industry are under constant
review for amendment or expansion, raising the possibility of changes that may
affect, among other things, the pricing or marketing of oil and gas production.
State and local authorities regulate various aspects of oil and gas drilling and
production activities, including the drilling of wells (through permit and
bonding requirements), the spacing of wells, the unitization or pooling of oil
and gas properties, environmental matters, safety standards, the sharing of
markets, production limitations, plugging and abandonment and restoration of
wells. The overall regulatory burden on the industry increases the cost of doing
business, which, in turn, decreases profitability.





27


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





Our
operations are subject to complex and constantly changing environmental laws and
regulations adopted by federal, state and local governmental authorities,
including in the U.S. and in Australia. New laws or regulations, or changes to
current requirements, could have a material adverse effect on our business. We
will continue to be subject to uncertainty associated with new regulatory
interpretations and inconsistent interpretations between state and federal
agencies. We would face significant liabilities to the government or other third
parties for discharges of oil, natural gas, produced water or other pollutants
into the air, soil or water, and we would have to spend substantial amounts on
investigations, litigation and remediation if such a spill were to occur. We
cannot be sure that existing environmental laws or regulations, as currently
interpreted or enforced, or as they may be interpreted, enforced or altered in
the future, will not have a material adverse effect on our results of operations
and financial condition.





Risks
Related to Our Common Stock





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





The
equity trading markets periodically experience periods of volatility, which
could result in highly variable and unpredictable pricing of equity securities.
The market price of our common stock could change in ways that may or may not be
related to our business, our industry or our operating performance and financial
condition. In addition, the trading volume in our common stock may fluctuate and
cause significant price fluctuations. Some of the factors that could negatively
affect our share price or result in fluctuations in the price or trading volume
of our common stock include:




•
            actual
      or anticipated quarterly variations in our operating
    results;




•
            actual
      or anticipated changes in our liquidity, financial position, or capital
      resources;




•
            changes
      in expectations as to our future financial performance or changes in
      financial estimates, if any, of public market
  analysts;




•
            announcements
      relating to our business or the business of our
    competitors;




•
            conditions
      generally affecting the oil and natural gas
  industry;




•
            changes
      in investor perceptions of the level of risk and volatility associated
      with investments in the oil and natural gas
  industry;




•
            the
      success of our operating strategy;




•
            the
      operating and stock price performance of other comparable companies;
      and




•
            the
      market price of our common stock.





The
market price of our common stock has declined substantially during recent
months, and as a result of these factors, it is possible that the market price
of our common stock will remain volatile or decline even further in the future.
In addition, many brokerage firms may not effect transactions and may not deal
with low priced securities as it may not be economical for them to do so. This
could have an adverse effect on developing and sustaining a market for our
securities. In addition, an investor may be unable to use our securities as
collateral.





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.





Although
our common stock is currently traded on the OTC Bulletin Board, at any
time, it may be thinly traded. To the extent that is true, an investor may not
be able to liquidate his or her investment without a significant decrease in
price, or at all.





28


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





We have
not paid cash dividends to date with respect to our common stock. We do not
anticipate paying dividends on our common stock in the foreseeable future since
we will use all of our available cash to finance exploration and development of
our properties. We are authorized to issue preferred stock and may pay dividends
on our preferred stock issued in the future.








ITEM 1B.
            UNRESOLVED STAFF
      COMMENTS





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








ITEM 2.
            DESCRIPTION OF
      PROPERTY





Location
and Characteristics





Our
headquarters are located at 1600 Stout Street Suite 2000 Denver, Colorado,
80202. The lease for this office space of approximately 12,400 square feet has a
term expiring February, 2013.  The annual rent is approximately $0.2
million with certain adjustments for inflation and expenses.





Currently,
we own property in Colorado, where we have drilled five wells on our Buckskin
Mesa property, and Australia, where we have drilled one well on our property in
the Northern Territory, and in Montana, where we hold a land position in the
Bear Creek area.  The wells on these properties have not yet commenced
oil and gas production. As of September 30, 2008, we owned working interests in
eight additional natural gas wells in Colorado which are operated by EnCana Oil
& Gas USA (“EnCana”).  These interests were sold to a third party
in December 2008.  In November 2007, we sold 66,000 net acres of land
and two wells in Montana and 173,738 acres of land in Utah and on May 30, 2008,
we sold 605 net acres, 16 wells which had been drilled but not completed or
connected to a pipeline, and rights to participate in an additional 8 wells in
the Southern Piceance Basin in Colorado.





Piceance
Basin, Colorado Properties


Buckskin Mesa Project.We
own approximately 20,000 net acres of leasehold in Rio Blanco County,
Colorado, subject to certain payment and work commitments, including five wells
that were drilled (but not completed) during 2006-2007 calendar years, and six
shut-in gas wells drilled by our predecessor in interest. During this fiscal
year, we expanded our operational infrastructure for the project area, and spud
and drilled the fifth of the five obligation exploratory wells specified in the
original acquisition agreement with Daniels Petroleum Company (“DPC”), as
amended (the “DPC Agreement”). Each of the five wells encountered greater than
five hundred feet of net pay within the Cretaceous Mesa Verde Group, and each
was cased in preparation for testing and completion. In conjunction with Clear
Creek Energy Services, we continued working on the design and development of an
expandable gathering system and primary production facility to allow for the
handling and movement of a minimum of 15 million cubic feet of gas per
day.





As of
September 30, 2008, we had drilled five wells, awaiting completion and
installation of the gathering system.  At the end of the first
calendar quarter of 2008, we extended and subsequently paid $0.5 million in
penalties for three wells that were required to be drilled that quarter by
agreeing to pay the $1.5 million fee, plus a $1.0 million additional payment as
consideration for the extension. These amounts were paid on April 28, 2008,
thereby reducing the total number of wells we were committed to drill
for the remainder of calendar year 2008 to 13. Prior to June 30, 2008 (the
due date for commencing the next four wells), we determined that we could not
obtain the materials necessary to commence such operations by June 30, and we
provided written notice of such force majeure condition to DPC.  We were
otherwise prepared to comply with all obligations regarding the referenced
commitment.  DPC objected to the notice. On June 30, 2008, we filed an
action in Denver District Court requesting the court to issue a declaratory
judgment concerning this dispute (the “Daniels Litigation”).  On
September 10, 2008, we entered into an amendment to the original
agreement with DPC (the “Amendment”), which included a settlement of the Daniels
Litigation.  Under the Amendment, we paid $0.5 million for each of the
four wells scheduled to be drilled by June 30, 2008, and we paid an
additional $1.5 million on January 9, 2009, as required under the
Amendment.  Further, we are required to drill four
wells by July 31, 2009, five additional wells






29




by
December 31, 2009, and eleven additional wells by December 31,
2010.   If we do not satisfy these drilling requirements, our
agreement with DPC requires that we pay DPC $0.5 million for each undrilled well
on the last day of the applicable period.





As part
of the settlement of the Daniels Litigation, PetroHunter and Daniels agreed to
extend the date for commencing the first well in Buckskin Mesa to July 31, 2009,
and to increase the total minimum number of obligation wells to 20, through
December 2010. PetroHunter and Falcon closed the first phase of their agreement
(announced August 25, 2008) on November 10, 2008, under which PetroHunter has
begun testing and completion operations on two of the five wells, which
PetroHunter previously drilled but did not complete in Buckskin
Mesa.





PetroHunter
is moving forward on the Buckskin Mesa gas gathering system. Under PetroHunter’s
agreement with CCES Piceance Partners I, LLC (“Clear Creek”), PetroHunter and
Clear Creek have begun ordering all necessary materials for construction of the
Buckskin Mesa gathering facilities.





Logs from
the five wells which PetroHunter drilled in this area in 2007 indicate an
average of 500 to 600 feet of pay. The primary objective in these wells is the
Williams Fork formation, while the secondary objectives are the Sego, Cozzette,
and Corcoran formations, members of the Iles formation, which are below the
Williams Fork.





The
Company recently initiated fracture stimulation operations on the Lake 16-21 and
Lake 6-22 wells. Flow testing operations are continuing and have recovered
hydrocarbons from both wells. PetroHunter
will continue its completion and testing program on the Lake 16-21 and Lake 6-22
wells in the remaining intervals over the first and second quarters of our next
fiscal year.





Piceance II
Project.  As of September 30, 2008, we owned interests within
the Piceance II Project area in one undeveloped lease and an undivided 50%
working interest in eight producing wells operated by EnCana Oil & Gas
(USA), Inc. (“EnCana”), all in Garfield County, Colorado, and which were sold to
a third party on December 30, 2008.





Effective
October 1, 2007, we entered into a trade by which we exchanged our
40 net acre leasehold interest in certain lands located in
Sections 16, 17, 20 and 21 of Township 7 South, Range 95 West (along
with 0.35 net under 19 gross wells) for 40 net acres of leasehold
covering the 40 acre parcel located in Section 22 of Township 7 South,
Range 95 West adjacent to the Furr leased lands (along with two net
under two gross wells). The trade also included our acquisition of a new
lease dated December 10, 2007, covering the remaining 50% of the balance of
the lands located in said Section 22 to which 10 of the 14 Furr area wells
were attributable.





On May
30, 2008, we completed the sale of 605 net acres of land, 16 wells which had
been drilled but not completed or connected to a pipeline and rights to
participate in an additional 8 wells to Laramie Energy II,
LLC.  Additionally, as of June 30, 2008, as part of this transaction,
we held $0.8 million in escrow relating to a dispute between us and the lessor
of 435 acres of land in the Southern Piceance in which the lessor of this land
claims that the lease will be terminated in conjunction with the Laramie
transaction.  On August 1, 2008, we transferred the $0.8 million in
escrow back to Laramie and retained the 435 acres of land relating to the
escrowed amount.





Plan of
Operations.  In fiscal 2009, we will focus on completing the
five wells drilled in 2006-2007, and connect them to the gathering system,
followed by drilling nine additional obligation wells, which must be commenced
by December 31, 2009. Completion of the gathering system and central facility
for the Buckskin Mesa Project will also enable us to recomplete and hook-up one
or more of the six additional shut-in gas wells acquired with the properties in
2006.





Extensive
regulatory compliance work has been initiated to facilitate our asset
development plan, and some title issues are being addressed in connection with
the drilling program for the fiscal year 2009. In summary, execution of the plan
for these assets will optimally yield the drilling of not less than nine new
exploratory wells in the Buckskin Mesa Prospect, and the completion or
recompletion of as many as six wells in the Buckskin Mesa Prospect during fiscal
year 2009.





30


Australia
Properties


Beetaloo Basin
Project.The Beetaloo Basin property in the Northern Territory
of Australia currently consists of approximately 7.0 million net contiguous
acres.  Sweetpea now owns an undivided 50% working interest in the
existing four exploration permits that cover this acreage following the sale of
the other undivided 50% working interest to Falcon Oil & Gas Australia,
Ltd., effective September 30, 2008.





Located
about 600 kilometers south of Darwin, the Beetaloo Basin is a large basin,
comparable in size to the Williston Basin in the U.S. or the entire
southern North Sea basin. Structurally it has been viewed as a relatively simple
intracratonic, passive margin basin, with minor extension (strike-slip), filled
with sediments ranging from Cambrian to Mesoproterozoic rocks. However,
interpretation of 2-D seismic data acquired by us in 2006 requires modification
of the structural and tectonic history of the basin. The broad, low relief
structures previously recognized in the basin, probably related to strike-slip
movement, represent only a portion of its history. Significant and possibly
multiple compressional events are observed in the basin. Ongoing geophysical
evaluation has identified a more recent compressional history along the western
margin of the basin resulting in a series of westerly verging, imbricate thrust
faults.  All identified structures are untested and
prospective.





The basin
has many thousands of meters of sediments, but the reservoirs of interest to us
are within 4,000 meters of the surface, most less than 3,000 meters. The
sedimentary rocks include thick (hundreds of meters), rich source rocks, namely
the Velkerri Shale with Total Organic Carbon (“TOC”) contents as high as 12% and
the Kyalla Shale with typical TOC contents of 2-3%. There are also a number of
sandstone reservoirs interbedded with the rich source rocks. These formations,
from stratigraphically youngest to oldest, include the Cambrian Bukalara
Sandstone, and the Neoproterozoic Hayfield, Jamison, Moroak, and Bessie Creek
sandstones. A number of even deeper sandstones are expected to be very tight and
are viewed as not prospective in the single well where they were tested east of
the Basin.





Three
primary plays have been recognized within the basin. The first is a conventional
structural, shallow sweet oil play of 35° API gravity. The Bukalara, Hayfield,
Jamison, and Moroak sands (and perhaps the Bessie Creek sand along the western
margin) have potential for oil and gas accumulations in trapped and sealed
geometries. Most of the eleven previous wells drilled within the basin had oil
and gas shows, and the Jamison No. 1 well tested oil on a Drill Stem
Test. Detailed petrophysical analyses have been performed on all wells and have
identified significant potential in some of these tests.





The
second play is an unconventional fractured shale play within the Kyalla and
Velkerri formations, not unlike the Barnett Shale play in Texas, although the
Barnett Shale is of Paleozoic age and the Velkerri is older, being of the
Proterozoic age. It is unknown whether the hydrocarbons will be gas or oil (or
possibly both) for this exploration target; however, the Barnett Shale model and
algorithms in our petrophysical analyses of these shales suggest they are viable
targets.  The Barnett Shale is a Paleozoic (Mississippian) black shale
in Texas that ranges from a few feet to over 1,000 feet but is generally
considered most favorable where the Barnett is 300 feet or more and is thermally
mature with vitrinite reflectance values greater than 1.1% (Ro≥1.1) 400 feet
thick and has TOC of between 1-5 weight percentage averaging between 2.5% and
3.5%.   Barnett wells are typically stimulated to induce
fracturing or enhance fracturing.  The Barnett where it is the thermal
maturity window of a vitrinite reflectance of 1.1 or above is considered to be
in the gas window and thus prospective.  The Velkerri Shale in the
Beetaloo Basin is up to 2438 feet (800 meters) thick, but the prospective
portion of the Velkerri where TOCs range from 4 to 12% commonly in the 4-7%
range in a 140 meter interval (or about 425 feet).  The Velkerri Shale
which is PreCambrian (approximately 1.4 billion years old) is in the gas window
throughout much of the Beetaloo Basin with equivalent thermal maturity values of
1.1 or higher.  It should be noted that a geochemical equivalency was
developed to allow comparison of the thermal maturity levels to standard
vitrinite reflectance levels.  Thus, the Velkerri and Barnett are
analogous in thickness, thermal maturity where prospective for gas, and
TOC.  The Kyalla Shale is also PreCambrian (Proterozoic) in age and
can reach thicknesses in the subsurface up to 800 meters in the Beetaloo Basin.
Approximately 115 meters (350 feet) of prospective interval for both oil and gas
although TOC is somewhat lower ranging from about 1.5-8% although mostly in the
2-4% range.  The upper part of the Kyalla is in the oil window
(greater than .7% equivalent vitrinite reflectance) and the lower part of the
Kyalla is in the gas window (greater than 1.1% equivalent vitrinite
reflectance.  Both Kyalla and Velkerri shales are fractured as
evidenced cores taken in wells in the basin and observed on well
logs.  For example, a Formation Micro Imager Log in the Kyalla
demonstrates considerable fracturing and this fracturing extends throughout most
horizons encountered in a recent






31




test, the
Shenandoah #1 complete with hydrocarbon (both oil and gas) shows.  For
these reasons we consider the Kyalla and Velkerri Shales to be analogous to the
Barnett Shale.





Finally,
the Moroak and Bessie Creek sandstones offer a Basin Centered Gas Accumulation
(BCGA) play at the center of the basin. It is an unconventional resource play
characterized by a lack of a gas/water contact. Petrophysical analyses of
several wells previously drilled in the basin demonstrate the presence of a BCGA
in the basin.





We
spudded the Sweetpea Shenandoah No. 1 well on July 31, 2007 and
drilled to 4,724 feet. Intermediate casing was run on September 15,
2007 and the well was then suspended with an intention to deepen the well to a
depth of 9,580 feet.





Because
of its proximity and geological similarity to the Balmain No. 1 well,
we regard this well as a twin to the Balmain No. 1 well that was
drilled by an unrelated third party in 1992. The original plan to drill the
Shenandoah No. 1 well under-balanced with air was modified due to
encountering a shallow-sand formation that produced excessive water. The well
was drilled with air along with water and mud. Oil and gas hydrocarbon shows in
the Hayfield Formation and Kyalla Shale were confirmed. The mudlog exhibits gas
shows and fluorescence starting at about 1,900 feet, in the Hayfield
Formation, and continuing through to present depth of 4,550 feet. Over
700 feet of hydrocarbon shows have been encountered. Geologically, the
Shenandoah No. 1 well has matched its prognosis and the drilling results
correlate with the Balmain No. 1 well.In 2008, the Company
engaged NuTech Energy Alliance to further analyze the logs from the Well, and to
run a shale model, using recent North American oil productive fractured shale
analogs. The preliminary results of the NuTech analysis for shales at
approximately 3,000-foot depth indicate an estimated initial production rate of
several hundred barrels a day (assuming a horizontal well), and a 3-year
recovery of 70,000 barrels per well.





To date,
seven drilling locations have been identified based on extensive geological and
geophysical analysis. These locations have been cleared through the Northern
Land Council, responsible for consulting with and representing traditional
landowners and other Aborigines with an interest in land. Final drilling
approval was received in May 2007, and these locations have been staked and will
be formally surveyed. The preparation of drilling pads and access lines
commenced the last week of May 2007 and continued into June 2007. We are
attempting to obtain drilling locations beyond the initial seven
locations.





From July
through November of 2006, 686 kilometers of new 2-D seismic data were acquired
throughout the Beetaloo Basin. Additionally, 1,000 kilometers of previously
acquired 2-D seismic data were reprocessed. Along, with the other existing 1,500
kilometers of 2-D seismic data that have not been reprocessed, geologic
structure maps were generated for the basin.





The
exploration drilling program for fiscal 2009 will test several play concepts
within the basin. Hydrocarbon potential exists in shallow, conventional
structures (in the form of oil), and in deeper unconventional reservoirs,
including fractured shales and basin centered gas accumulations. The
unconventional plays may be gas and/or oil. All of the exploration wells are
planned to reach a total depth in the Bessie Creek Sandstone formation. The
deepest penetration is expected to be 3,000 meters.





Northwest Shelf
Project.Effective February 19, 2007, the Commonwealth of
Australia granted to Sweetpea an exploration permit in the shallow, offshore
waters of Western Australia. The permit, WA-393-P, has a six-year term and
encompasses almost 20,000 acres. Geophysical data across the permit from
public sources has been acquired and has been analyzed. We have committed to an
exploration program with geological and geophysical data acquisition in the
first two years with a third year drilling commitment and additional wells to be
drilled in the subsequent three year period depending upon the results of the
initial well.





Plan of
Operations.In Australia, we plan to explore and develop
portions of our undivided 50% working interest in the four exploration permits
that comprise the 7.0 million net acres of the project area in the Northern
Territory of Australia (Beetaloo Basin). We plan to resume drilling of the
Shenandoah No. 1 well. We are currently committed to drill eight
additional wells on our four permits and complete a potential delineation
seismic program, projected to cost a minimum of $37.0 million ($18.5 million for
our 50% working interest). In calendar year 2009, we may farm-out a portion of
our working interest in the acreage to third parties.





32


Other
Assets


Bear Creek, Montana.On
September 30, 2008, we owned slightly greater than 15,990 net acres of
leasehold in a combination deeper conventional gas/coalbed methane project area
located in southern Montana, east of the Fiddler Creek heavy oil assets. The
primary deep objectives are incised Greybull valley-fill sequences along the
Nye-Bowler lineament, and the Frontier sandstone, while the shallow
Ft. Union provides an opportunity to produce methane from multiple thin
coal lenses at intervals from 500 to 3,000 feet. No activity was conducted
in this project area during the fiscal year, nor are any funds budgeted to
evaluation of this asset in the coming year.





Oil
and Gas Reserves





The
following table sets forth the Company’s quantities of domestic proved reserves,
for the years ended September 30, 2008, and 2007 as estimated by independent
petroleum engineers Gustavson Associates, LLC. The table summarizes our domestic
proved reserves, the estimated future net revenues from these reserves and the
standardized measure of discounted future net cash flows attributable thereto at
September 30, 2008 and 2007. In accordance with PetroHunter’s planning and
budgeting cycle, proved undeveloped reserves included in this table include only
economic locations that are forecast to be on production before October 1, 2013.
As of September 30, 2008, proved undeveloped reserves represent 83.24% of our
total proved reserves.




The
following table is a summary of our oil and gas reserves (in thousands, except
per unit data):





Years Ended
                  September 30,2008
                
                
                2007Proved
      Undeveloped ReservesNatural
      gas (MMcf)
                
                
                16,504
                
                
                
                13,699Oil
      (MBbl)
                
                
                5
                
                
                
                19Proved
      Developed ReservesNatural
      gas (MMcf)
                
                
                3,310
                
                
                
                —Oil
      (MBbl)
                
                
                2
                
                
                
                112Total
      Proved Reserves (MMcfe)
                
                
                19,858
                
                
                
                14,486Estimated
      future net cash flows, before income tax
                
                $
                33,739
                
                
                $
                44,956Standardized
      measure of discounted future net cash flows, before income
      taxes
                
                $
                8,357
                
                
                $
                19,865Future
      income tax
                
                
                —
                
                
                
                —Standardized
      measure of discounted future net cash flows, after income
      taxes
                
                $
                8,357
                
                
                $
                19,865Calculated
      weighted average price at September 30,Gas
      ($/Mcf)
                
                $
                3.36
                
                
                $
                3.47Oil
      ($/Bbl)
                
                $
                79.47
                
                
                $
                61.28





Production
Volumes, Average Sales Prices and Average Production Costs





The
following table sets forth certain information regarding our net production of
oil and natural gas, and certain price and cost information for our fiscal
years ended September 30, 2008, 2007 and 2006.


For
      the fiscal year ended September 30,2008
                
                
                2007
                
                
                2006Production
      Data:Natural gas
(Mcf)
                
                
                286,474
                
                
                
                456,740
                
                
                
                5,822Oil (Bbl)
                
                
                348
                
                
                
                137
                
                
                
                —Average
      Prices:Natural gas (per
    Mcf)
                
                $
                6.82
                
                
                $
                6.16
                
                
                $
                6.12Oil (per Bbl)
                
                $
                111.80
                
                
                $
                52.40
                
                
                $
                —Production
      Costs:Lease operating expenses (per
      Mcfe)
                
                $
                2.79
                
                
                $
                1.73
                
                
                $
                0.63





(a)
            2008
      lease operating expense includes monthly compressor rental of $0.1
      million


(b)
            All
      information relates to the US operations as no drilling or production
      occurred in Australia during 2008.




33


Productive
Wells





The
following table summarizes information at September 30, 2008, relating to
the productive wells in which we owned a working interest as of that date.
Productive wells consist of producing wells and wells capable of production, but
specifically exclude wells drilled and cased during the fiscal year that have
yet to be tested for completion.  Gross wells are the total number of
producing wells in which we have an interest, and net wells are the sum of our
fractional working interests in the gross wells.


Gross
                    
                    
                    NetOil
                    
                    
                    Gas
                    
                    
                    Total
                    
                    
                    Oil
                    
                    
                    Gas
                    
                    
                    TotalLocationColorado
                    
                    
                    —
                    
                    
                    
                    10
                    
                    
                    
                    10
                    
                    
                    
                    —
                    
                    
                    
                    6
                    
                    
                    
                    6Australia
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Total
                    
                    
                    —
                    
                    
                    
                    10
                    
                    
                    
                    10
                    
                    
                    
                    —
                    
                    
                    
                    6
                    
                    
                    
                    6





Oil
and Gas Drilling Activities





During
the fiscal year ended September 30, 2008, our drilling activities were
limited to Colorado and Australia. We drilled, or participated in the drilling
of a total of 2 gross wells and 2 net wells categorized as follows: the
Lake 6-22 well in the Buckskin Mesa Project, and the Shenandoah #1 well in the
Beetaloo Basin Project. During 2008, we drilled no dry exploratory wells and no
development wells.





During
the fiscal year ended September 30, 2007, our drilling activities were
limited to Colorado and Australia. We drilled, or participated in the drilling
of a total of 39 gross wells and 14.46 net wells categorized as
follows: (i) 2.21 net wells under 21 gross wells drilled,
completed and turned down-line to production; and (ii) 12.25 net wells
under 18 gross wells drilled and cased, but not completed for production.
In addition, the Company acquired during the year six net under six gross
producing wells in Colorado that are shut-in awaiting a tie-in to the market,
and drilled one net under one gross exploratory well in Australia that is
currently suspended. During 2007, we drilled no dry exploratory wells and no
development wells.





During
the fiscal year ended September 30, 2006, our drilling activities were
limited to Colorado; we drilled, or participated in the drilling of six gross
exploratory wells and 2.14 net exploratory wells with no dry exploratory
wells, and we acquired two gross and net oil wells. We did not drill development
wells during 2006.





Oil
and Gas Interests





As of
September 30, 2008, we owned interests in the following developed and
undeveloped acreage positions. Undeveloped acreage refers to acreage that has
not been placed in producing units.





Developed
                
                
                UndevelopedGross Acres
                
                
                Net Acres
                
                
                Gross Acres
                
                
                Net AcresLocationColorado
                
                
                400
                
                
                
                240
                
                
                
                24,833
                
                
                
                20,174Montana
                
                
                —
                
                
                
                —
                
                
                
                18,147
                
                
                
                15,991Australia
                
                
                —
                
                
                
                —
                
                
                
                7,000,000
                
                
                
                3,500,000Total
                
                
                400
                
                
                
                240
                
                
                
                7,042,980
                
                
                
                3,536,165





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, an impairment
is recognized. During 2007, we recorded an impairment expense in the amount of
$24.1 million, representing the excess of capitalized costs over the
ceiling, as calculated in accordance with these full cost rules. During 2008 we
recorded an impairment of $30.8 million.  Current year impairment was
due to decreases in natural gas prices from our third quarter ended
June 30, 2008 of $10.51 per Mcf, to $4.96 per Mcf as of September 30,
2008.





34


Depreciation,
Depletion, Amortization and Accretion


Depreciation,
depletion, amortization and accretion expense (“DD&A”) was $1.2 million
in 2008 and $1.2 million in 2007.





ITEM 3.
            LEGAL
      PROCEEDINGS





As of
September 30, 2008, the Company is not a party to any legal or administrative
actions or proceedings.





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





None.





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, 2006
                  $2.30
                  $1.50March
      31, 2007
                  $1.85
                  $0.96June
      30, 2007
                  $1.29
                  $0.46September
      30, 2007
                  $0.55
                  $0.16December
      31, 2007
                  $0.31
                  $0.15March
      31, 2008
                  $0.25
                  $0.12June
      30, 2008
                  $0.30
                  $0.15September
      30, 2008
                  $0.24
                  $0.11





On
December 29, 2008 the last sale price for our common stock was
$0.09.





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 the exploration and development of our properties.
Our Board of Directors will determine future declaration and payment of
dividends, if any, in accordance with applicable corporate law.





As of
December 31, 2008, 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


35


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.





Background





PetroHunter
is considered a development stage company as defined by Statement of Financial
Accounting Standards (“SFAS”) 7, Accounting and Reporting by
Development Stage Enterprises,as we have not yet commenced our planned principal operations.A development stage
enterprise is one in which planned principal operations have not commenced, or
if its operations have commenced, there have been no significant revenues to
date.





From
inception (June 2005) through our fiscal year ended September 30, 2007, we
devoted our efforts to the acquisition of oil and gas properties and raising
capital to fund such acquisitions.  During the years ended September 30,
2006 and 2007, we operated and managed our properties in three groups: 
Heavy Oil, Piceance Basin and Australia.  We determined at the end of our
2007 fiscal year that we needed to focus our operating efforts on our Buckskin
Mesa and Beetaloo Basin Projects, as we lacked sufficient capital to develop our
other properties. In addition, we had a $37.9 million working capital deficit as
of September 30, 2007, which required us to secure additional debt financing and
sell non-strategic assets. Accordingly, during the year ended September 30,
2008, we sold assets we did not consider to be central to our business plan in
order to reduce a substantial accumulated working capital deficit and provide a
path to achieve our future operating objectives in our core development
projects. In addition, we sold certain working interests in our areas of focus
in Australia and Colorado to Falcon Oil & Gas Ltd. (“Falcon”), a related
party, with whom we plan to develop those properties. In August 2008, we entered
into an agreement with Falcon to sell a 50% working interest in four exploration
permits covering our 7.0 million-acre prospect in the Northern Territory,
Australia (the “Beetaloo Basin”), and closed this transaction on September 30,
2008. We also entered into a binding agreement with Falcon to sell a 25% working
interest in five wells located within our 20,000-acre Buckskin Mesa Project
located in the Piceance Basin, Colorado, and to undertake a completion and
testing program with respect to these five wells, and closed this transaction in
November 2008.





The
following discussion addresses our operating results for the years ended
September 30, 2008, 2007 and 2006.





Results
of Operations - Year Ended September 30, 2008 versus Year Ended
September 30, 2007





Oil and Gas
Revenues


Oil and
gas revenues were $2.0 million and $2.8 million for the fiscal years ended
September 30, 2008 and 2007, respectively, which represents a decline of $0.8
million or 29.3%.  Oil and gas revenues decreased primarily due
to our swap of acreage with EnCana (see Note 3) which reduced our net producing
wells from 27 in 2007 to eight wells in 2008.  In 2008, we sold
287,000 Mcf of natural gas and 348 Bbls of oil, and in 2007, we sold
approximately 457,000 Mcf of natural gas and 137 Bbls of
oil.  Our natural gas volumes decreased by 37.2%, while our oil sales
remained insignificant.  The average price received for our natural
gas sales in 2008 was $6.82 per Mcf, versus $6.16 per Mcf in 2007, representing
an increase of $0.66 or 10.7%.  We also generated $0.2 million in
consulting revenue in 2008 under an agreement with a third party.





Costs
and Expenses.


Lease Operating
Expenses.  Lease operating expenses of $0.8 million in
2008 include expenses on the remaining producing wells (our eight EnCana
operated wells) of $0.5 million, and $0.3 million relating to compression
charges on our Buckskin Mesa wells which are not yet producing, and are awaiting
completion. We have incurred certain operating costs in anticipation of
completing our five wells in our Buckskin Mesa Project, which has been delayed
due to our cash flow constraints.  This compares to $0.8 million of
total lease operating expenses in 2007, which solely related to our
producing wells.





General and
Administrative.  During 2008, general and administrative
expenses decreased by $7.3 million or 40.6% in comparison to 2007. The
following table highlights the areas with the most significant changes ($ in
thousands):


36





Year Ended
    September 30,2008
                
                
                2007
                
                
                ChangePayroll
                
                $
                2,572
                
                
                $
                2,346
                
                
                $
                226Consulting
      fees
                
                
                1,936
                
                
                
                2,887
                
                
                
                (951
                )Stock
      based compensation expense
                
                
                3,276
                
                
                
                8,172
                
                
                
                (4,896
                )Legal
                
                
                906
                
                
                
                1,419
                
                
                
                (513
                )Travel
                
                
                224
                
                
                
                1,193
                
                
                
                (969
                )Investor
      relations
                
                
                250
                
                
                
                709
                
                
                
                (459
                )Insurance
                
                
                575
                
                
                
                325
                
                
                
                250Office
      operations
                
                
                314
                
                
                
                457
                
                
                
                (143
                )Other
      Miscellaneous
                
                
                689
                
                
                
                567
                
                
                
                122Total
                
                $
                10,742
                
                
                $
                18,075
                
                
                $
                (7,333
                )




Taken
together, our payroll-related costs and consulting costs in 2008 declined $0.7
million to $4.5 million, from $5.2 million in 2007. This 13.9% decline was due
to lower property development activity during 2008 and our efforts to reduce
overall expenses to conserve cash. The increase in payroll-related costs is the
result of converting certain long-term consultants to employees in the latter
part of 2008.





Our stock
based compensation expense decreased 59.9% to $3.3 million in 2008, from $8.2
million in 2007, and this $4.9 million reduction represented the most
significant component of our overall reduction in general and administrative
expenses. The reduction in this non-cash expense was primarily due to lower
initial grant values in 2008 resulting from our falling share price, and
significant charges recorded in 2007 due to the acceleration of certain stock
options granted to former employees.





Our legal
fees in 2008 were $0.9 million, a decrease of $0.5 million, or 36.2% lower than
in 2007, due primarily to a streamlining of certain relationships with outside
counsel and a conscious effort to reduce the use of outside legal services in
2008.





Our
travel costs of $0.2 million in 2008 were $1.0 million or 81.2% lower than the
$1.2 million in costs we incurred in 2007 as a result of our conscious efforts
to manage costs and conserve cash.





Our
investor relations costs of $0.3 million in 2008 were $0.4 million or $64.7%
lower than the $0.7 million in costs we incurred in 2007, due primarily to our
focus on expense management.  All other general and administrative
costs taken together increased by $0.2 million, primarily due to increased
insurance costs.





Project Development Costs —
Related Party.  Property development costs were $0.0 million in
2008 and $1.8 million in 2007, as a result of our restructuring of our
agreements with MAB, which was effective January 1, 2007 (See Note 10 of
Notes to Consolidated Financial Statements). Prior to January 1, 2007, we
incurred monthly project development costs pursuant to our Development Agreement
with MAB on a series of individual property agreements, which did not continue
after December 31, 2006.





Impairment of Oil and Gas
Properties.During 2008, we recorded an impairment of $30.8
million compared to $24.1 million in 2007.  Costs capitalized for
properties accounted for under the full cost method of accounting are subjected
to a ceiling test limitation on 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, an impairment is recognized representing
the excess of capitalized costs over the ceiling, as calculated in accordance
with the full cost accounting rules. The impairment in 2008 primarily resulted
from the sale of oil and gas properties with significant proved reserves, offset
in part by an increase in natural gas prices in 2008. The impairment in 2007 was
primarily caused by an increase to the cost pool in the amount of
$94.5 million, most of which was related to the fair value of the shares
given up to MAB to increase our interest in several properties and as a result
of the Consulting Agreement and amendments thereto. In accordance with GAAP, the
shares were valued based on their market price on the date of issuance, which
was $1.62 per share.






37




Depreciation, Depletion,
Amortization and Accretion.Depreciation, depletion,
amortization and accretion expense (“DD&A”) was $1.2 million in 2008
and 2007.  Depletion is based on the production volumes described
above and declined slightly in 2008 to $0.9 million from $1.0 million
in 2007. Depreciation expense was slightly higher in 2008 at $0.3 million
compared to $0.2 million in 2007, as the evaluated asset pool increased for the
balance of the year.





Losses on Conveyances of
Property. During 2008, we completed several significant asset
sales, which resulted in our recognizing losses of $20.5 million in accordance
with the full cost pool accounting rules.  During our first quarter
ended December 31, 2007, we sold our Heavy Oil Projects and realized net
proceeds of $13.0 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 an $11.9 million loss on conveyance during the quarter
ended December 31, 2007. Similarly, during our third quarter ended June 30,
2008, we sold the majority of our properties in the Southern Piceance Basin in
Colorado, and realized net proceeds of $18.7 million.  This
transaction also required us to conduct a loss evaluation, upon which we
concluded that this transaction also resulted in the recognition of an $8.6
million loss on conveyance during the quarter ended June 30, 2008. During 2007,
we did not have any oil and gas property dispositions (See Note 3 of Notes
to Consolidated Financial Statements).





Interest
Expense.  During 2008, interest expense was $11.2 million,
in comparison to $6.7 million incurred in 2007. The $4.5 million net
increase in interest expense, or 67.6%, primarily relates to the following:
increased interest expense of $4.4 million associated with our credit facilities
with Global Project Finance AG in 2008, versus $2.1 million incurred in 2007
resulting from a partial year the debt was outstanding in 2007, and additional
borrowings in 2008; interest expense of $0.6 million on our convertible
debentures in 2008 with none in 2007; and increased amortization of debt
discounts and issuance costs of $4.0 million in 2008 versus $1.0 million in
2007; all partially offset by a $1.9 million decrease in interest on accounts
and contracts payable aggregating $1.6 million in 2008 versus $3.5 million in
2007.





Net Loss.Our net
loss of $76.9 million in 2008 compared to the loss of $49.8 million in 2007
represents an increase of $27.1 million or 54.3%, as a result of the factors
above.





Year
Ended September 30, 2007 vs. Year Ended September 30,
2006





Oil and Gas
Revenues.  Our initial revenues were generated during 2006 in
the amount of $35,656. The 2006 revenues resulted from the initial testing and
production of four natural gas wells in the Piceance Basin of Colorado that sold
5,822 Mcf of natural gas. Revenues increased to $2.8 million for the
2007 fiscal year. The increase is related to our earning revenue on our interest
in certain producing wells, operated by a third party, in the Piceance Basin,
Colorado. In 2007, these producing wells produced and sold approximately
457,000 Mcf of natural gas and 137 Bbls of oil. Average prices
received for gas sold increased to $6.16 per Mcf in 2007 from $6.12 per Mcf in
2006 as a result of market conditions.





Costs
and Expenses


Lease Operating
Expenses.  For 2007, lease operating expenses increased to
$0.8 million compared to $0.0 million in 2006. This is a result of the fact
that we had only performed testing on the four wells that we earned revenue from
in 2006 while those same wells were operating for the full year during
2007.





General and
Administrative.  During 2007, general and administrative
expenses increased by $4.4 million or 33% in comparison to 2006. The
following table highlights the areas with the most significant increases ($ in
thousands):


38





Year Ended
                        September 30,2007
                      
                      
                      2006
                      
                      
                      ChangePayroll
                      
                      $
                      2,346
                      
                      
                      $
                      846
                      
                      
                      $
                      1,500Consulting
      fees
                      
                      
                      2,887
                      
                      
                      
                      1,292
                      
                      
                      
                      1,595Stock
      based compensation expense
                      
                      
                      8,172
                      
                      
                      
                      9,189
                      
                      
                      
                      (1,017
                      )Legal
                      
                      
                      1,419
                      
                      
                      
                      550
                      
                      
                      
                      869Travel
                      
                      
                      1,193
                      
                      
                      
                      759
                      
                      
                      
                      434Investor
      relations
                      
                      
                      709
                      
                      
                      
                      553
                      
                      
                      
                      156IT
      maintenance and support
                      
                      
                      205
                      
                      
                      
                      13
                      
                      
                      
                      192Total
                      
                      $
                      16,931
                      
                      
                      $
                      13,202
                      
                      
                      $
                      3,729





The
increase in general and administrative expenses in 2007 is a result of
commencing operations and hiring full-time employees in June 2006.  We
also experienced increased legal fees and travel expenses due to additional
business and financing transactions, along with increased development activities
in Australia and Colorado.  There were no individually significant
changes or trends in all other general and administrative costs not included in
the above table.





Project Developmental Costs —
Related Party.  Property costs incurred to MAB were
$1.8 million during 2007, as compared to $4.5 million in 2006, a
decrease of $2.7 million or 60%. These costs decreased as a result of the
restructuring of our agreements with MAB, which was effective January 1,
2007.





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, an impairment is recognized. During 2007, we recorded an
impairment expense of $24.1 million, representing the excess of
capitalized costs over the ceiling, as calculated in accordance with these full
cost rules. The impairment in 2007 was primarily caused by an increase to the
cost pool in the amount of $94.5 million, most of which was related to the
fair value of the shares given up to MAB to increase our interest in several
properties and as a result of the Consulting Agreement and amendments
thereto.





Depreciation, Depletion,
Amortization and Accretion.  Depreciation, depletion,
amortization and accretion expense (“DD&A”) was $1.2 million in 2007 as
compared to $0.1 million in 2006. The increase is primarily a result of a
higher amortization base in 2007.





Interest
Expense.  During 2007, interest expense was $6.7 million,
as compared to $2.5 million during 2006. During 2007, interest expense
included $3.4 million of costs paid to extend the Maralex Agreement and
$1.0 million of amortization of discount and deferred financing costs on
the credit facilities entered into during the year.





Net Loss.  During
2007,we incurred a net loss of $49.8 million as compared to a net loss of
$20.7 million during 2006.





Going
Concern





The
report of our independent registered public accounting firm on the financial
statements for the year ended September 30, 2008, includes an explanatory
paragraph relating to significant doubt or uncertainty of our ability to
continue as a going concern.  From our inception to September 30,
2008, we have generated a cumulative net loss of $149.5 million, we have a
working capital deficit of $3.9 million as of September 30, 2008, we
have obtained waivers of the covenants of several loan agreements to avoid
defaults, and have significant capital expenditure commitments. For our 2009
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 or that we acquire and we may not achieve profitability from operations in
the near future or at all. We require significant additional funding to sustain
our operations and satisfy our contractual obligations for our






39




planned
oil and gas exploration and development operations. 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.





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, 2008 ($ in thousands):





Payments Due by PeriodContractual
      Obligations
                          
                          Total
                          
                          
                          Less
      Than
                            1 Year
                          
                          
                          1-3
                            Years
                          
                          
                          3-5
                            Years
                          
                          
                          More
      Than
                            5 YearsRelated party notes
                          
                          
                          43,478
                          
                          
                          
                          3,572
                          
                          
                          
                          39,800
                          
                          
                          
                          106
                          
                          
                          
                          -Long-term borrowings
                          
                          
                          7,236
                          
                          
                          
                          280
                          
                          
                          
                          -
                          
                          
                          
                          6,956
                          
                          
                          
                          -Office leases
                          
                          
                          990
                          
                          
                          
                          340
                          
                          
                          
                          582
                          
                          
                          
                          68
                          
                          
                          
                          -Compressor rentals
                          
                          
                          2,748
                          
                          
                          
                          871
                          
                          
                          
                          1,877
                          
                          
                          
                          -
                          
                          
                          
                          -Drilling and seismic commitments
                          
                          
                          72,600
                          
                          
                          
                          25,800
                          
                          
                          
                          43,100
                          
                          
                          
                          2,400
                          
                          
                          
                          1,300Total
                          
                          $
                          127,052
                          
                          
                          $
                          30,863
                          
                          
                          $
                          85,359
                          
                          
                          $
                          9,530
                          
                          
                          $
                          1,300





Plan
of Operation





Colorado


In fiscal
year 2009 we will focus on completing the five wells drilled in 2006-2007, and
connect them to the gathering system, followed by drilling nine additional
obligation wells, which must be commenced by December 31, 2009. Completion of
the gathering system and central facility for the Buckskin Mesa Project will
also enable us to recomplete and hook-up one or more of the six additional
shut-in gas wells acquired with the properties in 2006.





Extensive
regulatory compliance work has been initiated to facilitate our asset
development plan, and some title issues are being addressed in connection with
the drilling program for the fiscal year 2009. In summary, execution of the plan
for these assets will optimally yield the drilling of not less than nine new
exploratory wells in the Buckskin Mesa Prospect, and the completion or
recompletion of as many as six wells in the Buckskin Mesa Prospect during fiscal
year 2009.





Australia


We plan
to explore and develop portions of our undivided 50% working interest in our
7.0 million acre position in four exploration permits in the
Beetaloo Basin project area located in northwestern Australia. During
calendar year 2009, we plan to drill four wells in the exploration permit
blocks. We anticipate that costs related to seismic acquisition, development of
operational infrastructure, and the drilling and completion of wells over the
next twelve months, will aggregate approximately $18.5 million relating to our
50% working interest.  We closed the sale of a 50%
working interest in four exploration permits covering the above
mentioned acreage to Falcon Oil and Gas Australia Pty Ltd. on September 30,
2008.





Liquidity
and Capital Resources





Our most
recent year ended September 30, 2008 was a year of significant transition for
us. We began the year with a $37.9 million working capital deficit, and our cash
flows from operations were not sufficient for us to meet our operating
commitments.  Our cash flows from operations continue to be, and are
expected to continue to be, insufficient to meet our operating commitments
through the year ending September 30, 2009.





Given
these circumstances, our primary goals during 2008 were to significantly improve
our balance sheet through the sale of non-core assets, pursue debt and equity
financing transactions, and to seek development partners for our Buckskin Mesa
Project in Colorado and our Beetaloo Basin Project in Australia. We made
significant progress toward these goals during 2008. We were successful at
raising $17.2 million through borrowings under our existing credit
facilities and from the sale of convertible debentures; we realized net proceeds
of $13.0 million through the sale of Our Heavy Oil Projects to Pearl Exploration
and Production Ltd. in November 2007; we realized net proceeds of $18.7 million
from the sale of all our interest in the Piceance II properties to Laramie
Energy II, LLC, in






40




May 2008;
and we completed the sale of the following interests in our properties pursuant
to a purchase and sale agreement with Falcon Oil & Gas Ltd., 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. As a result of our completion of
these transactions, we reduced our working capital deficit to $3.9 million as of
September 30, 2008.





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 may elect to become the operator of the Buckskin Mesa Project for an
additional payment of $3.5 million. Falcon will have 60 days to determine
whether it wishes to exercise the option after we have completed our testing
program, which we expect will occur during our second quarter ending March 31,
2009. The exercise of this option would provide substantial additional liquidity
to us.





In
October 2008, we and Global Project Finance AG (“Global”) agreed that under
certain circumstances, we may reduce the outstanding balance under the credit
facilities with Global by up to $20.0 million in exchange for securities in
Falcon and our common stock.  If Falcon exercises its option to acquire a
50% interest in the Buckskin Mesa project and pays up to $10.0 million of the
purchase price in Falcon convertible securities, we will assign to Global up to
$10.0 million of such Falcon convertible securities, and pay the balance,
if any, in cash, so that the total of the assigned Falcon convertible securities
and any cash payment equals $10.0 million.  Global has agreed to treat
this assignment and payment as payment of $10.0 million against amounts owed
under the Credit Facilities.  In addition, upon exercise of the
option, we would issue to Global shares of our common stock valued at $10.0
million as payment of an additional $10.0 million against amounts owed under the
credit facilities.





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 many factors,
including changes in our oil and gas revenue production and changes in our
ongoing operating costs, along with other business factors that affect our
operating results and cash flows. Our working capital is also affected by 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.


As of
September 30, 2008, we had a working capital deficit of $3.9 million
and cash of $1.0 million, and as of September 30, 2007, we had working
capital deficit of $37.9 million and cash of $0.1 million. Accordingly, we
reduced our working capital deficit by $34.0 million during 2008. Included in
current liabilities as of September 30, 2008 is a $4.8 million obligation we are
contingently liable to pay to CCES Piceance Partners I, LLC  upon our
inability to reach mutual agreement on a commitment for our long term gas
gathering system for our Buckskin Mesa Project. We expect we will be able to
reach agreement with them, which would then release the guarantee, and we would
then offset this obligation against the related intangible asset we have
recorded as of September 30, 2008.





As of
September 30, 2008, a total of $14.1 million of our $17.9 million in current
assets related to shares of the common stock of Falcon Oil & Gas Ltd., which
have declined significantly in value subsequent to September 30, 2008, and are
subject to significant price volatility.  In addition, the shares are
traded on the Toronto Venture Exchange, and are denominated in Canadian Dollars,
so they are also subject to changes in value due to changes in the value of the
Canadian Dollar versus the U.S. Dollar.  As of September 30, 2008,
Falcon common shares were trading at CAD $0.55, resulting in a total value of
$14.9 million (prior to a $0.8 million impairment we recognized due to an other
than temporary decline in the value of certain of the shares based on
management’s plans and intentions), and as of January 9. 2009, Falcon common
shares were trading at CAD $0.40, resulting in a total value of $9.7 million. Of
the $5.2 million subsequent decline in value, $1.5 million of the decline was
due to the





41


strengthening
of the U.S. Dollar against the Canadian Dollar, and $3.7 million of the decline
was due to a drop in the market value of the shares.




In
addition, a total of 14.5 million of the 28.9 million Falcon shares we have
received in the Beetaloo Basin transaction are pledged as collateral for a $5.0
million loan we received from Falcon on October 1, 2008, and are reflected as
restricted marketable securities on our consolidated balance sheet as of
September 30, 2008. Substantially all of the proceeds of this loan were paid
toward our outstanding vendor obligations as of September 30, 2008, included in
accounts payable and accrued liabilities. The amount of cash we are ultimately
able to realize upon the sale of these securities is a significant factor in our
future liquidity and consequently will have a material effect upon our ability
to meet our future cash commitments.





For our
fiscal year ending September 30, 2009, we plan to fund our operating cash needs
through: the sale of the Falcon stock; obtaining debt financing that is
collateralized by the Falcon stock; seeking further sales of our remaining
working interests in our Buckskin Mesa and Beetaloo Basin Projects;
and/or completing additional private placements of debt or equity to raise
cash to meet our working capital needs. A significant amount of capital is
needed to fund our proposed drilling program for 2009 and to meet the balance of
our operating cash needs.





Cash
Flow – Year Ended September 30, 2008 versus Year Ended September 30,
2007


Net cash
used in or provided by operating, investing and financing activities for the
years ended September 30, 2008 and 2007 were as follows ($ in
thousands):





Year Ended
                  September 30,2008
                
                
                2007Net
      cash used in operating activities
                
                $
                (21,737
                )
                
                $
                (10,326
                )Net
      cash used in investing activities
                
                $
                14,145
                
                
                $
                (35,666
                )Net
      cash provided by financing activities
                
                $
                8,439
                
                
                $
                35,483





Net Cash Used in Operating
Activities.  The changes in net cash used in operating
activities are attributable to our net loss, adjusted for non-cash charges
as presented in the consolidated statements of cash flows, together
totaling ($12.7) million, plus an additional ($9.0)
million in uses of working capital, which was primarily due to our payment
of approximately $16.0 million of prior year property-related obligations to our
vendors, partially offset by the non-cash conversion of $6.5 million of accrued
interest on our Global credit facility to equity on September 30,
2008.





Net Cash Used in Investing
Activities. Net cash used in investing activities for the
year ended September 30, 2008 was primarily related to additions to
oil and gas properties of $20.0 million, offset by proceeds of $31.9
million from the sale of various property interests and proceeds of $2.5
million from the sale of securities received in the sale of our Heavy Oil
Projects.





Net Cash Provided by Financing
Activities.Net cash provided by financing activities for
the year ended September 30, 2008 was primarily comprised of: borrowings of
$17.2 million under our Global credit facility, convertible notes, and
other arrangements; net of $8.8 million of repayments on our various debt
obligations other than to Global and our convertible debt holders.





Cash
Flow – Year Ended September 30, 2007 versus Year Ended September 30,
2006


Net cash
used in or provided by operating, investing and financing activities for the
years ended September 30, 2007 and 2006 were as follows ($ in
thousands):





Year Ended
                        September 30,2007
                      
                      
                      2006Net
      cash used in operating activities
                      
                      $
                      (10,326
                      )
                      
                      $
                      (10,546
                      )Net
      cash used in investing activities
                      
                      $
                      (35,666
                      )
                      
                      $
                      (32,692
                      )Net
      cash provided by financing activities
                      
                      $
                      35,483
                      
                      
                      $
                      52,620





Net Cash Used in Operating
Activities.  The changes in net cash used in operating
activities are attributable to our net income adjusted for non-cash charges as
presented in the consolidated statements of cash flows and changes in working
capital as discussed above.





42


Net Cash Used in Investing
Activities.  Net cash used in investing activities for the year
ended September 30, 2007 was primarily used for: (1) additions to oil
and gas properties of $33.0 million; and (2) a $2.0 million
earnest money deposit related to the proposed purchase of the Powder River basin
assets that became a note receivable. Net cash used in investing activities for
the year ended September 30, 2006 was primarily used for additions to oil
and gas properties.





Net Cash Provided by Financing
Activities.  Net cash provided financing activities for the
year ended September 30, 2007 was primarily comprised of:
(1) borrowings of $32.3 million; and (2) the issuance of common
stock subscriptions and common stock for $3.2 million. Net cash provided by
financing activities for the year ended September 30, 2006 was comprised
of: (1) the issuance of common stock and warrants of $36.4 million and
(2) the issuance of convertible notes of $17.8 million offset by
offering and financing costs of $1.6 million.





Capital
Requirements


Uses of
cash for 2009 will be primarily for our drilling programs in the Piceance Basin
and in Australia. The following table summarizes our minimum drilling
commitments for fiscal year 2009 ($ in thousands):





Activity
              Prospect
              
              Aggregate
                Total Cost
              
              
              Our
                Working
                Interest
              
              
              Our
                ShareDrill
      and complete 4 wells (a)
              Buckskin
      Mesa
              
              $
              9,600
              
              
              
              100%
              
              
              $
              9,600Drill
      and complete 4 wells (b)
              Piceance
      II
              
              
              6,400
              
              
              
              37.5%
              
              
              
              2,400Drill
      and complete 8 wells (c)
              Beetaloo
              
              
              27,600
              
              
              
              50%
              
              
              
              13,800Total
              
              
              $
              43,600
              
              
              
              
              
              
              $
              25,800




(a)
                See
      Subsequent Events (Note 14 of Notes to Consolidated Financial Statements)
      for additional information on our sale of a portion of the Buckskin Mesa
      project area.(b)
                Our
      proportionate share of the total commitment assumes our working interest
      partners pay their proportionate share.(c)
                See
      Oil & Gas properties (Note 3 of Notes to Consolidated Financial
      Statements) for additional explanation on our sale of a
      50% working interest in 2008.  Reflects cost of eight-well
      commitment by December 31, 2009 that we expect to incur by September 30,
      2009.


2008
Financing Transactions


During
2008, we completed financing transactions as follow:





(1)
            We
      borrowed $8.3 million on our credit facility with Global, for a total of
      $39.8 million 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 in lieu of
      cash payment.  We pay an advance fee of 2% on all amounts
      borrowed under the facility, totaling $0.2 million during the
      year.  As of September 30, 2008, we do not expect to obtain
      further funds from this facility and we are working with the lender to
      determine ways to satisfy the outstanding balance. The funds borrowed were
      used to fund working capital needs of the
  Company.





(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 common stock.  We
      paid a placement fee of $0.3 million.  Funds were used to fund
      working capital needs.





(3)
            We
      borrowed $1.4 million from Global under short term promissory notes, which
      were unsecured and bore interest at 15% per annum.  The funds
      were used primarily to fund working capital
  needs.





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





43


(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.





Other
Cash Sources


The
continuation and future development of our business will require substantial
additional capital expenditures, and we believe we are actively pursuing all of
our available options to generate cash. Meeting capital expenditure,
operational, and administrative needs for the period ending September 30,
2009 will depend on our success in farming out or selling portions of working
interests in our properties for cash and/or funding of our share of development
expenses, the availability of debt or equity financing, and the outcomes of
various uncertainties, including whether Falcon will exercise its option on our
Buckskin Mesa properties. To limit capital expenditures, we may form industry
alliances and exchange an appropriate portion of our interest for cash and/or a
carried interest in our exploration projects using farm-out arrangements. We may
need to raise additional funds to cover capital expenditures. These funds may
come from cash flow, equity or debt financings, credit facilities, or sales of
interests in our properties, although there is no assurance additional funding
will be available or that it will be available on satisfactory terms. If we are
unable to raise capital through the methods discussed above, our ability to
execute our development plans will be greatly impaired.





Development
Stage Company


We have
not commenced our principal operations or earned significant revenue as of
September 30, 2008, and we are considered a development stage entity for
financial reporting purposes. During the period from inception to
September 30, 2008, we incurred a cumulative net loss of
$149.5 million. We have raised approximately $108.3 million through
borrowing and the sale of convertible notes and common stock from inception
through September 30, 2008. In order to fund our planned exploration and
development of oil and gas properties, we will require significant additional
funding.





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 geloogical interpretation and judgment. 
Estimates of economically recoverable oil and natural gas reserves and future
net cash flows necessarily 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 assumtions 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






44


and gas
properties is 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 SFAS 143, Accounting for Asset Retirement
Obligations. The estimated fair value of the future costs associated with





Share
Based Compensation


Effective
October 1, 2006, we adopted the provisions of SFAS 123(R) (as
amended), Share-Based
Payment, using the modified prospective method, which results in the
provisions of SFAS 123(R) being applied to the consolidated financial
statements on a going-forward basis. SFAS 123(R) revises SFAS 123,
Accounting for Stock-Based
Compensation, and supersedes Accounting Principles Board (“APB”) Opinion
25, Accounting for Stock
Issued to Employees. SFAS 123(R)
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods and services at fair value, focusing
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. It also addresses transactions in
which an entity incurs liabilities in exchange for goods and services that are
based on the fair value of the entity’s equity instruments or that may be
settled by the issuance of those equity instruments.





We have
accounted for stock-based compensation awarded to non-employees under the
provisions of EITF 96-18, Accounting for Equity Instruments
That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
or Services.





Impairment


SFAS 144,
Accounting for the Impairment
and Disposal of Long-Lived Assets,requires
long-lived assets to be held and used to be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. We use the full cost method of accounting for our oil
and gas properties. Properties accounted for using the full cost method of
accounting are excluded from the impairment testing requirements under
SFAS 144. Properties accounted for under the full cost method of accounting
are subject to SEC Regulation S-X Rule 4-10, Financial Accounting and
Reporting for Oil and Gas
Producing Activities Pursuant to the Federal Securities Laws and the Energy Policy and
Conversion Act of 1975(“Rule 4-10”). Rule 4-10 requires that
each regional cost center’s (by country) capitalized cost, less accumulated
amortization and related deferred income taxes, not exceed a cost center
“ceiling”. The ceiling is defined as the sum of:





•
            The
      present value of estimated future net revenues computed by applying
      current prices of oil and gas reserves to estimated future production of
      proved oil and gas reserves as of the balance sheet date less estimated
      future expenditures to be incurred in developing and producing those
      proved reserves to be computed using a discount factor of 10%;
      plus


•
            The
      cost of properties not being amortized;
plus


•
            The
      lower of cost or estimated fair value of unproven properties included in
      the costs being amortized; less


•
            Income
      tax effects related to differences between the book and tax basis of the
      properties.






45




If
unamortized costs capitalized within a cost center, less related deferred income
taxes, exceed the cost center ceiling, the excess is charged to expense. During
the periods ended September 30, 2008 and 2007, $30.8 million and $24.1
million was charged to impairment expense, respectively.
 
 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 SFAS 115, Accounting for Certain Investments
in Debt and Equity Securities. As the shares we have received are
available for sale in the short term, 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, when they will
then be recognized in our statement of operations. In addition,
in





In
November 2007, we received 1.5 million shares of the common stock of the
purchaser of our Heavy Oil Projects, which were sold in March 2008, when we
recognized a $3.0 million loss.





On
September 30, 2008, we closed the sale of a 50% working interest in four of our
exploration permits in Australia, and received 28.9 million shares of the common
stock of the purchaser. Certain of these shares were subsequently pledged as
collateral for a note, and are reflected as restricted marketable securities on
our balance sheet as of September 30, 2008. In addition, we have recorded an
estimated impairment of $0.8 million in relation to 2.8 million shares of
unrestricted marketable securities, due to subsequent declines in the value of
these shares that we consider to be other than temporary in light of our
expected disposition date.





Recently
Issued Accounting Pronouncements




May 2008,
the Financial Accounting Standards Board (the "FASB") issued Statement
of Financial Accounting Standards ("SFAS") Statement No. 162, "The Hierarchy of Generally Accepted Accounting
Principles", which identifies
the sources of accounting principles and the framework for selecting the
principles to be used in the preparation of financial statements of non-governmental
entities that are presented in conformity with generally accepted
accounting principles ("GAAP") in the United States. SFAS 162 is effective
sixty days following the SEC's approval of The Public Company Accounting
Oversight Board's related amendments to remove the GAAP hierarchy from
auditing standards. We do not expect adoption of SFAS 162 will have a material
impact on our Consolidated Financial Statements.




In May
2008, the FASB issued FASB Staff Position No. APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement) (the FSP). The FSP specifies that issuers of convertible debt
that can be settled in cash should separately account for the liability (debt)
and equity (conversion option) components in a manner that reflects the entity’s
nonconvertible debt borrowing rate when interest cost is recognized. The FSP
therefore may require different accounting for our Convertible Debentures due
2012 issued in November 2007 upon the adoption of the FSP.  We will
adopt the FSP October 1, 2009. The provisions of the FSP will be applied
retrospectively to all periods presented, or all periods subsequent to January
2007.





In March
2008, the FASB issued SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities, an Amendment of SFAS No. 133.
This new standard requires enhanced disclosures about how and why an entity uses
derivative instruments, how such instruments and related hedged items are
accounted for under SFAS No. 133, and how those instruments and items
affect an entity’s financial position, financial performance, and cash flows. We
must adopt SFAS 161 no later than October 1, 2009. We currently have
no derivatives outstanding as of September 30, 2008.  The
adoption of this standard may affect future disclosures related to any
derivative instruments or related hedges that are entered into in future
periods.








46


In
December 2007, the FASB issued SFAS 141(R), Business Combinations, and
SFAS 160, Accounting and
Reporting of Non Controlling Interest in Consolidated Financial Statements, an
Amendment to ARB No. 51.  These new standards will
significantly change the accounting for and reporting of business combination
transactions and minority interests in financial statements. We must adopt these
standards simultaneously as of October 1, 2009, for the beginning of the fiscal
2010 year. The adoption of these standards will have a material effect on the
accounting for any business combination consummated thereafter or for any
minority interest that exists at that time.
 
 In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities, which allows entities to choose, at
specified election dates, to measure eligible financial assets and liabilities
at fair value that are not otherwise required to be measured at fair value. If a
company elects the fair value option for an eligible item, changes in that
item’s fair value in subsequent reporting periods must be recognized in current
earnings. SFAS 159 also establishes presentation and disclosure
requirements designed to draw comparison between entities that elect different
measurement attributes for similar assets and liabilities. SFAS 159 became
effective for us on October 1, 2008.  We believe that the impact
of SFAS 159 on our consolidated results of operations, cash flows or
financial position is not material.
 
 In
September 2006, the FASB issued SFAS 157, Fair Value Measurements,
which addresses how companies should measure fair value when they are required
to use a fair value measure for recognition or disclosure purposes under
generally accepted accounting principles. We adopted SFAS 157 as of
October 1, 2008. We will use fair value measurements to determine the
reported amounts of assets acquired and liabilities assumed in purchase
transactions, in testing potential goodwill, for disclosure of the fair value of
financial instruments, and elsewhere. It is therefore





ITEM 7A.
            QUANTITATIVE AND QUALITATIVE
      DISCLOSURES ABOUT MARKET
RISK










ITEM 8.
            FINANCIAL STATEMENTS AND
      SUPPLEMENTARY DATA







47




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 The Board
of Directors
 PetroHunter
Energy Corporation (a development stage company)
 Denver,
Colorado
 
 We have
audited the accompanying consolidated balance sheet of PetroHunter Energy
Corporation (the “Company”), a development stage company, as of September 30,
2008 and the related consolidated statements of operations, stockholders’ equity
and comprehensive loss and cash flows for the year then ended and the cumulative
period from June 20, 2005 (inception) to September 30, 2008.  We did
not audit the cumulative period from June 20, 2005 (inception) to September 30,
2007. Those amounts were audited by other auditors, whose report dated January
11, 2008 has been furnished to us, and our opinion, insofar as it relates to the
cumulative amounts from June 20, 2005 (inception) to September 30, 2007, is
based solely on the report of the other auditors. These financial statements are
the responsibility of the Company’s management.  Our responsibility is
to express an opinion on these financial statements based on our
audit.
 
 We
conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit 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 audit provides 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 (a
development stage company) as of September 30, 2008, and the results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of
America.
 
 We have
also audited the combination in the consolidated statements of operations, cash
flows, and shareholders’ equity and comprehensive loss of the amounts as
presented for the year ending September 30, 2008 with the amounts for the
corresponding statements for the period from June 20, 2005 (inception) through
September 30, 2007. In our opinion the amounts have been properly combined for
the period from June 20, 2005 (inception) through September 30,
2008.
 
 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, 6, 7, 9, 10 11, and 14, the Company had numerous
significant transactions with related parties.
 
 
 
 Eide
Bailly LLP
 Greenwood
Village, Colorado
 January
12, 2009








48





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








To the
Board of Directors


PetroHunter
Energy Corporation


Denver,
Colorado





We have
audited the accompanying consolidated balance sheet of PetroHunter Energy
Corporation and subsidiaries (the “Company”), a development stage company, as of
September 30, 2007, and the related consolidated statement of operations,
comprehensive loss, stockholders’ equity and cash flows for the year ended
September 30, 2007 and for the period from inception (June 20, 2005)
to September 30, 2007. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provided a
reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of PetroHunter Energy
Corporation and subsidiaries as of September 30, 2007, and the results of
their operations and their cash flows for the year ended September 30, 2007 and
for the period from inception (June 20, 2005) to September 30, 2007 in
conformity with U.S. generally accepted accounting principles.




The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  As discussed in Note 2 to the
financial statements, the Company has incurred recurring losses from operations,
has a working capital deficit of approximately $37.8 million, was not in
compliance with the covenants of several loan agreements, has had multiple
property liens and foreclosure actions filed by vendors, and has significant
capital expenditure commitments.  These factors raise substantial
doubt about the Company’s ability to continue as a going
concern.  Management’s plans in regard to these matters are also
described in Note 2.  The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.





As
discussed in Note 2, effective October 1, 2006, the Company adopted Statement of
Financial Accounting Standards No. 123(R), Share Based
Payments.





As
discussed in Notes 3, 6, 7, 10, 11 and 14, the Company has had numerous
significant transactions with related parties.










HEIN& ASSOCIATES
LLP





Denver,
Colorado


January
11, 2008





49


PETROHUNTER
ENERGY CORPORATION


(A
Development Stage Company)


CONSOLIDATED
BALANCE SHEETS





September 30,ASSETS
                
                2008
                
                
                2007($
      in thousands)Current
      AssetsCash
      and cash equivalents
                
                $
                967
                
                
                $
                120ReceivablesOil
      and gas receivables, net
                
                
                193
                
                
                
                487GST
      receivables
                
                
                504
                
                
                
                —Other
      receivables
                
                
                12
                
                
                
                59Due
      from related parties
                
                
                1,840
                
                
                
                500Notes
      receivable – related party
                
                
                —
                
                
                
                2,494Restricted
      marketable securities
                
                
                7,495
                
                
                
                —Unrestricted
      marketable securities
                
                
                6,638
                
                
                
                —Prepaid
      expenses and other assets
                
                
                273
                
                
                
                187TOTAL
      CURRENT ASSETS
                
                
                17,922
                
                
                
                3,847Property
      and Equipment, at costOil
      and gas properties under full cost method, net
                
                
                97,352
                
                
                
                162,843Furniture and equipment, net
                
                
                737
                
                
                
                56998,089
                
                
                
                163,412Other
      AssetsJoint
      interest billings
                
                
                —
                
                
                
                13,637Restricted cash
                
                
                524
                
                
                
                599Deposits and other assets
                
                
                130
                
                
                
                —Deferred financing costs
                
                
                1,388
                
                
                
                529Intangible asset
                
                
                4,832
                
                
                
                —TOTAL
      ASSETS
                
                $
                122,885
                
                
                $
                182,024LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      LiabilitiesAccounts
      payable and accrued expenses
                
                $
                11,981
                
                
                $
                26,631Notes payable – short term
                
                
                329
                
                
                
                4,167Note payable –related party – current portion
                
                
                3,572
                
                
                
                4,255Note payable – long term – current portion
                
                
                —
                
                
                
                120Accrued interest payable
                
                
                166
                
                
                
                2,399Accrued interest payable related party
                
                
                969
                
                
                
                516Due to shareholder and related parties
                
                
                —
                
                
                
                1,474Contracts payable – oil and gas properties
                
                
                —
                
                
                
                1,750Convertible notes payable
                
                
                —
                
                
                
                400Contingent purchase obligation
                
                
                4,832
                
                
                
                —TOTAL
      CURRENT LIABILITIES
                
                
                21,849
                
                
                
                41,712Notes payable  – related party – net
                
                
                38,035
                
                
                
                36,864Notes
      payable
                
                
                —
                
                
                
                130Convertible notes payable – net
                
                
                325
                
                
                
                —Asset retirement obligation
                
                
                114
                
                
                
                136TOTAL
      LIABILITIES
                
                
                60,323
                
                
                
                78,842Commitments
      and Contingencies (Notes 3, 5, 6, 11 and 13)Common
      Stock Subscribed
                
                
                —
                
                
                
                2,858Stockholders’
      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;
      373,343,544 and
                  278,948,841
      issued and outstanding at September 30, 2008 and 2007,
      respectively
                
                
                374
                
                
                
                279Additional
      paid-in-capital
                
                
                212,308
                
                
                
                172,672Accumulated
      other comprehensive loss
                
                
                (632
                )
                
                
                (5
                )Deficit
      accumulated during the development stage
                
                
                (149,488
                )
                
                
                (72,622
                )TOTAL
      STOCKHOLDERS’ EQUITY
                
                
                62,562
                
                
                
                100,324TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                
                $
                122,885
                
                
                $
                182,024


See
accompanying notes to consolidated financial statements.





50


PETROHUNTER
ENERGY CORPORATION


(A
Development Stage Company)





CONSOLIDATED
STATEMENTS OF OPERATIONS





Year
      Ended
                September 30,
                2008
              
              
              Year
      Ended
                September 30,
                2007
              
              
              Year
      Ended
                September 30,
                2006
              
              
              Cumulative
                from
                Inception
                (June 20,
                2005) to
                September 30,
                2008($
      in thousands, except per share amounts)RevenuesOil
      and gas revenues
              
              $
              1,993
              
              
              $
              2,820
              
              
              $
              36
              
              
              $
              4,849Other
      revenues
              
              
              187
              
              
              
              —
              
              
              
              —
              
              
              
              187Total
      Revenue
              
              
              2,180
              
              
              
              2,820
              
              
              
              36
              
              
              
              5,036Costs
      and ExpensesLease
      operating expenses
              
              
              805
              
              
              
              793
              
              
              
              4
              
              
              
              1,602General
      and administrative
              
              
              10,742
              
              
              
              18,075
              
              
              
              13,638
              
              
              
              43,691Project
      development costs — related party
              
              
              —
              
              
              
              1,815
              
              
              
              4,530
              
              
              
              7,205Impairment
      of oil and gas properties
              
              
              30,847
              
              
              
              24,053
              
              
              
              —
              
              
              
              54,900Depreciation,
      depletion, amortization and
                accretion
              
              
              1,230
              
              
              
              1,245
              
              
              
              73
              
              
              
              2,548Total
      operating expenses
              
              
              43,624
              
              
              
              45,981
              
              
              
              18,245
              
              
              
              109,946Loss
      from Operations
              
              
              (41,444
              )
              
              
              (43,161
              )
              
              
              (18,209
              )
              
              
              (104,910
              )Other
      Income (Expense)Loss
      on conveyances of property
              
              
              (20,469
              )
              
              
              —
              
              
              
              —
              
              
              
              (20,469
              )Foreign
      currency exchange gain
              
              
              11
              
              
              
              23
              
              
              
              —
              
              
              
              34Interest
      income
              
              
              65
              
              
              
              36
              
              
              
              3
              
              
              
              104Interest
      expense
              
              
              (11,242
              )
              
              
              (6,709
              )
              
              
              (2,486
              )
              
              
              (20,460
              )Loss
      on sale of securities
              
              
              (2,987
              )
              
              
              —
              
              
              
              —
              
              
              
              (2,987
              )Impairment
      of marketable securities
              
              
              (800
              )
              
              
              —
              
              
              
              —
              
              
              
              (800
              )Total
      other expense
              
              
              (35,422
              )
              
              
              (6,650
              )
              
              
              (2,483
              )
              
              
              (44,578
              )Net
      Loss
              
              $
              (76,866
              )
              
              $
              (49,811
              )
              
              $
              (20,692
              )
              
              $
              (149,488
              )Net
      loss per common share — basic and diluted
              
              $
              (0.24
              )
              
              $
              (0.20
              )
              
              $
              (0.14
              )Weighted
      average number of common shares
                outstanding —
      basic and diluted
              
              
              322,902,152
              
              
              
              243,816,957
              
              
              
              147,309,096





See
accompanying notes to consolidated financial statements








51





PETROHUNTER
ENERGY CORPORATION


(A
Development Stage Company)





CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS





Common  StockShares
                                                            
                                                            
                                                            Amount
                                                            
                                                            
                                                            Additional
                                                              Paid-in
      Capital
                                                            
                                                            
                                                            Deficit
                                                              Accumulated During
      the
                                                              Development
      Stage
                                                            
                                                            
                                                            Accumulated
      Other Comprehensive Loss
                                                            
                                                            
                                                            TotalStockholders'
      Equity
                                                            
                                                            
                                                            Total
                                                              Comprehensive
      Loss
                                                            
                                                            
                                                            Common
                                                              Stock
      Subscribed($
      in thousands)Balance,
      June 20, 2005 inception)
                                                            
                                                            $
                                                            —
                                                            
                                                            
                                                            $
                                                            —
                                                            
                                                            
                                                            $
                                                            —
                                                            
                                                            
                                                            $
                                                            —
                                                            
                                                            
                                                            $
                                                            —
                                                            
                                                            
                                                            $
                                                            —
                                                            
                                                            
                                                            $
                                                            —
                                                            
                                                            
                                                            $
                                                            —Shares issued to founder at $0.001 per share
                                                            
                                                            
                                                            100,000,000
                                                            
                                                            
                                                            
                                                            100
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            100
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Stock based compensation costs for optionsgranted
      to non- employees
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            823
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            823
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Net
      loss
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            (2,119
                                                            )
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            (2,119
                                                            )
                                                            
                                                            
                                                            (2,119
                                                            )
                                                            
                                                            
                                                            —Balance,
      September 30, 2005
                                                            
                                                            
                                                            100,000,000
                                                            
                                                            
                                                            
                                                            100
                                                            
                                                            
                                                            
                                                            823
                                                            
                                                            
                                                            
                                                            (2,119
                                                            )
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            (1,196
                                                            )
                                                            
                                                            
                                                            (2,119
                                                            )
                                                            
                                                            
                                                            —Shares issued for property interests at $0.50 pershare
                                                            
                                                            
                                                            3,000,000
                                                            
                                                            
                                                            
                                                            3
                                                            
                                                            
                                                            
                                                            1,497
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            1,500
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Shares issued for finder’s fee on property at$0.50
      per share
                                                            
                                                            
                                                            3,400,000
                                                            
                                                            
                                                            
                                                            3
                                                            
                                                            
                                                            
                                                            1,697
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            1,700
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Shares issued upon conversion of debt, at $0.50per
      share
                                                            
                                                            
                                                            44,063,334
                                                            
                                                            
                                                            
                                                            44
                                                            
                                                            
                                                            
                                                            21,988
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            22,032
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Shares issued for commission on convertibledebt
      at $0.50 per share
                                                            
                                                            
                                                            2,845,400
                                                            
                                                            
                                                            
                                                            3
                                                            
                                                            
                                                            
                                                            1,420
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            1,423
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Sale of shares and warrants at $1.00 per unit
                                                            
                                                            
                                                            35,442,500
                                                            
                                                            
                                                            
                                                            35
                                                            
                                                            
                                                            
                                                            35,407
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            35,442
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Shares issued for commission on sale of units
                                                            
                                                            
                                                            1,477,500
                                                            
                                                            
                                                            
                                                            1
                                                            
                                                            
                                                            
                                                            1,476
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            1,477
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Costs of stock offering:
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Cash
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            (1,638
                                                            )
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            (1,638
                                                            )
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Shares issued for commission at $1.00 pershare
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            (1,478
                                                            )
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            (1,478
                                                            )
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Exercise of warrants
                                                            
                                                            
                                                            1,000,000
                                                            
                                                            
                                                            
                                                            1
                                                            
                                                            
                                                            
                                                            999
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            1,000
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Recapitalization of shares issued upon merger
                                                            
                                                            
                                                            28,700,000
                                                            
                                                            
                                                            
                                                            30
                                                            
                                                            
                                                            
                                                            (436
                                                            )
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            (406
                                                            )
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Stock based compensation
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            9,189
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            9,189
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Net
      loss
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            (20,692
                                                            )
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            (20,692
                                                            )
                                                            
                                                            
                                                            (20,692
                                                            )
                                                            
                                                            
                                                            —Balance,
      September 30, 2006
                                                            
                                                            
                                                            219,928,734
                                                            
                                                            
                                                            
                                                            220
                                                            
                                                            
                                                            
                                                            70,944
                                                            
                                                            
                                                            
                                                            (22,811
                                                            )
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            48,353
                                                            
                                                            
                                                            
                                                            (20,692
                                                            )
                                                            
                                                            
                                                            —Common stock subscribed
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            2,858Shares issued for property interests at $1.70 pershare
                                                            
                                                            
                                                            2,428,100
                                                            
                                                            
                                                            
                                                            2
                                                            
                                                            
                                                            
                                                            4,125
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            4,127
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Shares issued for property interests at $1.62 pershare
                                                            
                                                            
                                                            50,000,000
                                                            
                                                            
                                                            
                                                            50
                                                            
                                                            
                                                            
                                                            80,950
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            81,000
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Shares issued for property interests at $1.49 pershare
                                                            
                                                            
                                                            256,000
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            382
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            382
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Shares issued for commission costs on propertyat
      $1.65 per share
                                                            
                                                            
                                                            121,250
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            200
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            200
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Shares issued for finance costs on property at$1.72
      per share
                                                            
                                                            
                                                            571,900
                                                            
                                                            
                                                            
                                                            1
                                                            
                                                            
                                                            
                                                            984
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            985
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Shares issued for finance costs on property at$1.29
      per share
                                                            
                                                            
                                                            475,000
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            612
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            612
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Shares issued for finance costs on property at$0.70
      per share
                                                            
                                                            
                                                            642,857
                                                            
                                                            
                                                            
                                                            1
                                                            
                                                            
                                                            
                                                            449
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            450
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Shares issued for finance costs on property at$0.51
      per share
                                                            
                                                            
                                                            525,000
                                                            
                                                            
                                                            
                                                            1
                                                            
                                                            
                                                            
                                                            268
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            269
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Shares issued for finance costs on property at$0.23
      per share
                                                            
                                                            
                                                            4,000,000
                                                            
                                                            
                                                            
                                                            4
                                                            
                                                            
                                                            
                                                            916
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            920
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Foreign currency translation adjustment
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            (5
                                                            )
                                                            
                                                            
                                                            (5
                                                            )
                                                            
                                                            
                                                            (5
                                                            )
                                                            
                                                            
                                                            —Discount on notes payable
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            4,670
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            4,670
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Stock based compensation
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            8,172
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            8,172
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Net
      loss
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            (49,811
                                                            )
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            (49,811
                                                            )
                                                            
                                                            
                                                            (49,811
                                                            )
                                                            
                                                            
                                                            —Balance,
      September 30, 2007
                                                            
                                                            
                                                            278,948,841
                                                            
                                                            
                                                            
                                                            279
                                                            
                                                            
                                                            
                                                            172,672
                                                            
                                                            
                                                            
                                                            (72,622
                                                            )
                                                            
                                                            
                                                            (5
                                                            )
                                                            
                                                            
                                                            100,324
                                                            
                                                            
                                                            
                                                            (49,816
                                                            )
                                                            
                                                            
                                                            2,858Shares 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 pershare
      - related party
                                                            
                                                            
                                                            25,000,000
                                                            
                                                            
                                                            
                                                            25
                                                            
                                                            
                                                            
                                                            7,725
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            7,750
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Shares issued in connection with debt conversionat
      $0.23 per share – related party
                                                            
                                                            
                                                            16,000,000
                                                            
                                                            
                                                            
                                                            16
                                                            
                                                            
                                                            
                                                            3,664
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            3,680
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Shares issued for property conveyance at $0.25per
      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 debtat
      $0.20 per share
                                                            
                                                            
                                                            2,677,519
                                                            
                                                            
                                                            
                                                            3
                                                            
                                                            
                                                            
                                                            533
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            536
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —   52
  Common shares issued for conversion of accruedinterest
      – related party at $0.20 per share
                                                            
                                                            
                                                            32,600,075
                                                            
                                                            
                                                            
                                                            33
                                                            
                                                            
                                                            
                                                            6,487
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            6,520
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Shares issued for vendor settlements at $0.20 pershare
                                                            
                                                            
                                                            16,879,219
                                                            
                                                            
                                                            
                                                            17
                                                            
                                                            
                                                            
                                                            3,359
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            3,376
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Shares issued for finance costs at $0.18 per share
                                                            
                                                            
                                                            2,037,890
                                                            
                                                            
                                                            
                                                            2
                                                            
                                                            
                                                            
                                                            365
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            367Shares issued for purchase option at $0.20 pershare
                                                            
                                                            
                                                            400,000
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            80
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            80
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Discount associated with beneficial conversionfeature
      and detachable warrants on convertibledebenture
      issuance
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            6,956
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            6,956
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Warrant value associated with convertibledebenture
      issuance
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            21
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            21
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Warrant value associated with debt conversion –related
      party
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            1,841
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            1,841
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Debt conversion - related party
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            2,704
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            2,704
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Recognition of warrant value associated withamendment
      & waiver on convertible debt
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            495
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            495
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Discount on notes payable
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            336
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            336Stock based compensation
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            3,276
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            3,276
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Origination fees associated with debt issuance
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            1,895
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            1,895Foreign 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
                                                            )





See
accompanying notes to consolidated financial statements.





53


PETROHUNTER
ENERGY CORPORATION


(A
Development Stage Company)





CONSOLIDATED
STATEMENTS OF CASH FLOWS





Year
      Ended
                September 30,
                2008
              
              
              Year
      Ended
                September 30,
                2007
              
              
              Year
      Ended
                September 30,
                2006
              
              
              Cumulative
                from
                Inception
                (June 20,
                2005) to
                September 30,
                2008($
      in thousands)Cash
      flows used in operating activitiesNet
      loss
              
              $
              (76,866
              )
              
              $
              (49,811
              )
              
              $
              (20,692
              )
              
              $
              (149,488
              )Adjustments
      used to reconcile net loss to net cash used inoperating
      activities:Stock
      based compensation
              
              
              3,276
              
              
              
              8,172
              
              
              
              9,189
              
              
              
              21,460Depreciation,
      depletion, amortization and accretion
              
              
              1,230
              
              
              
              1,245
              
              
              
              73
              
              
              
              2,548Impairment
      of oil and gas properties
              
              
              30,847
              
              
              
              24,053
              
              
              
              —
              
              
              
              54,900Warrants
      issued to settle interest costs
              
              
              495
              
              
              
              —
              
              
              
              —
              
              
              
              495Amortization
      of deferred financing costs
              
              
              1,575
              
              
              
              200
              
              
              
              1,423
              
              
              
              3,198Amortization
      of debt discount and beneficial conversion
                feature
              
              
              2,419
              
              
              
              1,036
              
              
              
              —
              
              
              
              3,455Loss
      on conveyance of properties
              
              
              20,469
              
              
              
              —
              
              
              
              —
              
              
              
              20,469Losses
      on sale and impairment of marketable securities
              
              
              3,787
              
              
              
              —
              
              
              
              —
              
              
              
              3,787Other,
      net
              
              
              45
              
              
              
              (23
              )
              
              
              —
              
              
              
              122Changes in operating assets and liabilities:Receivables
              
              
              (163
              )
              
              
              (488
              )
              
              
              (58
              )
              
              
              (709
              )Due from related party
              
              
              —
              
              
              
              421
              
              
              
              (921
              )
              
              
              (500
              )Prepaid expenses and other assets
              
              
              (216
              )
              
              
              (36
              )
              
              
              9
              
              
              
              (261
              )Accounts payable and accrued expenses
              
              
              (7,161
              )
              
              
              3,628
              
              
              
              882
              
              
              
              (2,307
              )Due to shareholder and related parties
              
              
              (1,474
              )
              
              
              1,277
              
              
              
              (451
              )
              
              
              —Net
      cash used in operating activities
              
              
              (21,737
              )
              
              
              (10,326
              )
              
              
              (10,546
              )
              
              
              (42,831
              )Cash
      flows used in investing activitiesAdditions
      to oil and gas properties
              
              
              (20,040
              )
              
              
              (33,038
              )
              
              
              (31,062
              )
              
              
              (85,705
              )Proceeds
      from sale of oil and gas properties
              
              
              31,922
              
              
              
              —
              
              
              
              —
              
              
              
              31,922Sale
      of trading securities
              
              
              2,541
              
              
              
              —
              
              
              
              —
              
              
              
              2,541Note
      receivable — related party
              
              
              —
              
              
              
              (2,494
              )
              
              
              —
              
              
              
              (2,494
              )Additions
      to furniture and equipment
              
              
              (353
              )
              
              
              (134
              )
              
              
              (553
              )
              
              
              (1,040
              )Restricted
      cash
              
              
              75
              
              
              
              —
              
              
              
              (1,077
              )
              
              
              (1,002
              )Net
      cash used in investing activities
              
              
              14,145
              
              
              
              (35,666
              )
              
              
              (32,692
              )
              
              
              (55,778
              )Cash
      flows from financing activitiesProceeds
      from the sale of common stock
              
              
              —
              
              
              
              300
              
              
              
              35,442
              
              
              
              35,742Proceeds
      from common stock subscribed
              
              
              —
              
              
              
              2,858
              
              
              
              —
              
              
              
              2,858Proceeds
      from the Global credit facility
              
              
              8,250
              
              
              
              31,550
              
              
              
              —
              
              
              
              39,800Borrowing
      on short-term notes payable
              
              
              850
              
              
              
              —
              
              
              
              —
              
              
              
              850Proceeds
      from related party borrowings
              
              
              1,770
              
              
              
              775
              
              
              
              —
              
              
              
              2,545Proceeds
      from issuance of convertible notes
              
              
              6,330
              
              
              
              —
              
              
              
              17,795
              
              
              
              27,162Payments
      on short-term notes payable
              
              
              (6,163
              )
              
              
              —
              
              
              
              —
              
              
              
              (6,163
              )Payments
      on related party borrowings
              
              
              (2,598
              )
              
              
              —
              
              
              
              —
              
              
              
              (2,598
              )Proceeds
      from the exercise of warrants
              
              
              —
              
              
              
              —
              
              
              
              1,000
              
              
              
              1,000Cash
      received upon recapitalization and merger
              
              
              —
              
              
              
              —
              
              
              
              21
              
              
              
              21Offering
      and financing costs
              
              
              —
              
              
              
              —
              
              
              
              (1,638
              )
              
              
              (1,638
              )Net
      cash provided by financing activities
              
              
              8,439
              
              
              
              35,483
              
              
              
              52,620
              
              
              
              99,579Effect
      of exchange rate changes on cash
              
              
              —
              
              
              
              (3
              )
              
              
              —
              
              
              
              (3
              )Net
      (decrease) increase in cash and cash equivalents
              
              
              847
              
              
              
              (10,512
              )
              
              
              9,382
              
              
              
              967Cash
      and cash equivalents, beginning of period
              
              
              120
              
              
              
              10,632
              
              
              
              1,250
              
              
              
              —Cash
      and cash equivalents, end of period
              
              $
              967
              
              
              $
              120
              
              
              $
              10,632
              
              
              $
              967





54








Supplemental
      schedule of cash flow informationCash
      paid for interest
                          
                          $
                          2,698
                          
                          
                          $
                          473
                          
                          
                          $
                          1,028
                          
                          
                          $
                          4,199Cash
      paid for income taxes
                          
                          $
                          ---
                          
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          —Supplemental
      disclosures of non-cash investing and
                            financing
      activitiesShares
      issued for expenditures advanced
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          100Contracts
      for oil and gas properties
                          
                          $
                          (1,500
                          )
                          
                          $
                          1,750
                          
                          
                          $
                          6,621
                          
                          
                          $
                          12,024Shares
      issued for debt conversion
                          
                          $
                          6,920
                          
                          
                          $
                          —
                          
                          
                          $
                          22,032
                          
                          
                          $
                          28,952Shares
      issued for commissions on offerings
                          
                          $
                          56
                          
                          
                          $
                          —
                          
                          
                          $
                          2,900
                          
                          
                          $
                          2,956Shares
      issued for property
                          
                          $
                          9,000
                          
                          
                          $
                          81,000
                          
                          
                          $
                          —
                          
                          
                          $
                          90,000Shares
      returned on property conveyances
                          
                          $
                          (1,408
                          )
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          (1,408
                          )Shares
      issued for payment of accrued interest
                          
                          $
                          6,520
                          
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          6,520Shares
      issued for property and finder’s fee on property
                          
                          $
                          367
                          
                          
                          $
                          7,444
                          
                          
                          $
                          2,200
                          
                          
                          $
                          10,011Shares
      issued for vendor settlements
                          
                          $
                          3,376
                          
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          3,376Warrants
      issued for debt
                          
                          $
                          4,588
                          
                          
                          $
                          4,670
                          
                          
                          $
                          —
                          
                          
                          $
                          9,258Non-cash
      uses of notes payable and accounts payable and
                            accrued
      liabilities
                          
                          $
                          —
                          
                          
                          $
                          26,313
                          
                          
                          $
                          —
                          
                          
                          $
                          26,313Convertible
      debt issued for property
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          1,200
                          
                          
                          $
                          1,200Discount
      associated with beneficial conversion feature
                            And
      detachable warrants
                          
                          $
                          6,956
                          
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          6,956Common
      stock subscriptions converted to notes and
                            convertible
      debentures
                          
                          $
                          2,858
                          
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          2,858Marketable
      securities received from sale of oil and gas
    properties
                          
                          $
                          20,461
                          
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          20,461Acquisition
      of oil and gas properties by exchange of joint interest
                            billings, oil and gas
      receivables and accounts payable
                          
                          $
                          12,707
                          
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          12,707





See
accompanying notes to consolidated financial statements.





55





PETROHUNTER
ENERGY CORPORATION


(A
Development Stage Company)





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Note 1 —
Organization and Basis of Presentation





We are a
development stage global oil and gas exploration and production company
committed to acquiring and developing primarily unconventional natural gas and
oil prospects that we believe have a very high probability of economic success.
Since our inception in 2005, our principal business activities have been raising
capital through the sale of common stock and convertible notes and acquiring oil
and gas properties in the western United States and Australia.  As of
September 30, 2008, we owned property in Rio Blanco and Garfield County,
Colorado, Bear Creek County, Montana, and Australia.  We have drilled five
wells on our Buckskin Mesa property located in Rio Blanco County,
Colorado.  In the Piceance Basin, we hold an interest in proved properties
located in Garfield County, Colorado.  During the period ended September
30, 2008, we owned working interests in eight wells which were operated by
EnCana Oil & Gas USA (“EnCana”) and are currently producing gas out of the
Piceance Basin.   On December 30, 2008, we sold these proved developed
producing properties with an effective date of December 1, 2008. 
Subsequent to the sale we continue to hold an interest in proved developed and
undeveloped properties in the Piceance Basin.  In Montana, we currently
hold a land position in the Bear Creek area.  The wells on these
properties have not yet commenced oil and gas production.  In November
2007, we sold 66,000 net acres of land and two wells in Montana and 173,738
acres of land in Utah (see “Heavy Oil Projects” in Note 3).  On May 30,
2008, we sold 605 net acres, 16 wells in Montana that had been drilled but not
completed or connected to a pipeline and rights to participate in an additional
eight wells in the Southern Piceance Basin in Colorado (see Note 3). In
Australia we have drilled one well on our property in the Northern Territory and
are undergoing a major development project in the area.





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.





PetroHunter
is considered a development stage company as defined by Statement of Financial
Accounting Standards (“SFAS”) 7, Accounting and Reporting by
Development Stage Enterprises,as we have not yet commenced our planned
principal operations. A
development stage enterprise is one in which planned principal operations have
not commenced, or if its operations have commenced, there have been no
significant revenue therefrom.





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. As
shown in the accompanying statements of operations, we have incurred a
cumulative net loss of $149.5 million for the period from inception
(June 20, 2005) to September 30, 2008, have a working capital
deficit of approximately $3.9 million as of September 30, 2008, and were
not in






56




compliance
with the covenants of several loan agreements. As of September 30, 2008, we
have earned oil and gas revenue from our initial operating wells, but will
require significant additional funding to sustain operations and satisfy
contractual obligations for planned oil and gas exploration, development and
operations in the future. These factors, among others, may indicate that we may
be unable to continue in existence.  Our financial statements do not
include adjustments related to the realization of the carrying value of assets
or the amounts and classification of liabilities that might be necessary should
we be unable to continue in existence.  Our ability to establish
ourselves as a going concern is dependent upon our ability to obtain additional
financing to fund planned operations and to ultimately achieve profitable
operations. Management believes that we can be successful in farming out or
selling portions of working interests in our properties for cash and/or funding
of our share of development expenses, obtaining debt and/or equity financing,
and selling our marketable securities, which will enable us to continue in
existence and establish ourselves as a going concern.  We have raised
approximately $108.3 million through September 30, 2008 through issuances
of common stock, convertible, and other debt. We believe we will be successful
at raising necessary funds to meet our obligations for our planned
operations.





For the
12 months ended September 30, 2008 and 2007, the consolidated
financial statements include the accounts of PetroHunter and our wholly-owned
subsidiaries. For the period from June 20, 2005 through September 30,
2005, the consolidated financial statements include only the accounts of GSL.
All significant intercompany transactions have been eliminated upon
consolidation.





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.





Reclassifications - Certain
prior period amounts have been reclassified in the consolidated financial
statements to conform to the current period presentation. Such reclassifications
have had no effect on net loss.





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.





Goods and Services Taxes
(“GST”) – We have recorded a $0.5 million receivable for GST as of September 30,
2008.  We have also recorded a GST payable of $1.8 million in Accounts
Payable and Accrued Expenses, which is due by February 28, 2009.





Accounts Receivable -Accounts
receivable at September 30, 2008 (other than GST Receivables) include Oil
and Gas Receivables.Oil and Gas Receivablesrepresent revenue
earned on our operating wells that have not yet been collected. The balances at
September 30, 2008 and 2007 were $0.2 million and $0.5 million,
respectively. Based on our history of collections with the operator, we have
deemed that no allowance is necessary on this balance.





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
SFAS 115, Accounting for
Certain Investments in Debt and Equity Securities. As the shares we have
received are available for sale in the short term, 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, when
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, and 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.




In
November 2007, we received 1.5 million shares of the common stock of the
purchaser of our Heavy Oil Projects (see Note 3), which were sold in March 2008,
when we recognized a $3.0 million loss (see Note 3).





57




On
September 30, 2008, we closed the sale of a 50% working interest in four of our
exploration permits in Australia, and received 28.9 million shares of the common
stock of the purchaser, a related party. Certain of these shares were
subsequently pledged as collateral for a note, and are reflected as restricted
marketable securities on our balance sheet as of September 30, 2008. In
addition, we have recorded an estimated impairment of $0.8 million in relation
to 2.8 million shares of unrestricted marketable securities, due to subsequent
declines in the value of these shares that we consider to be other than
temporary in light of our expected disposition date (Notes 3 and
14).





Concentration of Credit Risk -
Financial instruments which potentially subject us to concentrations of credit
risk consist of cash, receivables 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.  Credit risk associated with
receivables and marketable securities has been discussed earlier in Note
2.





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 is 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.




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. The costs of maintenance and repairs, which are not
significant improvements, are expensed when incurred. Expenditures to extend the
useful lives of assets are capitalized.  We have capitalized costs
associated with various equipment leases in accordance with SFAS 13, “Accounting for Leases.” These
amounts have been presented as components of our property and equipment in our
consolidated balance sheets.





Joint Interest Billings -
Joint interest billings represent our working interest partners’ share of costs
that we paid on their behalf of certain wells.  During the year ended
September 30, 2008, we entered into a swap transaction whereby we increased our
interest in certain wells which provided us a 100% working interest in all 12 of
these wells, representing approximately $12.6 million of the Joint interest
billing balance and as a result, $12.6 million was reclassified to oil and
gas properties in the first quarter of 2008 (see Note 3).





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





Asset Retirement Obligation-
Asset retirement obligations associated with tangible long-lived assets are
accounted for in accordance with SFAS 143, 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




58




component
of depreciation, depletion, amortization and accretion expense in the
accompanying consolidated statements of operations.





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 –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 deferred rent in the accompanying consolidated balance
sheets.





Debt Issue 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, the portion of unamortized debt issue costs related to the principal
repayment is written off and included in interest expense.





Impairment- SFAS 144,
Accounting for the Impairment
and Disposal of Long-Lived Assets,requires
long-lived assets to be held and used to be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. We use the full cost method of accounting for our oil
and gas properties. Properties accounted for using the full cost method of
accounting are excluded from the impairment testing requirements under
SFAS 144. Properties accounted for under the full cost method of accounting
are subject to SEC Regulation S-X Rule 4-10, Financial Accounting and
Reporting for Oil and Gas
Producing Activities Pursuant to the Federal Securities Laws and the Energy Policy and
Conversion Act of 1975(“Rule 4-10”). Rule 4-10 requires that
each regional cost center’s (by country) capitalized cost, less accumulated
amortization and related deferred income taxes, not exceed a cost center
“ceiling”. The ceiling is defined as the sum of:





•
            The
      present value of estimated future net revenues computed by applying
      current prices of oil and gas reserves to estimated future production of
      proved oil and gas reserves as of the balance sheet date less estimated
      future expenditures to be incurred in developing and producing those
      proved reserves to be computed using a discount factor of 10%;
      plus


•
            The
      cost of properties not being amortized;
plus


•
            The
      lower of cost or estimated fair value of unproven properties included in
      the costs being amortized; less


•
            Income
      tax effects related to differences between the book and tax basis of the
      properties.





If
unamortized costs capitalized within a cost center, less related deferred income
taxes, exceed the cost center ceiling, the excess is charged to expense. During
the periods ended September 30, 2008 and 2007, $30.8 million and $24.1
million was charged to impairment expense, respectively.





Fair Value - 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.





Off Balance Sheet Arrangements
- As part of its ongoing business, the Company has not participated in
transactions that generate relationships with unconsolidated entities or
financial partnerships. These entities are often referred to as structured
finance or special purpose entities (“SPEs”), and are usually established for
the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. As of September 30, 2008, we have
not been involved in unconsolidated SPE transactions.





Revenue Recognition - We
recognize revenues from the sales 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 has been presented on a gross basis, prior to deductions
for taxes and gathering expenses.





59


Comprehensive Loss -
Comprehensive loss consists of net loss and foreign currency translation
adjustments. Comprehensive loss is presented net of income taxes in the
consolidated statements of stockholders’ equity and comprehensive
loss.





Income Taxes – We have adopted
the provisions of SFAS 109, Accounting for Income Taxes.
SFAS 109 requires recognition of deferred tax liabilities and assets for
the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.  We
adopted FASB Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income
Taxes.  FIN 48  requires that amounts recognized in the balance
sheet related to uncertain tax positions be classified as a current or non
current liability, based on the expected timing of payments to taxing
authorites.  The Company had no uncertain tax positions as of September 30,
2008 or 2007.





Temporary
differences between the time of reporting certain items for financial and tax
reporting purposes consist primarily of exploration and development costs on oil
and gas properties, and stock based compensation of options
granted.





Loss Per Common Share - Basic
loss per share is based on the weighted average number of common shares
outstanding during the period. Diluted loss per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. Convertible equity instruments
such as stock options and convertible debentures are excluded from the
computation of diluted loss per share, as the effect of the assumed exercises
would be anti-dilutive. The diluted weighted-average number of common shares
outstanding excluded potential common shares from stock options and warrants of
approximately 177,519,000 and 85,923,000 for the years ending September 30,
2008 and 2007, respectively.





Contingencies – In accounting
for legal matters and other contingencies we follow the guidance in SFAS 5,
Accounting for
Contingencies, under which loss contingencies are accounted for based
upon the likelihood of an impairment of an asset or the occurrence of a
liability. If a loss contingency is “probable” and the amount of the loss can be
reasonably estimated, it is accrued.  If a loss contingency is
“probable” but the loss cannot be reasonably estimated, disclosure is made. If a
loss contingency is “reasonably possible” disclosure is made, including a
potential range of loss, if determinable. Loss contingencies that are “remote”
are neither accounted for nor disclosed. Gain contingencies are given no
accounting recognition until realized, but are disclosed if
material.





Guarantees -As part of a Gas
Gathering Agreement we have with CCES Piceance Partners I, LLC (“CCES”), we have
guaranteed that, should there be a mutual failure to execute a formal agreement
for long-term gas gathering services in the future, we will repay CCES for
certain costs they have incurred in relation to the development of a gas
gathering system and repurchase certain gas gathering assets we sold to
CCES.  We have accounted for this guarantee using Financial Accounting
Standards Board (“FASB”) Interpretation No. 45 as amended, Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others(“FIN 45”),which requires us to
recognize a liability for the obligations undertaken upon issuing the guarantee
in order to have a more representationally faithful depiction of the guarantor’s
assets and liabilities.  Accordingly, we have recognized a $4.8
million contingent purchase obligation and related intangible asset on our
balance sheet, as of September 30, 2008.  See Note 13.





Share Based Compensation -Effective October 1, 2006, we adopted the provisions of
SFAS 123(R) (as amended), Share-Based Payment, using
the modified prospective method, which results in the provisions of
SFAS 123(R) being applied to the consolidated financial statements on a
going-forward basis. SFAS 123(R) revises SFAS 123, Accounting for Stock-Based
Compensation, and supersedes Accounting Principles Board (“APB”) Opinion
25, Accounting for Stock
Issued to Employees. SFAS 123(R)
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods and services at fair value, focusing
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. It also addresses transactions in
which an entity incurs liabilities in exchange for goods and services that are
based on the fair value of the entity’s equity instruments or that may be
settled by the issuance of those equity instruments.








60


We have
accounted for stock-based compensation awarded to non-employees under the
provisions of EITF 96-18, Accounting for Equity Instruments
That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
or Services.


Recently Issued Accounting
Pronouncements – In May 2008,
the Financial Accounting Standards Board (the "FASB") issuedStatement
of Financial Accounting Standards ("SFAS") Statement No. 162, TheHierarchy of Generally Accepted Accounting
Principles, whichidentifies
the sources of accounting principles and the framework for selectingthe
principles to be used in the preparation of financial statements ofnon-governmental
entities that are presented in conformity with generallyaccepted
accounting principles ("GAAP") in the United States. SFAS 162 iseffective
sixty days following the SEC's approval of The Public CompanyAccounting
Oversight Board's related amendments to remove the GAAP hierarchyfrom
auditing standards. We do not expect adoption of SFAS 162 will have amaterial
impact on our Consolidated Financial Statements.




In May
2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
No. APB 14-1, Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement) (the FSP). The FSP specifies that
issuers of convertible debt that can be settled in cash should separately
account for the liability (debt) and equity (conversion option) components in a
manner that reflects the entity’s nonconvertible debt borrowing rate when
interest cost is recognized. The FSP therefore may require different accounting
for our Convertible Debentures due 2012 issued in November 2007 upon the
adoption of the FSP.  We will adopt the FSP October 1, 2009. The
provisions of the FSP will be applied retrospectively to all periods presented,
or all periods subsequent to January 2007.





In March
2008, the FASB issued SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities, an Amendment of SFAS No. 133.
This new standard requires enhanced disclosures about how and why an entity uses
derivative instruments, how such instruments and related hedged items are
accounted for under SFAS No. 133, and how those instruments and items
affect an entity’s financial position, financial performance, and cash flows. We
must adopt SFAS 161 no later than October 1, 2009. We currently have
no derivatives outstanding as of September 30, 2008.  The
adoption of this standard may affect future disclosures related to any
derivative instruments or related hedges that are entered into in future
periods.





In
December 2007, the FASB issued SFAS 141(R), Business Combinations, and
SFAS 160, Accounting and
Reporting of Non Controlling Interest in Consolidated Financial Statements, an
Amendment to ARB No. 51.  These new standards will
significantly change the accounting for and reporting of business combination
transactions and minority interests in financial statements. We must adopt these
standards simultaneously as of October 1, 2009, for the beginning of the fiscal
2010 year. The adoption of these standards will have a material effect on the
accounting for any business combination consummated thereafter or for any
minority interest that exists at that time.





In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities, which allows entities to choose, at
specified election dates, to measure eligible financial assets and liabilities
at fair value that are not otherwise required to be measured at fair value. If a
company elects the fair value option for an eligible item, changes in that
item’s fair value in subsequent reporting periods must be recognized in current
earnings. SFAS 159 also establishes presentation and disclosure
requirements designed to draw comparison between entities that elect different
measurement attributes for similar assets and liabilities. SFAS 159 became
effective for us on October 1, 2008.  We believe that the impact
of SFAS 159 on our consolidated results of operations, cash flows or
financial position is not material.





In
September 2006, the FASB issued SFAS 157, Fair Value Measurements,
which addresses how companies should measure fair value when they are required
to use a fair value measure for recognition or disclosure purposes under
generally accepted accounting principles. We adopted SFAS 157 as of
October 1, 2008. We will use fair value measurements to determine the
reported amounts of assets acquired and liabilities assumed in purchase
transactions, in testing potential goodwill, for disclosure of the fair value of
financial instruments, and elsewhere. It is therefore possible that the
implementation of SFAS 157 could have a material effect on the reported amounts
or disclosures in our consolidated financial statements in future
periods.









61


Note 3 —
Oil and Gas Properties
 
 Commencing
effective July 1, 2005 and continuing through December 31, 2006, we and MAB
operated pursuant to a Development Agreement and a series of individual property
agreements (collectively, the “EDAs”).  Effective January 1,
2007, the Development Agreement and the EDAs were replaced in their entirety by
the Consulting Agreement with MAB (see Note 10).
 
 The
following description of our oil and gas property acquisitions for the period
from inception to September 30, 2008 is pursuant to the original
Development Agreement and related EDAs. All references to the Company’s
obligations to pay “project development costs” pertaining to the following
properties relate to the specified amount of capital expenditures (for each such
property), which were credited against our obligation to carry MAB for MAB’s 50%
portion of such expenditures. Effective January 1, 2007, for properties
that both MAB and the Company
owned working interest, MAB assigned its remaining undivided working interests
in those properties to the Company, and the commitment to pay up to a certain
portion of project costs was terminated (see Note 10).





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





2008
                
                
                2007
                
                
                2006
                
                
                Previous
                
                
                TotalUnited
      States:Acquisition
      (Divestiture) costs
                
                $
                (10,025
                )
                
                $
                64,688
                
                
                $
                10,722
                
                
                $
                5,363
                
                
                $
                70,748Exploration
      costs
                
                
                (5,645
                )
                
                
                15,807
                
                
                
                172
                
                
                
                3
                
                
                
                10,337Development
      costs
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Capitalized
      interest
                
                
                —
                
                
                
                955
                
                
                
                —
                
                
                
                —
                
                
                
                955Total
                
                
                (15,670
                )
                
                
                81,450
                
                
                
                10,894
                
                
                
                5,366
                
                
                
                82,040Australia:Acquisition
      (Divestiture) costs
                
                
                (21,033
                )
                
                
                6,450
                
                
                
                5,542
                
                
                
                —
                
                
                
                (9,041
                )Exploration
      costs
                
                
                —
                
                
                
                10,913
                
                
                
                612
                
                
                
                —
                
                
                
                11,525Development
      costs
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Capitalized
      interest
                
                
                —
                
                
                
                52
                
                
                
                —
                
                
                
                —
                
                
                
                52Total
                
                
                (21,033
                )
                
                
                17,415
                
                
                
                6,154
                
                
                
                —
                
                
                
                2,536Acquisition
      (Divestiture) costs
                
                
                (31,058
                )
                
                
                71,138
                
                
                
                16,264
                
                
                
                5,363
                
                
                
                61,707Exploration
      costs
                
                
                (5,645
                )
                
                
                26,720
                
                
                
                784
                
                
                
                3
                
                
                
                21,862Development
      costs
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Capitalized
      interest
                
                
                —
                
                
                
                1,007
                
                
                
                —
                
                
                
                —
                
                
                
                1,007Total
                
                $
                (36,703
                )
                
                $
                98,865
                
                
                $
                17,048
                
                
                $
                5,366
                
                
                $
                84,576





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





2008
                
                
                2007
                
                
                2006
                
                
                Previous
                
                
                TotalUnited
      States:Buckskin
      Mesa
                
                $
                7,459
                
                
                $
                34,569
                
                
                $
                4,793
                
                
                $
                5,366
                
                
                $
                52,187Piceance
      II
                
                
                (14,727
                )
                
                
                39,232
                
                
                
                5,126
                
                
                
                —
                
                
                
                29,631Sugarloaf
                
                
                (7,029
                )
                
                
                7,029
                
                
                
                —
                
                
                
                —
                
                
                
                —Total
      Piceance Basin
                
                
                (14,297
                )
                
                
                80,830
                
                
                
                9,919
                
                
                
                5,366
                
                
                
                81,818Bear
      Creek
                
                
                (1,373
                )
                
                
                620
                
                
                
                975
                
                
                
                —
                
                
                
                222Total
      United States
                
                
                (15,670
                )
                
                
                81,450
                
                
                
                10,894
                
                
                
                5,366
                
                
                
                82,040Australia:Beetaloo
                
                
                (21,033
                )
                
                
                17,415
                
                
                
                6,154
                
                
                
                —
                
                
                
                2,536Total
                
                $
                (36,703
                )
                
                $
                98,865
                
                
                $
                17,048
                
                
                $
                5,366
                
                
                $
                84,576





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









62


US
Projects – Piceance Basin
 
 Buckskin Mesa Project -The
Buckskin Mesa Project area was purchased on September 17, 2005 from MAB
Resources, subject to a drilling commitment agreement with Daniels Petroleum
Company ("DPC").  The property is located in the northern part of the
Piceance Basin in Rio Blanco County, Colorado.  We own approximately
20,000 net acres of leasehold in Rio Blanco County, Colorado, subject to
certain payment and work commitments, including five wells that were drilled
(but not completed) during 2006-2007 calendar years, and six shut-in gas wells
drilled by our predecessor in interest.
 
 At the
end of our second fiscal quarter of 2008, we extended and subsequently
paid $0.5 million in penalties for three wells that were required to be
drilled that quarter by agreeing to pay the $1.5 million fee, plus a $1.0
million additional penalty. These amounts were paid on April 28, 2008,
thereby reducing the total number of wells we were committed to drill
for the remainder of calendar year 2008 to 13. Prior to June 30, 2008 (the
due date for commencing the next four wells), we determined that we could not
obtain the materials necessary to commence such operations by June 30, and we
provided written notice of such force majeure condition to DPC. 
We were otherwise prepared to comply with all obligations regarding the
referenced commitment.  DPC objected to the notice. On June 30, 2008, we
filed an action in Denver District Court requesting the court to issue a
declaratory judgment concerning this dispute (the “Daniels
Litigation”).  On September 10, 2008, we entered into an
amendment to the original agreement with DPC (the “Amendment”), which included a
settlement of the Daniels Litigation.  Under the Amendment, we paid
$0.5 million for each of the four wells scheduled to be drilled by June 30,
2008 from the proceeds of the Falcon loan on October 1, 2008 (see Note 14),
and we paid an additional $1.5 million on January 9, 2009 from the $7.0 million
of completion capital provided by Falcon described below, as required under the
Amendment.  Further, we are required to drill four
wells by July 31, 2009, five additional wells by December 31,
2009, and eleven additional wells by December 31, 2010.   If
we do not satisfy these drilling requirements, our agreement with DPC requires
that we pay DPC $0.5 million for each undrilled well on the last day of the
applicable period.





As part
of the settlement of the Daniels Litigation, PetroHunter and Daniels agreed to
extend the date for commencing the first well in Buckskin Mesa to July 31, 2009,
and to increase the total minimum number of obligation wells to 20, through
December 2010. PetroHunter and Falcon closed the first phase of their agreement
(announced August 25, 2008) on November 10, 2008, under which PetroHunter will
begin testing and completion operations on one or more of the five wells, which
PetroHunter previously drilled but did not complete in Buckskin
Mesa.





At
September 30, 2008, we reflected amounts due to DPC for obligations incurred
under the DPC Agreements, as amended, of $3.8 million.  Since entering
into the Amendment on September 10, 2008, we have been in compliance with our
agreement with DPC.





On August
25, 2008, we entered into a purchase and sale agreement with Falcon Oil and Gas
Ltd. (“Falcon”) to sell a 25% working interest in the five drilled but
uncompleted wells, including the 40-acre tract surrounding each
well.    As part of the transaction, we also granted Falcon
an option to acquire an undivided 50% working interest in our 20,000-acre
Buckskin Mesa project. As operator, we will conduct the testing and completion
program. As consideration for the working interest and option, Falcon will pay
for all testing and completion costs related to the five wells, up to $7.0
million. Following the completion program, Falcon will have up to 60 days to
decide whether to exercise the option.  If Falcon elects to exercise
the option, it will pay an additional $18.0 million for drilling and development
in Buckskin Mesa, with $9.0 million representing a 50% carried interest credited
to us. Further, Falcon will pay $28.5 million directly to us, subject to
adjustment under the agreement, payable in cash, Falcon stock, or a combination
of both.  We will retain an undivided 50% working interest in the
Buckskin Mesa leases, and will remain operator of the properties, subject to
Falcon’s election to become operator upon the payment of an additional $3.5
million in cash or Falcon shares.  In November 2008, we completed the
sale of the 25% working interest in the wells (see Note 14).





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.  We own approximately 482 net acres within the
Jolley area.  As of September 30, 2008, we had 8 producing gas wells
that were operated by EnCana Oil and Gas (USA) Inc. (“EnCana”).  We
sold these wells in December 2008 for $2.3 million in cash (see Note
14).










63


On
December 10, 2007, we entered into two agreements with EnCana to exchange
interests in certain Piceance Basin wells as follows:
 
 Exchange
1 — We received an interest in 40 net acres, including two wells with
a total present value of net cash flows discounted at 10% as of
September 30, 2007 of $2.6 million, and conveyed interests in
19 wells with a total present value of net cash flows discounted at 10% as
of September 30, 2007 of $0.9 million. We relieved each other of
existing obligations related to all past costs and operations. Therefore,
EnCana’s share of the costs to drill the two wells of $3.2 million
reflected as Joint interest
billingsin our consolidated balance sheet at September 30, 2007 was
reclassified to oil and gas properties during the first quarter ended
December 31, 2007. In addition, our accounts receivable from EnCana for oil
and gas sales and accounts payable to EnCana for lease operating expenses from
the 19 wells, of $0.5 million and $0.1 million, respectively, as
of September 30, 2007, were also reclassified to oil and gas properties
during the first quarter ended December 31, 2007.


Exchange
2 — We received an interest in 198 net acres, including 10 wells
with a total present value of net cash flows discounted at 10% as of
September 30, 2007 of $6.5 million. EnCana’s share of the costs to
drill the 10 wells of $9.4 million reflected as Joint interest billingsin
our consolidated balance sheet at September 30, 2007 was reclassified to oil and
gas properties during the first quarter ended December 31, 2007. In
addition, we paid EnCana $1.0 million at closing that was also reflected in
oil and gas properties during the first quarter ended December 31,
2007.





On May
30, 2008, we completed the sale of 605 net acres of land, 16 wells which had
been drilled but not completed or connected to a pipeline and rights to
participate in an additional 8 wells to Laramie Energy II, LLC.





US
Projects – Under Evaluation





Montana Bear Creek Project- Effective May 15, 2006, the Company entered into an EDA with
MAB related to the Bear Creek prospect in Montana, under which the Company
received an undivided 50% working interest in the properties. By the terms of
the agreement, and as the purchase price, the Company issued a convertible note
in the amount of $1.2 million, convertible to 2.4 million shares of
the Company’s common stock at $0.50 per share to an unrelated third party. The
Company was also obligated to pay MAB monthly project development costs of
$50,000 commencing May 1, 2006, and to pay the first $50.0 million of
project costs. Effective January 1, 2007, MAB assigned its remaining
undivided 50% working interest in these properties to the Company, and our
commitment to pay the remainder of the first $50.0 million of project costs
was terminated.





Of the
original 25,278 acres acquired, the Company has retained 15,991 of those
acres (13,905 acres in Carbon County, 1,280 acres in Stillwater County, and 806
acres in Yellowstone County). The remaining 9,287 acres have been released.
The acres retained have been reflected in unproved oil and gas properties
subject to further evaluation by the Company. The acres released have been
reflected in unproved properties but included in evaluated costs subject to
amortization; those costs have also been included in the full cost ceiling test
at the lower of cost or market value.





US
Projects - Discontinued





Southern Piceance - On May 30,
2008, we closed the sale of substantially all of our working interest in our
Southern Piceance properties in Colorado to Laramie Energy II, LLC (“Laramie”),
an unrelated third party, for total net consideration of $18.7 million. We
recognized a loss on the transaction of $8.6 million. Upon closing, we conveyed
605 net acres of land and 16 wells which had been drilled but not completed or
connected to a pipeline to Laramie. In addition, $0.8 million was held in escrow
pending the resolution of a dispute between us and the lessor of certain of the
properties that were included in the transaction.  On August 1, 2008,
we transferred the $0.8 million in escrow back to Laramie and retained the 435
acres of land relating to the escrow amount, which had no effect on the total
net consideration noted above.





Heavy Oil Projects - On
November 6, 2007 and effective October 1, 2007, the Company sold a majority of
its interest in certain Heavy Oil Projects, including the West Rozel, Fiddler
Creek and Promised Land Projects, to Pearl Exploration and Production Ltd.
(“Pearl”). We recognized a loss on the transaction of $11.9 million. The
purchase








64


price was
a maximum of $30.0 million, payable as follows: (a) $7.5 million in cash at
closing; (b) the issuance of the number of shares of Pearl equivalent up to
$10.0 million in total (based on a price of $4.00 Canadian dollars per share or
such other higher price as is dictated by the regulations of the TSX Venture
Exchange), including value attributable to leases on which title was being
reviewed after closing, and value attributable to 4,645 net acres of leasehold
which were not assigned at closing, pending Pearl’s attempt to renegotiate the
terms of the Company’s agreement with the third party that sold acreage to
PetroHunter (within six months after closing); and (c) a performance payment
(the “Pearl Performance Payment”) of $12.5 million in cash at such time as
either: (i) production from the assets reaches 5,000 barrels per day; or (ii)
proven reserves from the assets is greater than 50.0 million barrels of oil as
certified by a third party reserve engineer. In the event that these targets
have not been achieved by September 30, 2010, the Pearl Performance Payment
obligation will expire.  No amounts relating to the Pearl Performance
Payment have been recorded as the triggering events have not
occurred.
 
 The sale
of assets to Pearl also resulted in amendments to existing agreements with third
parties, including MAB’s relinquishment of its rights and obligations in all
PetroHunter present and future properties in Utah and Montana, as set forth in
the Second Amendment, and termination of PetroHunter’s obligation to pay an
overriding royalty and a per
barrel production payment to American Oil & Gas, Inc. (“American”) and
Savannah Exploration (“Savannah”), in consideration for: (a) five million common
shares of PetroHunter common stock to be issued to American and Savannah; and
(b) a contingent obligation to pay a total of $2.0 million to American and
Savannah in the event PetroHunter receives the Pearl Performance
Payment.





Powder River Basin Project
-On
December 29, 2006, we entered into a purchase and sale agreement (the
“Galaxy PSA”) with Galaxy Energy Corporation (“Galaxy”) and its wholly-owned
subsidiary, Dolphin Energy Corporation (“Dolphin”). Pursuant to the Galaxy PSA,
the Company agreed to purchase all of Galaxy’s and Dolphin’s oil and gas
interests in the Powder River Basin of Wyoming and Montana.  The
Galaxy PSA expired by its terms on August 31, 2007.





Sugarloaf Project -On
November 28, 2006, MAB entered into a Lease Acquisition and Development
Agreement (the Agreement”) with Maralex Resources, Inc. and Adelante Oil &
Gas LLC (collectively, “Maralex”) for the acquisition and development of the
Sugarloaf Prospect in Garfield County, Colorado. MAB subsequently assigned the
Agreement to us in January 2007 (the “Assignment”).  By the terms of
the Agreement and subsequent Assignment, we paid $0.1 million at closing, with
the remaining cash of $2.9 million and the issuance of 2.4 million shares of our
common stock due on January 15, 2007. We initially recorded the $2.9 million
obligation as a contract payable - oil and gasproperties, and $4.1
million as stockholders’ equity (equal to 2.4 million shares at the $1.70
closing price of our common stock on the date of the closing).





The terms
of the Agreement were amended on several occasions resulting in the issuance of
an additional 5.6 million shares of our common stock as well as the grant of
several cash “uplifts” and penalties that were recorded as increases in the
contract payable – oil and gas properties. In addition we agreed to pay to
Maralex a penalty in the amount equal to 5% of the outstanding contract payable
for each 20 days past due.





We
continually failed to make payments in accordance with the Agreement and
subsequent amendments and as a result, on December 4, 2007, Maralex terminated
the Agreement. Pursuant to this termination Maralex returned to us 6.4 million
shares of common stock that had been issued to them, and all leases related to
the Agreement were returned to Maralex. To account for the termination, we
reclassified the balance of the contract payable- oil and gas
properties in the amount of $1.5 million to oil and gas properties,
recorded the return of the common stock in the amount of $1.4 million as a
reduction of oil and gas propertiesand equity, and
reversed the remaining accrued liabilities to oil and gas
properties.





Gibson Gulch Project - In
August and November 2006, we entered into two agreements with a third party
owner (the “Farmor”) to farm-in and participate in the drilling and completion
of six wells located in the Mamm Creek Field, Garfield County, Colorado,
due east of our Piceance II wells and assets.  In February and
March 2007, the Farmor notified the Company that it was in default of the terms
of the joint operating agreement for failure to timely pay the operator amounts
due for drilling and completion costs.  Upon the termination of the
farm-outs, all amounts were eliminated from the Company’s consolidated financial
statements.








65


South Bronco Project -The
South Bronco Project was acquired July 17, 2006 from MAB Resources. In January
2007, the Company and the seller of the South Bronco properties mutually
terminated the Company’s drilling obligations and other rights related to these
properties, and the Company relinquished and reassigned its entire interest in
the properties to the seller.
 
 Australia
 
 Beetaloo Basin
Project - Effective March 17, 2006, the Company entered
into an EDA with MAB for the acquisition of an undivided 50% working interest in
the Beetaloo Basin Project through ownership of shares in
Sweetpea.  The Beetaloo Basin Project consists of four exploration
permits in the Northern Territory, Australia, comprising 7.0 million net acres.
By the terms of the EDA, the Company paid $1.0 million to the assignor and
has funded the $3.0 million seismic commitment.  The Company was
obligated to pay monthly project development costs of $0.1 million per
month, commencing March 1, 2006, and the first $100.0 million of
project costs.  Effective January 1, 2007, MAB assigned its
remaining undivided 50% working interest in these properties to the Company (by
assigning all remaining shares in Sweetpea), and our commitment to pay the
remainder of the first $100.0 million of project costs was
terminated.




Until
September 30, 2008, the Company had a 100% working interest in this project with
a royalty interest of 10% to the government of the Northern Territory and an
overriding royalty interest of 1% to 2%, 8% and 5% to the Northern Land Council,
the assignor and to MAB, respectively, leaving a net revenue interest of 75% to
76% to us. Effective September 30, 2008, the Company sold an undivided 50%
working interest in the four Beetaloo exploration permits to Falcon Oil &
Gas Australia Pty Ltd., a related party, leaving a net revenue interest of 37.5%
to 38% to us, for $5.0 million in cash, which was received on August 25, 2008,
and $20.0 million of equity securities convertible into Falcon common shares
based on the closing price on August 22, 2008. The value of these securities at
closing on September 30, 2008 was $14.9 million, and as of January 9, 2009, the
value of these securities was $9.7 million. The Company remains the operator of
the Beetaloo Basin Project.  The agreement provides for a joint
operating committee and mutual direct involvement by managerial, technical and
financial personnel.








On
July 31, 2007, Sweetpea commenced drilling the Sweetpea Shenandoah
No. 1 well in the central portion of the Beetaloo Basin. The well was
drilled to a depth of 4,724 feet, intermediate casing was run on
September 15, 2007 and the well was then suspended with an intention to
deepen the well to a depth of 9,580 feet. Pursuant to the terms of the
exploration permits for the calendar year ended December 31, 2009, the
Company is committed to drill eight wells on Exploration Permit 76, 98, 99,
117 and shoot 100 kilometers (approximately 62 miles) of seismic, at a
total estimate cost of $37 million ($18.5 million for our 50% working interest).
This is part of our major development program that Sweetpea has currently
underway to develop the properties in the Beetaloo Basin.





Northwest Shelf Project
- Effective February 19, 2007, the Commonwealth of Australia
granted an exploration permit in the shallow, offshore waters of Western
Australia to Sweetpea. The permit, WA-393-P, has a six-year term and encompasses
almost 20,000 net acres. We have committed to an exploration program with
geological and geophysical data acquisition in the first two years with a third
year drilling commitment and additional wells to be drilled in the subsequent
three-year period depending upon the results of the initial well.





Australia
Projects – Discontinued





Gippsland and Otway
Project - On November 14, 2006, the Company and Lakes Oil
N.L. (“Lakes Oil”) entered into an agreement (the “Lakes Agreement”) under which
they would jointly develop Lakes Oil’s onshore petroleum prospects (focusing on
unconventional gas resources) in the Gippsland and Otway Basins in Victoria,
Australia.





The Lakes
Agreement expired pursuant to its terms in June 2007.  We received
$0.1 million and both parties fully waived and release each other from all
further obligations and liabilities.








66


Summary
of Oil and Gas Properties
 
 Summary -Oil and gas
properties at September 30, 2008 and 2007 consisted of the following ($ in
thousands):
 
 2008
                      
                      
                      2007Oil
      and gas properties, at cost, full cost methodUnprovedUnited
      States
                      
                      $
                      82,040
                      
                      
                      $
                      107,239Australia
                      
                      
                      2,536
                      
                      
                      
                      23,569Proved
                      
                      
                      69,704
                      
                      
                      
                      57,168Total
                      
                      
                      154,280
                      
                      
                      
                      187,976Less
      accumulated depreciation, depletion, amortization and
      impairment
                      
                      
                      (56,928
                      )
                      
                      
                      (25,133
                      )Total
                      
                      $
                      97,352
                      
                      
                      $
                      162,843
 
 Included
in oil and gas properties above is capitalized interest of $0.3 million and
$1.5 million for the years ended September 30, 2008 and 2007, respectively.
No interest was capitalized during the year ended September 30,
2006.
 
 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):





2008
                  
                  
                  2007
                  
                  
                  2006Depreciation,
      depletion and amortization of oil and gas properties
                  
                  $
                  949
                  
                  
                  $
                  1,040
                  
                  
                  $
                  39Depreciation
      of furniture and equipment
                  
                  
                  273
                  
                  
                  
                  192
                  
                  
                  
                  32Accretion
      of asset retirement obligation
                  
                  
                  8
                  
                  
                  
                  13
                  
                  
                  
                  2Total
                  
                  
                  1,230
                  
                  
                  
                  1,245
                  
                  
                  
                  73Depreciation,
      depletion and amortization per thousand cubic feet of natural gas
      equivalent
                  
                  $
                  2.45
                  
                  
                  $
                  2.27
                  
                  
                  $
                  6.71.





For the
year ended September 30, 2008, capitalized costs, less accumulated
depreciation, depletion and amortization, less related deferred income taxes,
exceeded the ceiling limitation. Consequently, the Company reflected a charge of
$30.8 million for impairment of oil and gas properties that is reflected in
the consolidated statement of operations. Of the total recognized impairment,
$54.3 million, $0.1 million and $0.5 million related to the United
States, China and Africa, respectively. Impairment in China and Africa
represents all costs incurred through September 30, 2007 as the Company
relinquished all rights attributable to those countries.





Using
September 30, 2008 oil and gas prices of $80.68 per barrel and $4.57 per
mcf, the United States full cost pool exceeded the ceiling by $35.2 million.
Subsequent to year end, prices fluctuated. Gas prices increased and oil prices
decreased.  Using updated prices effective December 3, 2008,
pricing of $27.81 per barrel and $4.96 per mcf, United States impairment expense
was reduced by $4.4 million.





Note 4 —
Furniture and Equipment





Furniture
and Equipment at September 30, 2008 and September 30, 2007 is reported at cost,
net of accumulated depreciation and consisted of the following:





2008
                      
                      
                      2007Furniture
      and equipment
                      
                      $
                      1,073
                      
                      
                      $
                      748Less
      accumulated depreciation
                      
                      
                      (336
                      )
                      
                      
                      (179
                      )Total
                      
                      $
                      737
                      
                      
                      $
                      569





Depreciation
expense associated with office furniture and equipment was $0.3 million, $0.2
million and $0.0 million for the years ended September 30, 2008, 2007 and 2006,
respectively











67


Note 5 —
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 increase in carrying value is included in proved oil and gas
properties in the consolidated balance sheets. The Company depletes the amount
added to proved oil and gas property costs and 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. The credit-adjusted risk-free rate used for our abandonment
liabilities is 15%. Revisions to the liability are due to increases in estimated
abandonment costs and changes in well economic lives, or in changes to federal
or state regulations regarding the abandonment of wells.


A
reconciliation of our asset retirement obligation liability is as follows as of
September 30, 2008 and 2007 ($ in thousands):


2008
                
                
                2007Beginning
      asset retirement obligation
                
                $
                136
                
                
                $
                522Liabilities
      incurred
                
                
                —
                
                
                
                30Liabilities
      settled
                
                
                (16
                )
                
                
                —Revisions
      to estimates
                
                
                (14
                )
                
                
                (429
                )Accretion
      expense
                
                
                8
                
                
                
                13Ending
      asset retirement obligation
                
                $
                114
                
                
                $
                136





Note 6 —
Notes Payable





Notes
payable as of September 30, 2008 and 2007 are summarized below ($ in
thousands):


2008
                        
                        
                        2007Short-term
      notes payableInstallment
      loan
                        
                        $
                        199
                        
                        
                        $
                        117Vendor
                        
                        
                        130
                        
                        
                        
                        4,050Notes
      payable – short-term
                        
                        $
                        329
                        
                        
                        $
                        4,167Convertible
      notes payable
                        
                        $
                        —
                        
                        
                        $
                        400Notes
      payable – related party short-termBruner
      Family
      Trust
                        
                        $
                        2,722
                        
                        
                        $
                        —Global
      Project Finance
      AG
                        
                        
                        850
                        
                        
                        
                        500MAB-
      current
      portion
                        
                        
                        —
                        
                        
                        
                        3,755Notes
      payable – related party, short-term
                        
                        $
                        3,572
                        
                        
                        $
                        4,255Notes
      payable long term – current portion
                        
                        $
                        —
                        
                        
                        $
                        120Long-term
      notes payableVendor
                        
                        $
                        —
                        
                        
                        $
                        250Less current
      portion
                        
                        
                        —
                        
                        
                        
                        (120
                        )Long-term
      notes payable
                        
                        $
                        —
                        
                        
                        $
                        130Long-term
      notes payable – related party — netGlobal
      Project Finance
      AG
                        
                        $
                        39,800
                        
                        
                        $
                        31,550Bruner
      Family
      Trust
                        
                        
                        106
                        
                        
                        
                        275Capital
      lease
      obligations
                        
                        
                        146
                        
                        
                        
                        —MAB
                        
                        
                        —
                        
                        
                        
                        12,530Less
      current
      portion
                        
                        
                        —
                        
                        
                        
                        (3,755
                        )Discount
      on notes
      payable
                        
                        
                        (2,017
                        )
                        
                        
                        (3,736
                        )Long-term
      notes payable – related party — net
                        
                        $
                        38,035
                        
                        
                        $
                        36.864Convertible
      debt
                        
                        $
                        6,956
                        
                        
                        $
                        —Discount
      on convertible debt
                        
                        
                        (6,631
                        )
                        
                        
                        —Convertible
      debt — net
                        
                        $
                        325
                        
                        
                        $
                        —






68


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.  On June 6, 2007, we had entered into
a similar note in the amount of $0.2 million, which was paid in full in May
2008.
 
 Vendor- On June 19,
2007, we entered into a $6.5 million promissory note with a vendor for an
outstanding unpaid balance due to the vendor. The note was due July 31,
2007 and bore interest at 14% per annum. Upon our default, the interest rate
increased to 21% per annum. As of September 30, 2007, we were in default on
this note as a result of non-payment. The balance as of that date was
$4.1 million. Subsequent to September 30, 2007, we paid
$3.0 million towards the outstanding balance; however, in October 2007, the
vendor filed a judgment lien against us. In
conjunction with the Laramie transaction in May 2008 (see Note 3), we settled
all amounts due under this note, along with all other claims, by paying $6.3
million in cash and issuing 10 million shares of our common
stock.




Vendor -On August 10,
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 are due in 24 equal installments commencing on
October 1, 2007 and maturing on September 1, 2009.  At
September 30, 2008, we owed $0.1 million related to this
note.  We are current on our obligations.  This amount has
been classified as current on our consolidated balance sheets.  The balance
was reflected as long-term notes payable as of September 30, 2007.


Convertible notes payable- On
July 10, 2008, at the option of the lender we converted five separate
convertible notes totaling $0.4 million plus accrued interest of $0.1 million
into 2.7 million shares of our common stock.  These loans bore
interest at 12% per annum and were unsecured.





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 is due 12 months from each note’s respective date of issuance.  A
note for $2.4 million was due on November 13, 2008, but was extended by the
lender.  The remaining four notes are due in February, March (2) and
August 2009. As of September 30, 2008, accrued interest relating to these notes
is $0.0 million and all amounts have been classified as current on our
consolidated balance sheets.





Global Project Finance AG- On
October 10, 2007, we entered into a promissory note with Global Project Finance,
AG (“Global”).  Pursuant to this note, borrowings of $0.5 million were
obtained on October 10, 2007, $0.1 million on January 31, 2008, $0.2 million on
February 13, 2008 and $0.1 million on March 18, 2008.  As of September
30, 2008, the entire balance on the note was due and payable, after several
extensions, on December 31, 2008, along with the interest calculated at
15%.  The note is unsecured and the balance at September 30, 2008 was
$0.9 million, with accrued interest of $0.1 million. We have subsequently
obtained an extension from the lender to July 31, 2009.





On
September 25, 2007, we borrowed $0.5 million from Global under a
promissory note dated September 1, 2007.  The note was unsecured
and bore interest at 7.75% per annum.  This note was paid in full on
November 9, 2007.





Long-Term
Notes Payable – Related Party – Net





Global Project Finance
AG- 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, 2008, and September 30, 2007, 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 $60.0 million to us over the following
18 months. As of September 30, 2008, total amounts drawn against this
Facility were $24.8 million.  Interest accrues at 6.75% over the prime
rate.








69


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 pay an advance fee of 2% on all amounts drawn under the
May 2007 Credit Facility.  Payments shall be 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. We may prepay the
balance in whole or in part without penalty or notice and we may terminate the
facility with 30 days written notice. In the event that we sell any
interest in the oil and gas properties that comprise the collateral, a mandatory
prepayment is due in the amount equal to such sales proceeds.


As of
September 30, 2008 and 2007, $39.8 million and $31.6 million,
respectively, had been advanced to us under these Facilities. The cash portion
of the advance fees in the amount of $0.8 million, incurred proportionately
at 2% of each respective draw, has been recorded as a deferred financing cost
and these amounts are being 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, using the Black-Scholes method,
and is being amortized over the same time frame.  The fair value of
the warrants issued with the debt is $4.9 million.  We issued 15.9
million and 12.6 million warrants valued at $4.9 million and $4.5 million,
respectively, at September 30, 2008 and 2007 in connection with the Facilities
(see Note 9). No principal payments have been made to date.





On
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 was recorded as
additional paid in capital.  Global agreed to accept the shares as
complete and total payment for the accrued interest. As of the date of this
conversion we considered our relationship with Christian Russenberger and Global
under FASB 57. 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 and have reclassified prior period balances to conform to the
current period presentation.





As of
September 30, 2008, the Company was 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, through
October 1, 2009.  These amounts have been included in accrued
interest-related party at September 30, 2008. We had previously included unpaid
advance fees of $0.6 million in accounts payable and accrued liabilities at
September 30, 2007.




In
October 2008, we and Global Project Finance AG (“Global”) agreed that under
certain circumstances, we may reduce the outstanding balance under the Credit
Facilities with Global by up to $20.0 million in exchange for securities in
Falcon and our common stock.  If Falcon exercises its option to acquire a
50% interest in the Buckskin Mesa project and pays up to $10.0 million of the
purchase price in Falcon convertible securities, we will assign to Global up to
$10.0 million of such Falcon convertible securities, and pay the balance,
if any, in cash, so that the total of the assigned Falcon convertible securities
and any cash payment equals $10.0 million.  Global has agreed to treat
this assignment and payment as payment of $10.0 million against amounts owed
under the Credit Facilities.  In addition, upon exercise of the
option, we would issue to Global shares of our common stock valued at $10.0
million as payment of an additional $10.0 million against amounts owed under the
Credit Facilities.





Bruner Family Trust- On
July 11, 2007, we executed a subordinated unsecured promissory note in the
amount of $0.3 million in favor of Bruner Family Trust. Interest accrues at an
annual rate of 8% and the note plus accrued interest is due in full on the later
of October 29, 2007 or the time when the Global Project Finance AG Credit
Facility and all other senior indebtedness has been paid in full. In November
2007, this note was partially assigned to an Officer and Director of the Company
(see Note 10).





On
September 21, 2007, we executed a subordinated unsecured promissory note in
the amount of $0.0 million in favor of Bruner Family Trust. Interest accrues at
the rate of 8% per annum and the note plus accrued interest is due in full on
the later of December 20, 2007 or the time when the Global Project Finance
AG Credit Facility and all other senior indebtedness has been paid in
full.










70


At
September 30, 2008, we had accrued interest related to the Bruner Family
Trust notes in the amount of $0.0 million.
 
 MAB - On January 1,
2007, in conjunction with the Consulting Agreement, we issued a
$13.5 million promissory note (the “MAB Note”) as partial consideration for
MAB’s assignment of its undivided 50% working interest in certain oil and gas
properties (see Note 3). The MAB Note bore interest at a rate equal to LIBOR.
Monthly payments of principal of $0.2 million plus accrued interest were
scheduled to begin on January 31, 2007 and were scheduled to end in
December 2011.  As of September 30, 2007, the outstanding balance
of the MAB Note was $12.5 million.  Several amendments of the
consulting agreement with MAB were completed in 2008, reducing the





Falcon – On October 1, 2008,
we signed a Loan Agreement with Falcon for proceeds of $5.0 million secured by a
mortgage on our five Buckskin Mesa wellbores and a pledge of a portion of the
shares of Falcon stock to be received upon conversion of the securities issued
upon the closing of the Beetaloo transaction on September 30, 2008 (see Note
14).





Convertible
Debt





September
      30, 2008($
      in thousands)Convertible
      debentures – face value at issuance
                      
                      $
                      6,956Relative
      fair value assigned to warrants
                      
                      
                      (3,532
                      )Relative
      fair value of beneficial conversion feature
                      
                      
                      (3,424
                      )Net
      book value of convertible debentures at issuance
                      
                      $
                      -Accumulated
      accretion, as of September 30, 2008
                      
                      
                      325Net
      book value at September 30, 2008
                      
                      $
                      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 resale of 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 to each holder of
securities subject registration 1% of the purchase price paid 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.





A waiver
and amendment agreement relating to the above Registration Rights Agreement was
signed by all investors in April and May 2008, which extended the filing date
and effectiveness date of the registration statement until to June 30, 2008 and
December 31, 2008, respectively. Each purchaser waived (i) our obligation to
file a






71


registration
statement covering securities to be registered by March 4, 2008; (ii) our
obligation to have such registration statement declared effective by July 2,
2008; and (iii) any penalties associated with the failure to satisfy such
obligations as described above.  In addition, each purchaser waived as
events of default, our failure to pay the January 1, 2008 and April 1, 2008
interest payments.  As consideration for this waiver, we agreed to pay
the interest installments due January 1, 2008 and April 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 4% of the shares
each purchaser received with the original agreement. The terms of these warrants
mirror the terms given in the original agreement.


We
entered into a similar waiver agreement with respect to the interest installment
due July 1, 2008.  As consideration for this waiver, we agreed to pay
the 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
effectiveness 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 issue
warrants to purchase our common stock in an amount equal to 2% of the shares
each purchaser received with the original agreement.





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, in accordance with EITF 00-27, Application of EITF Issue No. 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios," to
Certain Convertible Instruments, 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.





Provided
that there is an effective registration statement covering the shares underlying
the debentures and the volume-weighted-average price of our common stock over 20
consecutive trading days is at least 200% of the per share conversion price,
with a minimum average trading volume of 0.3 million shares per day: (i) The
debentures are convertible, at our option and (ii) are redeemable at our option
at 120% of face value at any time after one year from date of
issuance.





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 long-term notes
payable in each of the years indicated are as follows as of September 30 ($
in thousands):





September 30,
                      
                      Principal2009
                      
                      $
                      3,8522010
                      
                      
                      39,8002011
                      
                      
                      --2012
                      
                      
                      --2013
                      
                      
                      7,062Total
                      
                      $
                      50,714







72
 
 Note 7 —
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, 2008 or
2007.
 
 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.





Fiscal 2007 Transactions -During the twelve months ended September 30, 2007 we issued 59.0 million
shares of our common stock as follows:




·
            In
      November 2006, we issued 2.4 million shares of our common stock at
      $1.70 per share to Maralex and Adelante Oil & Gas for purchases of oil
      and gas properties.




·
            In
      January 2007, we issued 50.0 million shares of our common stock to
      MAB, a related party, at $1.62 per share for property interests related to
      the acquisition and consulting agreement executed between MAB and
      us.




·
            In
      April 2007, we issued 0.3 million shares of our common stock at $1.49
      per share as finders fees in connection with the acquisition of oil and
      gas properties.




·
            In
      May 2007, we issued 0.1 million shares of our common stock at $1.65 per
      share for commission on the issuance of convertible
      debentures.




·
            In
      January 2007, we issued 0.6 million shares of our common stock at
      $1.72 per share to Maralex and Adelante Oil & Gas for transaction
      finance costs related to a property
transaction.




·
            In
      May 2007, we issued 0.6 million shares of our common stock at $0.70
      per share to Robert L. Bayless, Producer LLC for cash and transaction
      finance costs.




·
            In
      June 2007, we issued 0.5 million shares of our common stock at $1.29
      per share to Maralex and Adelante Oil & Gas for transaction finance
      costs related to a property
transaction.








73
 
 ·
                In
      June 2007, we issued 0.5 million shares of our common stock at $0.51
      per share to Maralex and Adelante Oil & gas for transaction finance
      costs related to a property
transaction.
  ·
                In
      August 2007, we issued 4.0 million shares of our common stock at
      $0.23 per share to Maralex and  Adelante Oil & Gas for
      finance costs related to a property
transaction.


Common Stock Subscribed -On
November 6, 2006, we commenced the sale of a maximum $125.0 million pursuant to
a private placement of units at $1.50 per unit. Each unit consisted of one share
of our common stock and one-half common stock purchase warrant. A whole common
stock purchase warrant entitled the purchaser to acquire one share of our common
stock at an exercise price of $1.88 per share through December 31, 2007. 
In February 2007 and again in November 2007, the Board of Directors determined
that the composition of the units being offered would be restructured, and those
investors who had subscribed in the offering were offered the opportunity to
rescind their subscriptions or to participate on the same terms as ultimately
defined for the restructured offering. During the fiscal period ended





Note 8 —
Share 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,
2008 and September 30, 2007, 5.8 million and 15.0 million shares respectively
remained available for grant pursuant to the Plan.





A summary
of the activity under the Plan for the years ended September 30, 2008,
2007, and 2006 and period ended September 30, 2005 is presented below
(shares in thousands):





Number
      of
                Shares
              
              
              Weighted-
                Average
                Exercise PriceOptions
      outstanding — October 1, 2005
              
              
              19,000
              
              
              $
              0.50Granted
              
              
              13,295
              
              
              $
              2.10Forfeited
              
              
              —
              
              
              $
              —Expired
              
              
              —
              
              
              $
              —Options
      outstanding — September 30, 2006
              
              
              32,295
              
              
              $
              1.16Granted
              
              
              4,020
              
              
              $
              0.76Forfeited
              
              
              (11,350
              )
              
              $
              0.69Expired
              
              
              —
              
              
              $
              —Options
      outstanding — September 30, 2007
              
              
              24,965
              
              
              $
              1.31Granted
              
              
              12,285
              
              
              $
              0.21Forfeited
              
              
              (3,080
              )
              
              $
              0.92Expired
              
              
              —
              
              
              $
              —Options
      outstanding — September 30, 2008
              
              
              34,170
              
              
              $
              0.90Options
      exercisable — September 30, 2008
              
              
              20,032
              
              
              $
              1.01





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





74


A summary
of the activity and status of non-vested awards for the periods ended and as of
September 30, 2008, 2007, 2006 and for the period ended September 30, 2005
is presented below (shares in thousands):





Number
      of
                Shares
              
              
              Weighted-
                Average
                Fair ValueNon-vested —
      October 1, 2005
              
              
              15,200
              
              
              $
              0.32Granted
              
              
              13,295
              
              
              $
              1.23Vested
              
              
              (6,459
              )
              
              $
              1.28Forfeited
              
              
              —
              
              
              $
              —Expired
              
              
              —
              
              
              $
              —Non-vested —
      September 30, 2006
              
              
              22,036
              
              
              $
              1.27Granted
              
              
              4,020
              
              
              $
              0.76Vested
              
              
              (7,138
              )
              
              $
              0.55Forfeited
              
              
              (8,710
              )
              
              $
              1.20Expired
              
              
              —
              
              
              $
              —Non-vested —
      September 30, 2007
              
              
              10,208
              
              
              $
              0.62Granted
              
              
              12,285
              
              
              $
              0.21Vested
              
              
              (5,814
              )
              
              $
              0.88Forfeited
              
              
              (2,532
              )
              
              $
              0.83Expired
              
              
              —Non-vested
      — September 30, 2008
              
              
              14,147
              
              
              $
              0.75


As of
September 30, 2008, there was $3.2 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 2009 through 2012.  The total fair
value of shares vested during the years ended September 30, 2008, 2007 and
2006 was $3.3 million, $3.9 million and $8.3 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,





2008
                  
                  
                  2007
                  
                  
                  2006Expected
      option term — years
                  
                  
                  1-5
                  
                  
                  
                  1-5
                  
                  
                  
                  5Weighted-average
      risk-free interest rate
                  
                  
                  1.8%-4.0%
                  
                  
                  
                  4.2%-4.9%
                  
                  
                  
                  4.2%-4.9%Expected
      dividend yield
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0Weighted-average
      volatility
                  
                  
                  72%-98%
                  
                  
                  
                  62%-74%
                  
                  
                  
                  74%





For the
period ended September 30, 2008 we used the historical volatility of our own
common stock for a period of time that is comparable to the expected life of the
option. For the periods ended September 30, 2007 and 2006, we used estimated
expected volatilities based on an average of volatilities of similar sized Rocky
Mountain oil and gas companies whose common stock is or has been publicly traded
for a minimum of three years and other similar sized oil and gas companies who
recently became publicly traded. The expected term ranges from 0.5 years to 5
years based on the above described vesting schedules, with a weighted-average of
3.25 years. The risk-free rate for periods within the contractual life of
the option is based on the 3-year U.S. Treasury yield curve in effect on
the date of grant. We did not include an estimated forfeiture rate due to a lack
of history of employee and contractor turnover.





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 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.






75


A summary
of the activity as of September 30, 2008 and 2007 is presented below (shares in
thousands):





Number
      of
                Shares
              
              
              Weighted-
                Average
                Exercise PriceOptions
      outstanding  –  September 30, 2006
              
              
              —
              
              
              $
              —Granted
              
              
              10,145
              
              
              $
              0.50Forfeited
              
              
              (250
              )
              
              $
              0.50Options
      outstanding – September 30, 2007
              
              
              9,895
              
              
              $
              0.50Options
      exercisable at September 30, 2007
              
              
              5,937
              
              
              $
              0.50Forfeited
              
              
              (2,300
              )
              
              $
              0.50Options
      outstanding – September 30, 2008
              
              
              7,595
              
              
              $
              0.50Options
      exercisable – September 30, 2008
              
              
              6,176
              
              
              $
              0.50





A summary
of the status and activity of non-vested awards not under the Plan for the year
ended September 30, 2008 is presented below ( shares in thousands):


Number
      of
                Shares
              
              
              Weighted-
                Average
                Fair ValueOptions
      outstanding – September 30, 2006
              
              
              —
              
              
              $
              —Granted
              
              
              10,145
              
              
              $
              0.45Vested
              
              
              (6,087
              )
              
              $
              0.45Forfeited
              
              
              (100
              )
              
              $
              0.01Expired
              
              
              —
              
              
              
              —Non-vested
      — September 30, 2007
              
              
              3,958
              
              
              $
              0.21Granted
              
              
              —
              
              
              
              —Vested
              
              
              (1,419
              )
              
              $
              0.38Forfeited
              
              
              (1,120
              )
              
              $
              0.38Non-vested
      — September 30, 2008
              
              
              1,419
              
              
              $
              0.38


As of
September 30, 2008 there was $0.2 million in unrecognized compensation cost
related to non-vested share based compensation arrangements granted not under
the Plan. The cost is expected to be recognized over a weighted-average period
of two years. The total fair value of the shares vested during the year ended
September 30, 2008 was $0.2 million.





Compensation Expense – Under
SFAS 123 (R) in 2008 and 2007 and APB 25 in 2006, pre-tax share based
compensation expense of $3.2 million, $6.7 million, and $2.8 million
was charged to operations for the years ended September 30, 2008, 2007, and 2006
respectively. Under EITF 96-18, pre-tax share-based compensation expense of $0.0
million $1.5 million, and $6.4 million was charged to operations as compensation
expense for the years ended September 30, 2008, 2007 and 2006
respectively.





Note
9 - Common Stock Warrants





Warrants- The following stock
purchase warrants were outstanding at September 30, 2008 and 2007 (warrants
in thousands):


2008
                2007Number
      of warrants
                135,754
                51,063Exercise
      price
                $0.22
      - $2.10
                $0.31
      - $2.10Expiration
      date
                2011
      - 2012
                2011
      - 2012





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 6). 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






76




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 32.0
million shares of our common stock at $0.50 per share. These warrants expire 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.




Fiscal 2007 Transactions -During 2007, the Company entered into a financing arrangements whereby
the lender would receive 0.4 million warrants for each $1.0 million borrowed. In
addition, 4.0 million warrants were issued in connection with the execution of
the agreements (see Note 6). The exercise prices of these warrants are 120% of
the weighted-average share price of the traded stock for the 30 days previous to
the issue date. During 2007, a total of 16.6 million warrants were issued under
these arrangements with a total valuation under the Black-Scholes method of $4.7
million.  As of September 30, 2007, none of these warrants had been
exercised.





During
2006, we issued warrants to purchase 35.4 million shares of common stock in
conjunction with the unit sale of common stock. The warrants are exercisable for
a period of five years from date of issuance at an exercise price of $1.00 per
share. As of September 30, 2008, 1.0 million warrants had been
exercised.





Note 10
— Agreements with MAB Resources LLC





We are
party to various agreements with MAB Resources, LLC (“MAB”), a company that is
our largest beneficial shareholder. All the MAB Agreements as described below
had been terminated prior to September 30, 2008. The following is a summary of
those prior MAB Agreements.





The Development Agreement -From July 1, 2005 through December 31, 2006, we and MAB operated pursuant
to a Development Agreement and a series of individual property agreements
(collectively, the “EDAs”).  The Development Agreement defined MAB’s
and our long-term relationship regarding the ownership and operation of all
jointly owned properties and stipulated that we and MAB would sign a joint
operating agreement governing all operations.  The Development
Agreement specified, among other things, that





·
            MAB
      assign to us a 50% undivided interest in any and all oil and gas leases,
      production facilities and related assets (collectively, the “Properties”)
      that MAB was to acquire from third parties in the
  future.




·
            We
      would be operator of the jointly owned properties, with MAB Operating
      Company LLC as sub-operator, and each party would pay its proportionate
      share of costs and receive its proportionate share of revenues, subject to
      certain adjustments, including our burden to carry MAB for specified
      costs, pay advances.




·
            We
      were to make an overriding royalty payment of 3% (gross, or 1.5% net) to
      MAB out of production and sales.




77


·
            Under
      the Development Agreement, we were to pay to MAB monthly project
      development costs representing a specified portion of MAB’s “carried”
      Project Costs. The total amount incurred to MAB by us was to be deducted
      from MAB’s portion of the Project Costs carried by the Company. During
      2008, 2007 and 2006, we paid MAB $0.0, $1.8 million and
      $4.5 million, respectively, for Project Costs which are classified on
      the consolidated statements of operations as Project development
      costs — related party.





The Consulting Agreement -
Effective January 1, 2007, we and MAB entered into an Acquisition and
Consulting Agreement (the “Consulting Agreement”) which replaced in its entirety
the Development Agreement, described above.  Upon execution of the
Consulting Agreement, MAB conveyed its entire remaining working interest in
jointly owned properties to us in consideration for a $13.5 million promissory
note, 50 million shares of our common stock and a potential additional 50
million shares to be delivered to MAB provided we met certain thresholds based
on proved reserves.





We
accounted for the conveyance component of the Consulting Agreement in accordance
with the purchase accounting provisions of SFAS 141, Business Combinations.  Accordingly,
at the date of acquisition, we recorded oil and gas properties of $94.5 million,
notes payable of $13.5 million, and common stock and additional-paid-in capital
totaling $81.0 million (equal to the 50.0 million shares issued to MAB at the
trading price of $1.62 per share for our common stock on the trading date
immediately preceding the closing date of the transaction). Furthermore under
the terms of the Consulting Agreement:





·
            We
      agreed to pay MAB $0.2 million per quarter for services rendered to us for
      which we paid no amounts in cash during the years ended September 30,
      2008 and 2007 respectively. (This was later rescinded by Amendment 1 to
      the Consulting Agreement effective retroactively to January 1,
      2007).




·
            Our
      obligation to pay up to $700.0 million in capital costs for MAB’s 50%
      interest as well as the monthly project cost advances against such capital
      costs was eliminated.




·
            We
      became obligated for monthly payments in the amount of $0.2 million
      under a $13.5 million promissory
note.




·
            MAB
      was granted a 5% overriding royalty interest  on certain of our
      properties, to be accrued and deferred for three years, provided these
      royalties did not render our net revenue interest to be less than
      75%.




·
            We
      agreed to grant MAB 7% of the issued and outstanding shares of any new
      subsidiary with assets comprised of the subject
  properties.





During
the first quarter of the current fiscal year ending September 30, 2008 the
Consulting Agreement was amended three times resulting in:




·
            MAB
      relinquishing its overriding royalty interests in all of our properties
      with the exception of Buckskin Mesa and Australia in exchange for 25
      million shares of our common stock.




·
            MAB
      relinquished its rights to contingently issuable performance shares as
      described above.




·
            MAB’s
      consulting services were retroactively terminated effective January 1,
      2007.




·
            The
      Note Payable to MAB was reduced in accordance and in exchange for the
      following:




o
            $8.0
      million in exchange for 16.0 million shares of our common stock with a
      value of $3.7 million based on the closing price of $0.23 per share at
      November 15, 2007 and warrants to acquire 32.0 million shares of our
      common stock at $.50 per share. The warrants were valued at $1.8
      million.




o
            $2.5
      million in exchange for our release of MAB’s obligation to pay the
      equivalent amount as guarantor of the performance of Galaxy Energy
      Corporation under the subordinated unsecured promissory note dated August
      31, 2007.




o
            $0.5
      million for cash payments made during the first quarter of 2008;
      and




o
            $0.2
      million for MAB assuming certain costs owed to
  us.




78


The net
effect of the reduction of debt and issuance of our common shares resulted in a
net benefit to us of $2.7 million and has been reflected as additional
paid-in-capital during the year ended September 30, 2008.





In June
2008, MAB sold all its interest in the above-mentioned overriding royalty (in
our Buckskin Mesa and Australian properties) to a related party. As of September
30, 2008, we have no future liability to MAB nor do we have any future
obligations to compensate MAB for services. Marc A. Bruner and the Bruner Family
Trust are creditors of the Company (see Note 6).





Note 11 —
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.





Falcon Oil & Gas- We had
previously entered into an office sharing agreement with Falcon for office space
in Denver, Colorado. At September 30, 2007, we owed Falcon
$0.3 million, for costs incurred pursuant to the office
agreement.  In February 2008, we moved to a separate office
location.  During 2008, $0.4 million was paid to Falcon pursuant to
the office agreement and for other costs paid on our behalf, and no amounts are
outstanding at September 30, 2008.





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 have 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 (see Note 3).





On
October 1, 2008, we entered into a $5.0 million Loan Agreement with Falcon (see
Note 14).





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– In
September 2008, Global converted all of its outstanding interest on two credit
facilities, aggregating $6.5 million, into shares of our common stock at a price
that was significantly above the market value of our shares at the time of
conversion (see Note 6).  As of the date of the conversion we
determined that in accordance with FASB Statement 57, Related Party Disclosures,
Global should be classified as a related party.  The balance of
outstanding short-term promissory notes at September 30, 2008, is $0.9 million
along with $0.1 million in accrued interest.  In 2008, $0.5 million
was both borrowed and repaid along with the interest due.





At
September 30, 2008, the outstanding balance of the Global credit facilities is
$39.8 million.  We also owe Global $0.8 million in advance fees for
this facility and these amounts are included in accrued interest and fees from
related parties.





In
October 2008, we and Global Project Finance AG (“Global”) agreed that under
certain circumstances, we may reduce the outstanding balance under the Credit
Facilities with Global by up to $20.0 million in exchange for securities in
Falcon and our common stock.  If Falcon exercises its option to acquire a
50% interest in the Buckskin Mesa project and pays up to $10.0 million of the
purchase price in Falcon convertible securities, we will assign to Global up to
$10.0 million of such Falcon convertible securities, and pay the balance,
if any, in cash, so that the total of the assigned Falcon convertible securities
and any cash payment equals $10.0 million.  Global has agreed to treat
this assignment and payment as payment of $10.0 million against amounts owed
under the Credit
   79
 Facilities.  In
addition, upon exercise of the option, we would issue to Global shares of our
common stock valued at $10.0 million as payment of an additional $10.0 million
against amounts owed under the Credit Facilities.





MAB- During the years ended
September 30, 2008 and 2007, we incurred project development costs under
the Development Agreement with MAB (see Note 10) in the amounts of
$­­­0.0 million and $1.8 million,
respectively.  Expenditures paid by MAB on our behalf during 2008 and
2007 were $0.0 million and $2.4 million, respectively.  The
outstanding balances on these accounts in the amount of $0.9 million, included
in due to shareholder and related parties as of September 30, 2007, were paid in
full during 2008.





Pursuant
to our agreements with MAB and the $13.5 million promissory note (see
Note 10), we incurred interest expense of $0.1 million and
$0.5 million and made principal payments of $1.2 million and
$1.0 million for the years ended September 30, 2008 and 2007,
respectively.  At September 30, 2008, we had also paid MAB for
accrued interest in the amount of $0.6 million and all balances due to MAB were
paid in full.





Bruner Family Trust- At
September 30, 2008, we have seven notes outstanding from the Bruner Family Trust
totaling $2.8 million.  In 2008, Charles Crowell, our 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.





Galaxy- At September 30,
2007, we had notes receivable of $2.5 million in relation to an earnest
money deposit under the terms of the Galaxy PSA (see Note 3), with
additional operating costs plus accrued interest on amounts due aggregating $0.3
million. In 2008, the entire balance was offset against amounts that we owed to
MAB.  Marc A. Bruner, the largest single beneficial shareholder of the
Company, is a 14.0% beneficial shareholder of Galaxy and is the father of the
President and Chief Executive Officer of Galaxy.





Officers and Directors-
Pursuant to the sale of our convertible debentures dated November 13, 2007 (see
Note 6), two officers and a director participated in the transaction,
representing a total of $0.5 million of the total $7.0 million offering.
During December 2008, three officers made short-term loans to the Company
aggregating $0.2 million dollars.  These loans were repaid in January
2009.





Note
12 – Income Taxes





Income
tax expense (benefit) consists of the following ($ in thousands):





Year
      Ended September 30,2008
                
                
                2007
                
                
                2006Current
      taxes
                
                $
                —
                
                
                $
                —
                
                
                $
                —Deferred
      taxes
                
                
                (24,325
                )
                
                
                (17,938
                )
                
                
                (6,850
                )Less:
      valuation allowance
                
                
                24,325
                
                
                
                17,938
                
                
                
                6,850Net
      income tax provision (benefit)
                
                $
                —
                
                
                $
                —
                
                
                $
                —





The
effective income tax rate for the years ended September 30, 2008, 2007 and 2006
differs from the U.S. Federal statutory income tax rate due to the
following:


Year
      Ended September 30,2008
                
                
                2007
                
                
                2006Federal
      statutory income tax rate
                
                
                -35.00
                %
                
                
                -35.00
                %
                
                
                -35.00
                %State
      income taxes, net of federal benefit
                
                
                -2.99
                %
                
                
                -2.97
                %
                
                
                -3.25
                %Permanent
      differences — disallowed interest on convertible debt
                
                
                2.51
                %
                
                
                0.81
                %
                
                
                5.20
                %Increase
      in valuation allowance
                
                
                35.49
                %
                
                
                37.16
                %
                
                
                33.05
                %Net
      income tax provision (benefit)
                
                
                —
                
                
                
                —
                
                
                
                —





80


The
components of the deferred tax assets and liabilities as of September 30, 2008
and 2007 are as follows ($ in thousands):


September
      30,2008
                    
                    
                    2007Deferred
      tax assets:Federal
      and state net operating loss carryovers
                    
                    $
                    46,007
                    
                    
                    $
                    20,964Capital
      loss carryovers
                    
                    
                    1,135
                    
                    
                    
                    —Investments
                    
                    
                    304
                    
                    
                    
                    —Asset
      retirement obligation
                    
                    
                    43
                    
                    
                    
                    51Stock
      compensation
                    
                    
                    8,154
                    
                    
                    
                    6,769Accrued
      Vacation
                    
                    
                    34
                    
                    
                    
                    9Transfer
      fees
                    
                    
                    3
                    
                    
                    
                    3Accrued
      Interest
                    
                    
                    129
                    
                    
                    
                    2,053Deferred
      tax asset
                    
                    $
                    55,809
                    
                    
                    $
                    29,849Deferred
      tax liabilities:Oil
      and gas properties and property and equipment
                    
                    
                    (5,861
                    )
                    
                    
                    (4,226
                    )Net
      deferred tax asset
                    
                    
                    49,948
                    
                    
                    
                    25,623Less:
      valuation allowance
                    
                    
                    (49,948
                    )
                    
                    
                    (25,623
                    )Deferred
      tax liability
                    
                    $
                    —
                    
                    
                    $
                    —





The
Company has approximately a $121.1 million net operating loss carryover and a
$3.0 million capital loss carryover as of September 30, 2008.  The net
operating losses may offset against taxable income through the year ended
September 2028.  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 2013.




The
Company has provided a valuation allowance for the deferred tax asset at
September 30, 2008, 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 $24.3 million, $17.9 million and
$6.9 million for the years ended September 30, 2008, 2007 and 2006,
respectively.





Note 13 —
Commitments and Contingencies





CCES- On April 11, 2008, we
closed the sale of certain natural gas gathering assets for $0.7 million in cash
consideration, and simultaneously entered into a Gas Gathering Agreement with
CCES Piceance Partners I, LLC (“CCES”) relating to the initial phase of our gas
gathering system project.  These agreements formalize and expand upon
a Letter of Understanding (“LOU”) between the parties which contemplates 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 include a
guarantee (the “Guarantee”) from us to CCES regarding their increasing financial
commitments as they are 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 is
contingent upon our mutual failure to execute a formal agreement for long-term
gas gathering services in the future (the “Second Phase Midstream Services
Agreement”).  The resolution of this contingency is dependent upon,
among other things, gas production levels from the initial phase gas gathering
system for our Buckskin Mesa Project over the next 12 to 18 months, and other
factors as determined by both parties.  Should we fail to execute a
mutually agreeable long-term contract, CCES has 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 have 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, and aggregated $4.8 million as of September 30,
2008.







81


We have
accounted for our Guarantee under the requirements of FASB Interpretation
(“FIN”) 45.  As of September 30, 2008, we have recorded a current
liability and intangible asset in our financial statements, to reflect our
Contingent Purchase Obligation relating to the Guarantee.  In the
event the triggering event does not occur and our obligation lapses, these
obligations will be offset against each other.  In the event the
Guarantee is triggered, we expect to acquire and obtain title to the
gas gathering assets, which will then be included in our full cost pool as
property.  Our Contingent Purchase Obligation will be adjusted during
future periods to its fair value, so long as the contingent Guarantee remains
unresolved.





In May
2008, we entered into an Option Agreement which gives us the right to purchase
up to 25% of the member shares of CCES, a subsidiary of Clear Creek Energy
Services, LLC (Clear Creek Energy) that holds all the gas gathering resources in
Buckskin Mesa.  In exchange for this purchase option, we issued
400,000 shares of our common stock to Clear Creek Energy.  These
shares are restricted by Rule 144.  These shares were valued at $0.1
million.





Environmental - Oil and
gas producing activities are subject to extensive environmental laws and
regulations. These laws, which are constantly changing, regulate the discharge
of materials into the environment and may require the Company to remove or
mitigate the environmental effects of the disposal or release of petroleum or
chemical substances at various sites. Environmental expenditures are expensed or
capitalized depending on their future economic benefit. Expenditures that relate
to an existing condition caused by past operations and that have no future
economic benefit are expensed. Liabilities for expenditures of a non-capital
nature are recorded when environmental assessment and/or remediation is
probable, and the costs can be reasonably estimated.





Other Contingencies- The
Company may from time to time be involved in various claims, lawsuits, and
disputes with third parties, actions involving allegations of discrimination, or
breach of contract incidental to the operations of its business. During the
fiscal year ending September 30, 2008, we were a party to the following legal
actions: (i) 21 vendors filed multiple liens applicable to our properties,
with 10 foreclosure actions pending at various stages of the pleadings, in
connection with the liens; (ii) a law suit was filed in August 2007 by a
law firm in the Supreme Court of Victoria, Australia for the balance of legal
fees owed to them in the amount of $0.2 million Australian dollars, (iii) a
law suit was filed in December 2007 by a vendor in the Supreme Court of
Queensland, Australia for the
balance which the vendor claims was owed by us in the amount of
$2.4 million Australian dollars, and (iv) a judgment lien was filed in
October 2007 by another vendor in the U.S. for the Company’s default under
a settlement agreement related to the contract between the two
companies.  As of September 30, 2008, all of the liens had been
released except for approximately $0.08 million, and all of the lawsuits had
been dismissed.  See Note 3 regarding the Daniels
Litigation.





Operating Leases - In 2006,
the Company entered into lease agreements for office space in Denver, Colorado
and Salt Lake City, Utah. The Salt Lake City office space was for our
subsidiary, Paleo, which was sold to a related party effective August 31,
2007.  The purchaser assumed all rights and obligations under the
lease, agreed to indemnify us, and guaranteed performance for all of
our obligations under the lease.In November
2007, we entered into a lease agreement for office space in Denver, Colorado.
This lease expires in 2011. In February 2008 we entered into an amended lease
agreement related to our Denver offices, which expires in 2013





Minimum
rental payments under our various operating leases in the year indicated are as
follows as of September 30, 2008 ($ in thousands):


Year
      Ended
                    September 30,2009
                  
                  $
                  3402010
                  
                  
                  3402011
                  
                  
                  2422012
                  
                  
                  682013
                  
                  
                  —





Rent
expense for the years ended September 30, 2008, 2007 and 2006 was $0.2
million, $0.2 million, and $0.1 million, respectively.




82


Note
14 —Subsequent Events (Unaudited)





Falcon Loan and Closing on Purchase -On October 1, 2008, we entered into a secured loan agreement with Falcon
(“Falcon Loan”), where Falcon agreed to advance to us up to $5.0 million in cash
to meet certain of our near term operating cash needs. During October and
November 2008, we received advances aggregating $5.0 million, and substantially
all of these advances were utilized to satisfy various vendor obligations and
lease commitments in the U.S. and Australia. The loan is secured by 14.5 million
shares of Falcon common stock we have received as consideration in relation to
the sale of a 50% working interest in four exploration permits in Australia, and
have been pledged to Falcon under a Pledge and Security
Agreement.  The loan is also secured by a first position security
interest in our five well bores in our Buckskin Mesa
Project.  Falcon’s common shares are traded on the Toronto Venture
Exchange, and the value of the pledged shares as of the close of trading on
January 9, 2009 was approximately $4.9 million. The loan carries interest at
10%, payable monthly, and is due in full on April 30, 2009, or earlier in the
Event of Default.  We are in compliance with the terms of the loan
agreement.





In
October 2008, we issued 1.9 million shares of our common stock to Clear Creek
Energy Services as consideration for Clear Creek granting us consents, waivers,
and modifications under the terms of our initial gas gathering agreement, which
were required to complete the sale of the working interest in the Buckskin Mesa
wells to Falcon.





On November 10, 2008, we closed
the sale of an undivided 25% working interest in five wells, including the
40-acre tract surrounding each well, to Falcon.  The wells are located
in our Buckskin Mesa project in the Piceance Basin in Rio Blanco County,
Colorado (see Note 3).  Subsequent to the closing, we and Falcon
agreed to use a portion of the $7 million of completion capital to make certain
payments to DPC.





Global Agreement Advances -In
October 2008, we received a $0.1 million advance from Global a related party
under our credit and facility agreement, and an additional $0.1 million in
December 2008 under a short-term note.





In
October 2008, we and Global Project Finance AG (“Global”) agreed that under
certain circumstances, we may reduce the outstanding balance under the Credit
Facilities with Global by up to $20.0 million in exchange for securities in
Falcon and our common stock.  If Falcon exercises its option to acquire a
50% interest in the Buckskin Mesa project and pays up to $10.0 million of the
purchase price in Falcon convertible securities, we will assign to Global up to
$10.0 million of such Falcon convertible securities, and pay the balance,
if any, in cash, so that the total of the assigned Falcon convertible securities
and any cash payment equals $10.0 million.  Global has agreed to treat
this assignment and payment as payment of $10.0 million against amounts owed
under the Credit Facilities.  In addition,
upon exercise of the option, we would issue to Global shares of our common stock
valued at $10.0 million as payment of an additional $10.0 million against
amounts owed under the Credit Facilities.





Stock Options - In December
2008, the Board of Directors elected to accelerate the vesting of 0.1 million
options granted to consultants of the Company. The options had initially vested
50% at the date of grant.  As a result of the acceleration the options
became 100% vested as of the date of the authorization.





Sale of Producing Wells - In
December 2008, we sold the working interests in our 8 producing “Jolley” wells
in Garfield County, Colorado to Robert L. Bayless, Producer LLC for $2.3 million
in cash.





Additional Financing – During
December 2008, the Company received $0.2 million in short-term loans from
certain officers.  These amounts were repaid in January
2009.







83


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 30,2008
                                
                                
                                2007
                                
                                
                                2006Development
                                
                                $
                                —
                                
                                
                                $
                                9,654
                                
                                
                                $
                                —Exploration
                                
                                
                                12,524
                                
                                
                                
                                28,952
                                
                                
                                
                                13,184Acquisitions:Proved
                                
                                
                                —
                                
                                
                                
                                3,948
                                
                                
                                
                                —Unproved
                                
                                
                                30,952
                                
                                
                                
                                99,409
                                
                                
                                
                                25,076Total
                                
                                $
                                43,476
                                
                                
                                $
                                141,963
                                
                                
                                $
                                38,260Capitalized
      costs associated with asset retirement obligation
                                
                                $
                                96
                                
                                
                                $
                                30
                                
                                
                                $
                                520





Oil and Gas Reserve Quantities -For all years presented, 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. The Fiddler Creek Heavy Oil Project was sold
effective October 1, 2007 (see Note 3).





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. All of the Company’s proved reserves are
located in the continental United States.





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




Year
      Ended September 30,2008
                          
                          
                          2007
                          
                          
                          2006Oil
      or
                            Condensate
                            (Bbl)
                          
                          
                          Gas
                            (Mcf)
                          
                          
                          Oil
      or
                            Condensate
                            (Bbl)
                          
                          
                          Gas
                            (Mcf)
                          
                          
                          Oil
      or
                            Condensate
                            (Bbl)
                          
                          
                          Gas
                            (Mcf)Developed
      and undeveloped:Beginning
      of year
                          
                          
                          131,037
                          
                          
                          
                          13,699,421
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Extensions
      and discoveries
                          
                          
                          3,436
                          
                          
                          
                          11,417,393
                          
                          
                          
                          131,174
                          
                          
                          
                          10,820,228
                          
                          
                          
                          —
                          
                          
                          
                          —Purchases
      of minerals in place
                          
                          
                          621
                          
                          
                          
                          2,020,689
                          
                          
                          
                          —
                          
                          
                          
                          3,335,933
                          
                          
                          
                          —
                          
                          
                          
                          —Production
                          
                          
                          (22
                          )
                          
                          
                          (286,474
                          )
                          
                          
                          (137
                          )
                          
                          
                          (456,740
                          )
                          
                          
                          —
                          
                          
                          
                          (5,822
                          )Sales
      of reserves
                          
                          
                          (130,379
                          )
                          
                          
                          (9,512,575
                          )
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Revisions
      to previous estimates
                          
                          
                          2,643
                          
                          
                          
                          2,475,960
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          5,822End
      of year
                          
                          
                          7,336
                          
                          
                          
                          19,814,414
                          
                          
                          
                          131,037
                          
                          
                          
                          13,699,421
                          
                          
                          
                          —
                          
                          
                          
                          —Proved
      developed reserves:Beginning
      of year
                          
                          
                          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






84




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. The following prices, as adjusted for transportation,
quality, and basis differentials, were used in the calculation of the
standardized measure:





As
      of September 30,2008
                
                
                2007
                
                
                2006Gas
      (per Mcf)
                
                $
                3.36
                
                
                $
                4.80
                
                
                $
                —Oil
      (per Bbl)
                
                $
                79.47
                
                
                $
                62.61
                
                
                $
                —





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 30,2008
                                    
                                    
                                    2007
                                    
                                    
                                    2006Future
      cash inflows
                                    
                                    $
                                    91,165
                                    
                                    
                                    $
                                    73,998
                                    
                                    
                                    $
                                    —Future
      production costs
                                    
                                    
                                    (24,009
                                    )
                                    
                                    
                                    (18,394
                                    )
                                    
                                    
                                    —Future
      development costs
                                    
                                    
                                    (33,416
                                    )
                                    
                                    
                                    (10,648
                                    )
                                    
                                    
                                    —Future
      net cash flows
                                    
                                    
                                    33,740
                                    
                                    
                                    
                                    44,956
                                    
                                    
                                    
                                    —10%
      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 30,2008
                  
                  
                  2007
                  
                  
                  2006Standardized
      measure, beginning of year
                  
                  $
                  19,865
                  
                  
                  $
                  —
                  
                  
                  $
                  —Changes
      in prices and production costs
                  
                  
                  (442
                  )
                  
                  
                  —
                  
                  
                  
                  —Sales
      of oil and gas produced
                  
                  
                  (1,188
                  )
                  
                  
                  (2,027
                  )
                  
                  
                  —Extensions
      of discoveries, net of production costs
                  
                  
                  368
                  
                  
                  
                  17,266
                  
                  
                  
                  —Purchases
      of minerals in place
                  
                  
                  403
                  
                  
                  
                  4,626
                  
                  
                  
                  —Sales
      of reserves
                  
                  
                  (13,043
                  )
                  
                  
                  —
                  
                  
                  
                  —Revisions
      of previous quantity estimates
                  
                  
                  764
                  
                  
                  
                  —
                  
                  
                  
                  —Accretion
      of discount
                  
                  
                  1,987
                  
                  
                  
                  —
                  
                  
                  
                  —Other
                  
                  
                  (357
                  )
                  
                  
                  —
                  
                  
                  
                  —Standardized
      measure, end of year
                  
                  $
                  8,357
                  
                  
                  $
                  19,865
                  
                  
                  $
                  —
  85




Note 16 —
Quarterly Financial Information (Unaudited)





Our
consolidated results of operations, by quarter, for the years ended
September 30, 2008, 2007 and 2006 were as follows ($ in thousands, except
per share amounts):





2008
              
              Restated
                First
              
              
              Restated
                Second
              
              
              Restated
                Third
              
              
              FourthTotal
      operating revenues
              
              $
              507
              
              
              $
              646
              
              
              $
              573
              
              
              $
              454Operating
      loss
              
              $
              (2,172
              )
              
              $
              (2,184
              )
              
              $
              (2,440
              )
              
              $
              (34,648
              )Net
      loss
              
              $
              (16,808
              )
              
              $
              (7,732
              )
              
              $
              (12,253
              )
              
              $
              (40,073
              )Basic
      and diluted net loss per common share
              
              $
              (0.05
              )
              
              $
              (0.02
              )
              
              $
              (0.04
              )
              
              $
              (0.13
              )








2007
              
              Restated
                First
              
              
              Restated
                Second
              
              
              Restated
                Third
              
              
              FourthTotal
      operating revenues
              
              $
              449
              
              
              $
              989
              
              
              $
              847
              
              
              $
              535Operating
      loss
              
              $
              (10,736
              )
              
              $
              (8,267
              )
              
              $
              (6,239
              )
              
              $
              (17,919
              )Net
      loss
              
              $
              (10,555
              )
              
              $
              (10,265
              )
              
              $
              (7,079
              )
              
              $
              (21,912
              )Basic
      and diluted net loss per common share
              
              $
              (0.05
              )
              
              $
              (0.05
              )
              
              $
              (0.03
              )
              
              $
              (0.11
              )











2006
                      
                      First
                      
                      
                      Second
                      
                      
                      Third
                      
                      
                      FourthTotal
      operating revenues
                      
                      $
                      ---
                      
                      
                      $
                      ---
                      
                      
                      $
                      ---
                      
                      
                      $
                      36Operating
      loss
                      
                      $
                      (1,411
                      )
                      
                      $
                      (1,978
                      )
                      
                      $
                      (3,180
                      )
                      
                      $
                      (11,640
                      )Net
      loss
                      
                      $
                      (1,599
                      )
                      
                      $
                      (2,477
                      )
                      
                      $
                      (4,475
                      )
                      
                      $
                      (12,141
                      )Basic
      and diluted net loss per common share
                      
                      $
                      (0.02
                      )
                      
                      $
                      (0.02
                      )
                      
                      $
                      (0.03
                      )
                      
                      $
                      (0.07
                      )








For
additional information related to the restated results of operations please see
our restated form 10Q/A’s for the following reporting periods December 31, 2007,
March 31, 2008 and June 30, 2008 filed contemporaneously with this Form
10-K.





86





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 decision to change
accountants was approved by the Audit Committee on January 31, 2008. 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.





The
report of Hein to the Audit Committee and our management addressing management’s
assessment of the effectiveness of internal control over financial reporting and
the effectiveness of internal control over financial reporting as of September
30, 2007 indicates that we did not maintain effective internal control over
financial reporting as of September 30, 2007 due to the effect of the following
material weaknesses:





1.
            The
      Company did not have an adequate process for monitoring accounting and
      financial reporting and had not conducted a comprehensive review of the
      account balances and transactions that had occurred during the
      year.  However, the Company did conduct such a review prior to
      filing of the Form 10-K.




2.
            The
      Company does not have sufficient controls to ensure that the accounting
      department would receive or review material documents, or to ensure that
      the accounting department would receive or review material information on
      a timely basis.





In
connection with the interim review of the June 30, 2007 financial statements,
Hein advised the Company that it did not have effective internal control over
financial reporting due to the effect of the following material
weaknesses:  The Company did not have sufficient controls to ensure
that the Company’s accounting department would receive or review material
documents, or to ensure that the accounting department would receive or review
material information on a timely basis.  There was not an effective
system in place to ensure that those responsible for financial reporting
received copies of Board minutes which reflected the issuance of common shares
of stock.  In addition, the Company’s accounting department did not
have adequate staffing to provide timely financial information.





In
connection with the audit of the September 30, 2006 financial statements, Hein
advised the Company that it did not have effective internal control over
financial reporting due to the effect of the following material
weakness:  The Company’s staffing for the period under audit and
record keeping was not adequate to ensure an effective internal control
structure as evidenced by the lack of recording certain equity transactions on a
timely basis and delays in providing necessary information to the
auditors.





In
connection with the interim review of the June 30, 2006 financial statements,
Hein advised the Company that it did not have effective internal control over
financial reporting due to the effect of the following material
weakness:  The Company’s current staffing was not adequate to ensure
an effective internal control structure as evidenced by the overpayment of
certain development fees to a related party and the filing of the Form 10-QSB
for the three and nine months periods ended June 30, 2006 prior to the
completion of the review by the Company’s independent registered public
accounting firm.





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.





87


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).




During
our two most recent fiscal years ended September 30, 2007 and 2006, we consulted
GHB on the application of the Financial Accounting Standards Board 109, Accounting for Income Taxes
and accrued $2,425 in fees related to that consultation.


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 recently 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.





As we
engaged GHB as of January 31, 2008, GHB did not issue a report on our financial
statements for the fiscal years ended September 30, 2007 or 2006.





During
our two most recent fiscal years and the period 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 during our two most recent
fiscal years and the period 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 was 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 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.






88


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
Interim 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, and specifically in
relation to our accounting for our oil and gas properties, existed as of
September 30, 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 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.
  
 89
 Our
management, with the participation of our Chief Executive Officer and Interim
Chief Financial Officer, assessed the effectiveness of our internal control over
financial reporting as of September 30, 2008. 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, 2008. In connection with the preparation of our Annual Report
on Form 10-K, we identified certain accounting errors that led us to
conclude that our internal control over financial reporting was not operating
effectively as of September 30, 2008.
 
 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 and we lacked adequately defined procedures and controls to properly
value and present our oil and gas properties in our consolidated balance sheets
and statements of operations; and (2) our controls over other non-recurring
complex accounting transactions were not operating effectively to ensure
that all such transactions were properly accounted for and disclosed in
accordance with GAAP.  These material weaknesses resulted in the
restatement of the Company's consolidated financial statements filed with the
SEC on Form 10-Q for the quarterly periods ended December 31, 2007, March 31,
2008 and June 30, 2008.
 
 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, 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, 2008 and 2007 and the
related consolidated statements of operations, stockholders’ equity, and cash
flows for the years ended September 30, 2008, 2007 and 2006 in conformity with
GAAP.
   90
 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, 2008
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
information required by this item will be included in the definitive proxy
statement of PetroHunter relating to the Company’s 2009 Annual Meeting of
Shareholders to be filed with the SEC pursuant to Regulation 14A, which
information is incorporated herein by reference.








ITEM 11.
            EXECUTIVE
      COMPENSATION





The
information required by this item will be included in the definitive proxy
statement of PetroHunter relating to the Company’s 2009 Annual Meeting of
Shareholders to be filed with the SEC pursuant to Regulation 14A, which
information is incorporated herein by reference.








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





The
information required by this item will be included in the definitive proxy
statement of PetroHunter relating to the Company’s 2009 Annual Meeting of
Shareholders to be filed with the SEC pursuant to Regulation 14A, which
information is incorporated herein by reference.








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





The
information required by this item will be included in the definitive proxy
statement of PetroHunter relating to the Company’s 2009 Annual Meeting of
Shareholders to be filed with the SEC pursuant to Regulation 14A, which
information is incorporated herein by reference.








ITEM 14.
            PRINCIPAL ACCOUNTING FEES AND
      SERVICES





The
information required by this item will be included in the definitive proxy
statement of PetroHunter relating to the Company’s 2009 Annual Meeting of
Shareholders to be filed with the SEC pursuant to Regulation 14A, which
information is incorporated herein by reference.








91


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)10.8
                  Lori
      Rappucci Employment Agreement (incorporated by reference to
      Exhibit 10.2 to the Company’s current report on Form 8-K dated
      October 17, 2007, filed October 23, 2007)10.9
                  Purchase
      and Sale Agreement between PetroHunter Heavy Oil Ltd. and Pearl
      Exploration and   92
 Regulation
                      S-K Number
                    Exhibit
 Production
      Ltd. effective October 1, 2007 (incorporated by reference to
      Exhibit 10.1 to the Company’s current report on Form 8-K dated
      November 6, 2007, filed November 7, 2007)10.10
                  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)10.11
                  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)10.12
                  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)10.13
                  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)10.14
                  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)10.15
                  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)10.16
                  Charles
      B. Crowell Employment Agreement (incorporated by reference to
      Exhibit 10.1 to the Company’s current report on Form 8-K dated
      January 4, 2008, filed January 10, 2008)10.17
                  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)10.18
                  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)10.19
                  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)10.20
                  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)10.21
                  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)10.22
                  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)10.23
                  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)   93
 
 Regulation
                        S-K Number
                      Exhibit
 10.24
                  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)10.25
                  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)10.26
                  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)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 Charles B. Crowell31.2
                  Rule 13a-14(a)
      Certification of Charles A. Josenhans32.1
                  Certification
      of Charles B. Crowell pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      200232.2
                  Certification
      of Charles A. Josenhans pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
  94








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, 2009
              By:
              /s/ Charles
      B. CrowellCharles
      B. CrowellChief
      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/
      Charles B. Crowell
                                                
                                                Chairman
      and Chief Executive Officer and Director
                                                  (Principal Executive Officer)
                                                
                                                January 13, 2009Charles
      B. Crowell/s/
      Charles A. Josenhans
                                                
                                                Interim
      Chief Financial Officer
                                                  (Principal Financial Officer
                                                
                                                January 13, 2009Charles
      A. Josenhans/s/
      Robert Perlman
                                                
                                                Controller
                                                  (Principal Accounting Officer)
                                                
                                                January 13, 2009Robert
      Perlman/s/
      Carmen J. Lotito
                                                
                                                Director
                                                
                                                January
      13, 2009Carmen
      J. Lotito/s/
      Martin B. Oring
                                                
                                                Director
                                                
                                                January
      13, 2009Martin
      B. Oring/s/
      Matthew R. Silverman
                                                
                                                Director
                                                
                                                January
      13, 2009Matthew
      R. Silverman/s/
      Anthony K. Yeats
                                                
                                                Director
                                                
                                                January
      13, 2009Anthony
      K. Yeats








95








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)10.8
                                Lori
      Rappucci Employment Agreement (incorporated by reference to
      Exhibit 10.2 to the Company’s current report on Form 8-K dated
      October 17, 2007, filed October 23, 2007)10.9
                                Purchase
      and Sale Agreement between PetroHunter Heavy Oil Ltd. and Pearl
      Exploration and Production
      Ltd. effective October 1, 2007 (incorporated by reference to
      Exhibit 10.1 to the Company’s current report on Form 8-K dated
      November 6, 2007, filed November 7,
      2007)
   96
 Regulation
                            S-K Number
                          Exhibit
 10.10
                          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)10.11
                          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)10.12
                          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)10.13
                          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)10.14
                          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)10.15
                          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)10.16
                          Charles
      B. Crowell Employment Agreement (incorporated by reference to
      Exhibit 10.1 to the Company’s current report on Form 8-K dated
      January 4, 2008, filed January 10, 2008)10.17
                          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)10.18
                          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)10.19
                          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)10.20
                          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)10.21
                          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)10.22
                          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)10.23
                          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)   97
 Regulation
                              S-K Number
                            Exhibit
 10.24
                          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)10.25
                          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)10.26
                          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)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 Charles B. Crowell31.2
                          Rule 13a-14(a)
      Certification of Charles A. Josenhans32.1
                          Certification
      of Charles B. Crowell pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      200232.2
                          Certification
      of Charles A. Josenhans pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002