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

                                   FORM 10-KSB

(Mark One)
[X]      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
         OF 1934
         FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2006

[ ]      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
         ACT OF 1934
         For the transition period from __________ to __________

                        Commission file number: 000-51152

                         PETROHUNTER ENERGY CORPORATION
           (Name of small business issuer as specified in its charter)

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

            1875 LAWRENCE STREET, SUITE 1400, DENVER, COLORADO 80203
               (Address of principal executive offices) (Zip Code)

                    Issuer's telephone number: (303) 572-8900

       Securities registered under Section 12(b) of the Exchange Act: NONE

         Securities registered under Section 12(g) of the Exchange Act:
                         COMMON STOCK, $0.001 PAR VALUE
                                (Title of class)

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

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. [ ]

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

State issuer's revenues for its most recent fiscal year:  $35,656

<PAGE>

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days: $249,298,342 ON NOVEMBER 30, 2006

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 219,928,734 ON NOVEMBER 30, 2006

Transitional Small Business Disclosure Format (Check one):    Yes [ ]   No [X]


                           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 or Plan 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 US dollars unless otherwise
indicated.

                                    GLOSSARY

         Unless otherwise indicated in this document, oil equivalents are
determined using the ratio of six Mcf of natural gas to one barrel of crude oil,
condensate or natural gas liquids so that six Mcf of natural gas are referred to
as one barrel of oil equivalent.

         AMI.  Area of Mutual Interest.

         API GRAVITY. A specific gravity scale developed by the American
Petroleum Institute (API) for measuring the relative density of various
petroleum liquids, expressed in degrees. API gravity is gradated in degrees on a
hydrometer instrument and was designed so that most values would fall between
10(degree) and 70(degree) API gravity. The arbitrary formula used to obtain this
effect is: API gravity = (141.5/SG at 60(degree)F) - 131.5, where SG is the
specific gravity of the fluid.

         ANTICLINE. An arch-shaped fold in rock in which rock layers are
upwardly convex.


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<PAGE>

         BBL. One stock tank barrel, or 42 U.S. gallons liquid volume, used in
reference to oil or other liquid hydrocarbons.

         BCF. One billion cubic feet of natural gas at standard atmospheric
conditions.

         CAPITAL EXPENDITURES. Costs associated with exploratory and development
drilling (including exploratory dry holes); leasehold acquisitions; seismic data
acquisitions; geological, geophysical and land related overhead expenditures;
delay rentals; producing property acquisitions; other miscellaneous capital
expenditures; compression equipment and pipeline costs.

         CARRIED INTEREST. The owner of this type of interest in the drilling of
a well incurs no liability for costs associated with the well until the well is
drilled, completed and connected to commercial production/processing facilities.

         CENTIPOISE. A unit of measurement for viscosity equivalent to
one-hundredth of a poise.

         COMPLETION. The installation of permanent equipment for the production
of oil or natural gas.

         DARCY. A standard unit of measure of permeability. One darcy describes
the permeability of a porous medium through which the passage of one cubic
centimeter of fluid having one centipoise of viscosity flowing in one second
under a pressure differential of one atmosphere where the porous medium has a
cross-sectional area of one square centimeter and a length of one centimeter.

         DEVELOPED ACREAGE. The number of acres that are allocated or assignable
to producing wells or wells capable of production.

         DEVELOPMENT WELL. A well drilled within the proved area of an oil or
natural gas reservoir to the depth of a stratigraphic horizon known to be
productive.

         EXPLOITATION. The continuing development of a known producing formation
in a previously discovered field. To make complete or maximize the ultimate
recovery of oil or natural gas from the field by work including development
wells, secondary recovery equipment or other suitable processes and technology.

         EXPLORATION. The search for natural accumulations of oil and natural
gas by any geological, geophysical or other suitable means.

         EXPLORATORY WELL. A well drilled to find and produce oil or natural gas
in an unproved area, to find a new reservoir in a field previously found to be
productive of oil or natural gas in another reservoir, or to extend a known
reservoir.

         FIELD. An area consisting of either a single reservoir or multiple
reservoirs, all grouped on or related to the same individual geological
structural feature and/or stratigraphic condition.

         FINDING AND DEVELOPMENT COSTS. The total capital expenditures,
including acquisition costs, and exploration and abandonment costs, for oil and
gas activities divided by the amount of proved reserves added in the specified
period.

         GROSS ACRES OR GROSS WELLS. The total acres or wells, as the case may
be, in which we have a working interest.


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<PAGE>

         LEASE. An instrument which grants to another (the lessee) the exclusive
right to enter to explore for, drill for, produce, store and remove oil and
natural gas on the mineral interest, in consideration for which the lessor is
entitled to certain rents and royalties payable under the terms of the lease.
Typically, the duration of the lessee's authorization is for a stated term of
years and "for so long thereafter" as minerals are producing.

         MBO. One thousand barrels of oil.

         MCF. One thousand cubic feet of natural gas at standard atmospheric
conditions.

         MMBO. One million barrels of oil

         MMCF. One million cubic feet of natural gas.

         NET ACRES OR NET WELLS. A net acre or well is deemed to exist when the
sum of our fractional ownership working interests in gross acres or wells, as
the case may be, equals one. The number of net acres or wells is the sum of the
fractional working interests owned in gross acres or wells, as the case may be,
expressed as whole numbers and fractions thereof.

         OPERATOR. The individual or company responsible to the working interest
owners for the exploration, development and production of an oil or natural gas
well or lease.

         OVERRIDING ROYALTY. A revenue interest in oil and gas, created out of a
working interest which entitles the owner to a share of the proceeds from gross
production, free of any operating or production costs.

         PARTICIPANT GROUP. The individuals and/or companies that, together,
comprise the ownership of 100% of the working interest in a specific well or
project.

         PAYOUT. The point at which all costs of leasing, exploring, drilling
and operating have been recovered from production of a well or wells as defined
by contractual agreement.

         PRODUCTIVE WELL. A well that is found to be capable of producing
hydrocarbons in sufficient quantities such that proceeds from the sale of the
production exceed production expenses and taxes.

         PROSPECT. A specific geographic area which, based on supporting
geological, geophysical or other data and also preliminary economic analysis
using reasonably anticipated prices and costs, is deemed to have potential for
the discovery of commercial hydrocarbons.

         PROVED RESERVES. The estimated quantities of oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be commercially recoverable in future years from known
reservoirs under existing economic and operating conditions.

         RE-ENTRY. Entering an existing well bore to redrill or repair.

         RESERVES. Natural gas and crude oil, condensate and natural gas liquids
on a net revenue interest basis, found to be commercially recoverable.



                                       4
<PAGE>

         RESERVOIR. A porous and permeable underground formation containing a
natural accumulation of producible natural gas and/or oil that is confined by
impermeable rock or water barriers and is separate from other reservoirs.

         ROYALTY. An interest in an oil and natural gas lease that gives the
owner of the interest the right to receive a portion of the production from the
leased acreage, or of the proceeds of the sale thereof, but generally does not
require the owner to pay any portion of the costs of drilling or operating the
wells on the leased acreage. Royalties may be either landowner's royalties,
which are reserved by the owner of the leased acreage at the time the lease is
granted, or overriding royalties, which are usually reserved by an owner of the
leasehold in connection with a transfer to a subsequent owner.

         SPUD. To start the well drilling process by removing rock, dirt and
other sedimentary material with the drill bit.

         TCF. One trillion cubic feet.

         3-D SEISMIC. The method by which a three-dimensional image of the
earth's subsurface is created through the interpretation of reflection seismic
data collected over a surface grid. 3-D seismic surveys allow for a more
detailed understanding of the subsurface than do conventional surveys and
contribute significantly to field appraisal, exploitation and production.

         UNDEVELOPED ACREAGE. Lease acres on which wells have not been drilled
or completed to a point that would permit the production of commercial
quantities of oil and gas regardless of whether or not such acreage contains
proved reserves.

         WORKING INTEREST. An interest in an oil and gas lease that gives the
owner of the interest the right to drill and produce oil and gas on the leased
acreage and requires the owner to pay a share of the costs of drilling and
production operations. The share of production to which a working interest owner
is entitled will always be smaller than the share of costs that the working
interest owner is required to bear, with the balance of the production accruing
to the owners of royalties.













                                       5

<PAGE>
                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

         PetroHunter Energy Corporation ("PetroHunter"), formerly Digital
Ecosystems Corp. ("Digital"), through the operations of its wholly owned
subsidiary, PetroHunter Operating Company, is a global oil and gas exploration
and production company with primary assets consisting of a working interest in
oil and gas leases and related interests in various oil and natural gas
prospects, including approximately 220,000 net acres in Colorado, Utah and
Montana and approximately seven million net acres in the Northern Territory of
Australia. The properties are managed and operated in three groups: Heavy Oil,
Piceance Basin, and Australia.

         PetroHunter Operating Company (formerly GSL Energy Corporation) was
formed in June 2005 as a Maryland corporation, and on May 12, 2006 completed a
stock exchange by which its stockholders received more than 85% of Digital's
outstanding stock. The business of PetroHunter Operating Company became the
business of Digital. Subsequent to May 2006, Digital acquired all the remaining
outstanding stock of PetroHunter Operating Company, and effective August 14,
2006, Digital changed its name from Digital Ecosystems Corp. to PetroHunter
Energy Corporation and changed its domicile to Maryland. Digital was
incorporated on February 21, 2002 under the laws of the State of Nevada.

         In October 2006, GSL Energy Corporation ("GSL") changed its name to
PetroHunter Operating Company. 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, PetroHunter formed PetroHunter Heavy Oil
Ltd. as a wholly-owned subsidiary for the purpose of holding and developing its
heavy oil assets. PetroHunter formed PetroHunter Energy NT Ltd. on October 20,
2006 for the purpose of holding and developing its assets in the Northern
Territory of Australia. Collectively, PetroHunter and its subsidiaries are
referred to herein as the "Company," "we," "us" or "our".

         Our principal executive offices are located at 1875 Lawrence Street,
Suite 1400, Denver, Colorado 80202. The telephone number is (303) 572-8900, the
facsimile number is (303) 572-8927 and our web site is WWW.PETROHUNTER.COM. Our
periodic and current reports filed with the Securities and Exchange Commission
(the "SEC") can be found on our web site at www.petrohunter.com and on the SEC's
website at www.sec.gov.

MAB RESOURCES LLC

         Effective July 1, 2005, we entered into a Management and Development
Agreement (the "Development Agreement") with MAB Resources LLC ("MAB"). MAB is a
Delaware limited liability company controlled by Marc A. Bruner, our largest
shareholder. MAB is in the business of oil and gas exploration and development.
MAB has acquired various oil and gas properties and related assets through
several purchase and sale agreements and lease development agreements
(collectively, the "MAB/Third-Party Agreements").

         Commencing shortly after our formation, we entered into a series of
exploration and development agreements (the "EDAs") and the Development
Agreement with MAB, under which MAB has assigned an undivided 50% working
interest in the oil and gas properties which MAB obtained under the
MAB/Third-Party Agreements. Under the EDAs and the Development Agreement, MAB
has the continuing obligation to assign to us an undivided 50% working interest
in additional properties which


                                       6
<PAGE>

MAB acquires (including leases, concessions, permits and related oil and gas
interests and assets) throughout the world, subject to reservation of a
specified overriding royalty and subject to our specified obligations certain of
which are described below.

         All of the MAB/Third-Party Agreements establish one or more areas of
mutual interest ("AMIs"). In the course of negotiating each MAB/Third-Party
Agreement, MAB secured each selling party's obligation to obtain substantial
additional acreage and/or oil and gas leases (including producing properties)
within each AMI and to convey to MAB 100% of the working interest in each lease
and production asset obtained by seller. Under the EDAs and the Development
Agreement, we have a continuing right to acquire an undivided 50% working
interest in all such properties.

         The Development Agreement sets forth: (a) MAB's obligation to assign to
us a minimum 50% undivided interest in any and all oil and gas assets which MAB
acquires from third parties in the future; and (b) our long-term relationship
with MAB regarding the ownership and operation of all jointly-owned properties.
Each of the Properties acquired is covered by a property-specific EDA that is
consistent with the terms of the Development Agreement.

         Each EDA and the Development Agreement include the following material
terms:

             o    OWNERSHIP: MAB and we each own an undivided 50% working
                  interest in all oil and gas leases, production facilities, and
                  related assets (collectively, the "Properties").

             o    OPERATOR: We are named as Operator, and have appointed a
                  related controlled entity, MAB Operating Company LLC, as
                  sub-operator. MAB and we will sign a joint operating
                  agreement, governing all operations.

             o    COSTS AND REVENUES: Each party pays its proportionate share of
                  costs and receives its proportionate share of revenues,
                  subject to us bearing the following burdens:

                     a)    MAB OVERRIDING ROYALTY INTEREST: Each assignment of
                           Properties from MAB to us reserves an overriding
                           royalty equivalent to 3% of 8/8ths (proportionately
                           reduced to 1.5% of our undivided 50% working interest
                           in the Properties) (the "MAB Override"), payable out
                           of production and sales.

                     b)    PROJECT COSTS:  Each EDA provides that we shall pay
                           100% of the cost of acquisitions and operations
                           ("Project Costs") up to a specified amount, after
                           which time each party shall pay its proportionate 50%
                           share of such costs.  The maximum specified amount of
                           Project Costs of which we must pay 100%, under the
                           Development Agreement for Properties acquired in the
                           future, is $100 million for each Property or project
                           acquired in the future.  There is no "before payout"
                           or "after payout" in the traditional sense of a
                           "carried interest" because our obligation to expend
                           the specified amount of Project Costs and MAB's
                           receipt of its 50% share of revenues apply without
                           regard to whether "payout" has occurred.  Therefore,
                           our payment of all Project Costs up to such specified
                           amount might occur BEFORE actual payout, or might
                           occur AFTER actual payout, depending on each project
                           and set of Properties.

                     c)    PROJECT DEVELOPMENT COSTS: Under the Development
                           Agreement, we pay to MAB a monthly advance of Project
                           Development Costs representing a specified portion of
                           MAB's "carried" Project Costs. The total amount of
                           such advances


                                       7
<PAGE>

                           paid to MAB by us will be deducted from MAB's portion
                           of the Project Costs carried by us.

             o    RIGHTS AND OBLIGATIONS: MAB conveys to us an undivided 50%
                  working interest in all rights and benefits under each EDA
                  (such as additional Assets acquired under AMIs), and we assume
                  our share of all duties and obligations under each EDA (such
                  as drilling and development obligations).

         Effective January 1, 2007, we entered into an Acquisition and
Consulting Agreement with MAB, which replaces the previous joint ownership
agreement between the parties. Under the new agreement, MAB has relinquished and
assigned to us all of MAB's 50% working interest, resulting in us now owning
100% working interest in the leases, permits and licenses covering 7.2 million
net mineral acres that were previously owned 50/50. As a direct result of that
assignment, MAB's carried interest (totaling 50% of our estimated $700 million
in capital expenditures) is void and no longer applicable. In addition, MAB's
monthly advance payments of Project Development Costs ($600,000 as of December
31, 2006) are replaced with a monthly consulting fee of $25,000 and monthly
payments of $225,000 under the $13.5 million promissory note.

         In consideration for MAB's full relinquishment of its working interest
and the carried interest, and the reduction in the monthly payment, and in
connection with MAB's ongoing consulting services, our new agreement with MAB
provides for the following consideration to MAB:

             a)   The new agreement increases MAB's previous 3% overriding
                  royalty interest to a 10% override. However, one-half of the
                  override (5%) is deferred for a three-year period, during
                  which time we receive the cash attributable to that 5% portion
                  of the override, with such amount to be repaid at the end of
                  the three-year period.

             b)   The new agreement provides for the issuance of 50 million
                  shares of our common stock to MAB.

             c)   MAB has the right and opportunity to receive up to an
                  additional 50 million shares, to be held in escrow and
                  released over a five-year period in specified numbers of
                  shares that are tied to our performance in booking reserves.
                  The agreement provides for thresholds, beginning with the
                  issuance of the first five million shares if and when we
                  achieve proved reserves of 150 billion cubic feet of gas. All
                  50 million shares would be issued to MAB if and when we book
                  one trillion cubic feet of proved reserves by January 1, 2012.
                  If we do not achieve one trillion cubic feet of proved
                  reserves by that date, the balance of shares in escrow, if
                  any, will be returned to us.

             d)   MAB will receive a promissory note in the principal amount of
                  $13.5 million, payable in arrears by monthly installments of
                  $225,000, commencing January 31, 2007, accruing interest at
                  the London Interbank Offered Rate (LIBOR) (to be adjusted
                  quarterly), and which shall be unsecured and subordinated to
                  any other indebtedness in existence as of the date of the
                  agreement or which is incurred by us or any affiliate or
                  subsidiary in the future.

         The transfer of MAB's working interest for our shares (including the
carried interest), the revised override and MAB foregoing monthly capital cost
advances, will be analyzed in an independent economic evaluation, and the
closing of this agreement, which is to occur by the end of January 2007, will be
subject to such evaluation concluding that the consideration exchanged by the
parties reflects a fair and reasonable market value for us.


                                       8
<PAGE>

PROPOSED ACQUISITION OF POWDER RIVER BASIN PROPERTIES

         On December 29, 2006, we entered into a Purchase and Sale Agreement
(the "PSA") with Galaxy Energy Corporation ("Galaxy") and its wholly owned
subsidiary, Dolphin Energy Corporation ("Dolphin"). Pursuant to the PSA, we
agreed to purchase all of Galaxy's and Dolphin's oil and gas interests in the
Powder River Basin of Wyoming and Montana (the "Powder River Basin Assets").

         Marc A. Bruner, who is our largest shareholder, also is a 14.3%
beneficial shareholder of Galaxy. Marc A. Bruner is the father of Marc E.
Bruner, the President, Chief Executive Officer and director of Galaxy. Marc E.
Bruner is the stepson of Carmen J. Lotito, the Chief Financial Officer and a
director of the Company.

         The purchase price for Powder River Basin Assets is $45 million, with
$20 million to be paid in cash and $25 million to be paid in shares of our
common stock at the rate of $1.50 per share.

         Closing of the transaction is subject to approval by Galaxy's secured
noteholders, approval of all matters in its discretion by our Board of
Directors, including the Company obtaining outside financing on terms acceptable
to its Board of Directors, and various other terms and conditions. Either party
may terminate the agreement if closing has not occurred by February 28, 2007.

         Within ten (10) days of signing the PSA, we were required and did make
an initial earnest money payment of $1.4 million. On or before January 31, 2007,
we will make an additional earnest money payment of $600,000. In the event the
closing does not occur for any reason other than a material breach by us, the
deposit shall convert into a promissory note (the "Note"), payable to us, and
shall be an unsecured subordinated debt of both Galaxy and Dolphin, which is
payable only after repayment of Galaxy's and Dolphin's senior indebtedness.

         We became the contract operator of the Powder River Basin Assets
beginning January 1, 2007. At closing, the operating expenses incurred by us as
the contract operator will be credited toward the purchase price, or if closing
does not occur, will be added to the principal amount of the Note.

         MAB has orally agreed to guarantee the performance of Galaxy and
Dolphin under the PSA (including but not limited to all their obligations under
the Note), and has orally agreed to reimburse us for certain losses and damages
which might be incurred as a result of those parties entering into the PSA. We
expect that a written agreement will be entered into by the parties prior to
closing.

PALEO

         On November 14, 2006, we, through our subsidiary, Paleo, and the Box
Hill Institute signed an agreement which commenced a five-year research
collaboration with the BioSkills Specialist Centre for Biotechnology Training at
the Box Hill Institute in Melbourne, Australia. As part of the agreement, Paleo
and the Box Hill Institute share laboratory space and offer training
opportunities for Box Hill students. The team will target a broad array of
applications including energy/petrochemical, environmental remediation, timber
and plant resources, agricultural and consumer products.

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


                                       9

<PAGE>

and to evaluate, bid for and purchase a greater number of properties and
prospects than our financial or human resources permit.

EMPLOYEES

         At December 31, 2006, we had 16 full time employees and 16 total
employees.

ENVIRONMENTAL MATTERS

         Operations on properties in which we have an interest are subject to
extensive federal, state and local environmental laws that regulate the
discharge or disposal of materials or substances into the environment and
otherwise are intended to protect the environment. Numerous governmental
agencies issue rules and regulations to implement and enforce such laws, which
are often difficult and costly to comply with and which carry substantial
administrative, civil and criminal penalties and in some cases injunctive relief
for failure to comply.

         Some laws, rules and regulations relating to the protection of the
environment may, in certain circumstances, impose "strict liability" for
environmental contamination. These laws render a person or company liable for
environmental and natural resource damages, cleanup costs and, in the case of
oil spills in certain states, consequential damages without regard to negligence
or fault. Other laws, rules and regulations may require the rate of oil and gas
production to be below the economically optimal rate or may even prohibit
exploration or production activities in environmentally sensitive areas. In
addition, state laws often require some form of remedial action, such as closure
of inactive pits and plugging of abandoned wells, to prevent pollution from
former or suspended operations.

         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.

         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, or 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 government to
pursue such claims.

         It is also not uncommon for neighboring landowners and other third
parties to file claims for personal injury or property or natural resource
damages allegedly caused by the hazardous substances released into the
environment. Under CERCLA, certain oil and gas materials and products are, by
definition, excluded from the term "hazardous substances." At least two federal
courts have held that certain wastes associated with the production of crude oil
may be classified as hazardous substances under CERCLA. Similarly, under the
federal Resource, Conservation and Recovery Act, or RCRA,


                                       10
<PAGE>

which governs the generation, treatment, storage and disposal of "solid wastes"
and "hazardous wastes," certain oil and gas materials and wastes are exempt from
the definition of "hazardous wastes." This exemption continues to be subject to
judicial interpretation and increasingly stringent state interpretation. During
the normal course of operations on properties in which we have an interest,
exempt and non-exempt wastes, including hazardous wastes, that are subject to
RCRA and comparable state statutes and implementing regulations are generated or
have been generated in the past. The federal Environmental Protection Agency and
various state agencies continue to promulgate regulations that limit the
disposal and permitting options for certain hazardous and non-hazardous wastes.

         We believe that the operator of the properties in which we have an
interest is 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 our 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 our 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 our operations. At this time, we have no plans to
make any material capital expenditures for environmental control facilities.

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.

         We are a development stage oil and gas company and have earned very
limited production revenue. Our principal activities have been 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, 2006, includes an
explanatory paragraph relating to the uncertainty of our ability to continue as
a going concern. From inception to September 30, 2006, we have generated a
cumulative net loss of $22,810,834. For the 2007 fiscal year, we do not expect
our operations to generate sufficient cash flows to provide working capital for
our ongoing overhead, 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 any prospects that we have or acquire and we may
not achieve profitability from operations in the near future or at all.

THE LACK OF PRODUCTION AND ESTABLISHED RESERVES FOR OUR PROPERTIES IMPAIRS OUR
ABILITY TO RAISE CAPITAL.

         As of September 30, 2006, we have established very limited production
of natural gas from a limited number of wells, and have no 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.
Therefore, we may have to raise capital on terms less favorable than we would
desire. This may result in increased dilution to existing stockholders.


                                       11
<PAGE>

TERMS OF SUBSEQUENT FINANCINGS MAY ADVERSELY IMPACT YOUR INVESTMENT.

         We may have to engage in common equity, debt, or preferred stock
financing in the future. Your rights and the value of your investment in the
common stock could be reduced by any type of financing we do. Interest on debt
securities could increase costs and negatively impacts operating results, and
investors in debt securities may negotiate for other consideration or terms
which could have a negative impact on your investment. Preferred stock could be
issued in series from time to time with such designations, rights, preferences,
and limitations as needed to raise capital, and the terms of preferred stock
could be more advantageous to those investors than to the holders of common
stock. If we need to raise more equity capital from the sale of common stock,
institutional or other investors may negotiate terms at least as, and possibly
more, favorable than the terms of your investment. In addition, any shares of
common stock that we sell could be sold into the market and subsequent sales
could adversely affect the market price of our stock.

MARC A. BRUNER AND HIS AFFILIATES CONTROL A SIGNIFICANT PERCENTAGE OF OUR
OUTSTANDING COMMON STOCK, WHICH WILL ENABLE THEM TO CONTROL MANY SIGNIFICANT
CORPORATE ACTIONS AND MAY PREVENT A CHANGE IN CONTROL THAT WOULD OTHERWISE BE
BENEFICIAL TO OUR STOCKHOLDERS.

         Marc A. Bruner beneficially owned approximately 33.4% of our common
stock as of November 30, 2006. Under the terms of the new Acquisition and
Consulting Agreement with MAB, he will acquire beneficial ownership of at least
50 million additional shares and up to as many as 100 million shares. This
control by Mr. Bruner could have a substantial impact on matters requiring the
vote of the stockholders, including the election of our directors and most of
our corporate actions. This control could delay, defer or prevent others from
initiating a potential merger, takeover or other change in our control, even if
these actions would benefit our stockholders and us. This control could
adversely affect the voting and other rights of our other stockholders and could
depress the market price of our common stock.

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. Marc A. Bruner, our largest shareholder, is the controlling owner of
MAB Resources LLC, the entity with which we have agreements affecting all of our
oil and gas properties. Mr. Bruner also serves as the chairman of the board of
Gasco Energy, Inc. and chairman of the board, chief executive officer and
president of Falcon Oil & Gas Ltd. ("Falcon"), and is involved with other
natural resource companies. He is a significant shareholder of Galaxy Energy
Corporation ("Galaxy") and the father of Galaxy's President, Marc E. Bruner. He
is also a significant shareholder of Exxel Energy Corp., a British Columbia
corporation, whose stock is traded on the TSX Venture Exchange. Carmen Lotito,
our Executive Vice President, Chief Financial Officer and Treasurer, is the
stepfather of Galaxy's President, Marc E. Bruner, a former officer and director
of Galaxy, and a director of Gasco Energy, Inc. 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.

         In addition to the agreement with MAB Resources LLC, we have an office
sharing arrangement with Falcon and have entered into a purchase and sale
agreement with Galaxy to purchase its oil and gas interests in the Powder River
Basin of Wyoming and Montana.


                                       12
<PAGE>

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. Further, potential for future reserve
revisions, either upward or downward, is significantly greater than normal
because 100% of our reserves are undeveloped.

         Actual natural gas and oil prices, future production, revenues,
operating expenses, taxes, development expenditures and quantities of
recoverable natural gas reserves 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 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 significant
capital expenditures 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.

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. This dependence is heightened where this
infrastructure is less developed. Therefore, if drilling results are positive in
certain areas of the Properties, a new gathering system would need to be built
to handle the potential volume of gas produced. We might be required to shut in
wells, at least temporarily, for lack of a market or because of the inadequacy
or unavailability of transportation facilities. If that were to occur, we would
be unable to realize revenue from those wells until arrangements were made to
deliver production to market.

         Our ability to produce and market natural gas and oil is affected and
also may be harmed by:
           o  the lack of pipeline transmission facilities or carrying capacity;
           o  government regulation of natural gas and oil production;
           o  government transportation, tax and energy policies;
           o  changes in supply and demand; and
           o  general economic conditions.



                                       13
<PAGE>


WE MIGHT INCUR ADDITIONAL DEBT IN ORDER TO FUND OUR EXPLORATION AND DEVELOPMENT
ACTIVITIES, WHICH WOULD CONTINUE TO REDUCE OUR FINANCIAL FLEXIBILITY AND COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION OR RESULTS
OF OPERATIONS.

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

WE HAVE SIGNIFICANT FUTURE CAPITAL REQUIREMENTS. IF THESE OBLIGATIONS ARE NOT
MET, OUR GROWTH AND OPERATIONS COULD BE NON-FUNCTIONAL.

         Our future growth depends on our ability to make large capital
expenditures for the development of the working interests we have acquired. 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 fundings for which we have no
commitments at this time. Future cash flows and the availability of financing
will be subject to a number of variables, such as:
            o   the success of the leases;
            o   success in locating and producing new reserves; and
            o   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:
            o   a substantial portion of operating cash flow being dedicated to
                the payment of principal and interest;
            o   the Company being more vulnerable to competitive pressures and
                economic downturns; and
            o   restrictions on our operations.

         Financing might 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 some assets on an untimely or unfavorable
basis, which would have an adverse affect our business, financial condition and
results of operations.

THE 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 the leases in a manner
consistent with industry practices, this review and evaluation might not
necessarily reveal all existing or potential problems. This is also true for any
future acquisitions made by us. Inspections may not always be performed on every


                                       14
<PAGE>

well, and environmental problems, such as groundwater contamination, are not
necessarily observable even when an inspection is undertaken. Even when problems
are identified, a seller may be unwilling or unable to provide effective
contractual protection against all or part of those problems, and we often
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
will be 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:
             o    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;
             o    abnormally pressured formations;
             o    mechanical difficulties, such as stuck oil field drilling and
                  service tools and casing collapse;
             o    fires and explosions;
             o    personal injuries and death;
             o    regulatory investigations and penalties; and
             o    natural disasters.

         Any of these risks could have a material adverse effect on our ability
to conduct operations or result in substantial losses. We might elect not to
obtain insurance if we believe 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.

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. Historically, natural gas and oil prices and markets have been
volatile, 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 of the value of
these 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


                                       15
<PAGE>

variety of additional factors that are beyond our control. Among the factors
that could cause this fluctuation are:
             o    changes in supply and demand for natural gas and oil;
             o    levels of production and other activities of the Organization
                  of Petroleum Exporting Countries, or OPEC, and other natural
                  gas and oil producing nations;
             o    market expectations about future prices;
             o    the level of global natural gas and oil exploration,
                  production activity and inventories;
             o    political conditions, including embargoes, in or affecting
                  other oil producing activity; and
             o    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
can 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 of our leases. These activities are
subject to numerous risks beyond our control, including the risk that we will
not find any 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
interpretations. 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:
             o    unexpected drilling conditions;
             o    pressure or irregularities in geological formations;
             o    equipment failures or accidents;
             o    pipeline and processing interruptions or unavailability;
             o    title problems;
             o    adverse weather conditions;
             o    lack of market demand for natural gas and oil;
             o    delays imposed by or resulting from compliance with
                  environmental and other regulatory requirements;
             o    shortages of or delays in the availability of drilling rigs
                  and the delivery of equipment; and
             o    reductions in natural gas and oil prices.

         Our future drilling activities might not be successful, and 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.



                                       16
<PAGE>

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:
             o    seeking oil and gas exploration licenses and production
                  licenses;
             o    acquiring desirable producing properties or new leases for
                  future exploration;
             o    marketing natural gas and oil production;
             o    integrating new technologies; and
             o    acquiring the equipment and expertise necessary to develop and
                  operate properties.

         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 its 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 PLANS.

         In periods of increased drilling activity, shortage 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 its operating results.

TO THE EXTENT THAT WE ESTABLISH NATURAL GAS AND OIL RESERVES, WE WILL BE
REQUIRED TO REPLACE, MAINTAIN OR EXPAND OUR NATURAL GAS AND OIL RESERVES IN
ORDER TO PREVENT OUR RESERVES AND PRODUCTION FROM DECLINING, WHICH WOULD
ADVERSELY AFFECT CASH FLOWS AND INCOME.

          In general, production from natural gas and oil properties declines
over time as reserves are depleted, with the rate of decline depending on
reservoir characteristics. If we establish reserves, of which there is no
assurance, and are not successful in our subsequent exploration and development
activities or in subsequently acquiring properties containing proved reserves,
our proved reserves will decline as reserves are produced. Our future natural
gas and oil production is highly dependent upon our ability to economically
find, develop or acquire reserves in commercial quantities.

         To the extent cash flow from operations is reduced, either by a
decrease in prevailing prices for natural gas and oil or an increase in finding
and development costs, and external sources of capital become limited or
unavailable, our ability to make the necessary capital investment to maintain or
expand our asset base of natural gas and oil reserves would be impaired. Even
with sufficient available capital,


                                       17
<PAGE>

our future exploration and development activities may not result in additional
proved reserves, and we might not be able to drill productive wells at
acceptable costs.

ACCOUNTING RULES MAY REQUIRE WRITE-DOWNS.

         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 a write-down for accounting
purposes if the ceiling is exceeded. If a write-down is required, it would
result in a charge to earnings, but would not impact cash flow from operating
activities. Once incurred, a write-down of oil and gas properties is not
reversible at a later date.

OUR INDUSTRY IS HEAVILY REGULATED.

         Federal, state and local authorities extensively 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. The overall regulatory burden on the industry increases the cost of
doing business, which, in turn, decreases profitability.

OUR OPERATIONS MUST COMPLY WITH COMPLEX ENVIRONMENTAL REGULATIONS.

         Our operations are subject to complex and constantly changing
environmental laws and regulations adopted by federal, state and local
governmental authorities. 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 could face significant liabilities to the government and third
parties for discharges of oil, natural gas, produced water or other pollutants
into the air, soil or water, and we could have to spend substantial amounts on
investigations, litigation and remediation. 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 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.

EVEN IF THERE IS AN ACTIVE TRADING MARKET DEVELOPS, STOCK PRICES MAY BE
VOLATILE.

         Even if the trading volume in our common stock is active, the price of
the common stock may be low or volatile. 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

                                       18
<PAGE>

sustaining a market for our securities. In addition, there is no assurance
that an investor will be able to use our securities as collateral.

         There is no assurance that our common stock will meet the criteria
necessary to qualify for listing on the AIM Stock Exchange, NASDAQ or the
American Stock Exchange. Even if our common stock does meet the criteria, there
is no assurance that our common stock would be accepted for listing on any of
these exchanges.

RAISING ADDITIONAL CAPITAL WOULD DILUTE EXISTING SHAREHOLDERS.

         In order to pursue our business plans, we will need to continue to
raise additional capital. If we are able to obtain additional funding through
the sale of common stock, the financing would dilute the equity ownership of
existing stockholders.

WE HAVE NOT AND DO NOT ANTICIPATE PAYING DIVIDENDS ON OUR COMMON STOCK.

         We have not paid any 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 earnings, if any, to finance
expansion of our operations. However, we are authorized to issue preferred stock
and may in the future pay dividends on our preferred stock that may be issued.


ITEM 2.  DESCRIPTION OF PROPERTY

         Commencing effective July 1, 2005 and continuing through December 31,
2006, we entered into a Management and Development Agreement (the "Development
Agreement") and a series of property-specific Exploration and Development
Agreements (collectively, the "EDAs") pursuant to the Development Agreement with
MAB. Effective January 1, 2007, the Development Agreement and the EDAs were
replaced in their entirety by the Acquisition and Consulting Agreement with MAB
as discussed in Item 1 above.

         The following description of our oil and gas property acquisitions for
the period from inception to September 30, 2006 is pursuant to the original
Development Agreement and related EDAs. All references to our obligations to pay
"project development costs" pertaining to the following properties mean the
specified amounts of capital expenditures (for each such property), which were
credited against our obligation to carry MAB for MAB's 50% portion of such
expenditures.

HEAVY OIL PROPERTIES

         As conventional petroleum reservoirs become depleted other
unconventional energy sources must supply an increasing proportion of North
American energy requirements. We believe that heavy oil and oil sands provide
this vitally needed resource increasingly in North America, as evidenced by oil
sands development in Alberta, Canada. Potential in heavy oil and oil sands are
known to exist in the United States. In California, heavy oil fields in the San
Joaquin Valley have demonstrated consistent and large field (reserve) growth for
nearly a hundred years. Application of new technology there resulted in
significant reserve additions both to recoverable reserves and in place
estimates. Most recent heavy oil technology advances have been made in Canada
related to development of the Athabasca heavy oil/tar sands. Heavy oil
occurrences are extensively developed in Canada but little effort has been
directed to U.S. heavy oil reservoirs in the Rocky Mountain region. We have
identified three such properties: Great Salt Lake (West Rozel field and Gunnison
Wedge Prospect) in Utah, the Fiddler Creek Area in southern Montana, and the
Promised Land Prospect in north central Montana. We believe that the economic


                                       19
<PAGE>

development of each project requires innovative technology to develop these
large potential oil resource plays.

         GREAT SALT LAKE -- UTAH. We have 173,851 net mineral acres under lease
(covered by approximately 78 leases) on two principal properties, West Rozel
Field and Gunnison Wedge prospect in the Great Salt Lake of Utah. Recent
developments are mapping of seismic data and recommendation of three drill sites
on the West Rozel field. Three vertical pairs of wells have been sited to test
the productivity of the field using a dual well strategy. This strategy involves
paired wells with one well being a production well and the other a water
injection (disposal) well. Seismic and geologic maps have been completed and the
permit process has been started for the proposed locations. We anticipate
gathering additional seismic data to test the Gunnison Wedge prospect in the
northwestern portion of the Great Salt Lake. A significant production component
of producing these heavy oils is maintenance of an appropriate gas oil ratio
within the reservoir. We have recently identified a new potential gas sand, up
to 60 feet in thickness at a depth of about 1500 feet, i.e. about 900 feet above
the target reservoir depth, at West Rozel field, which will help to provide in
situ gas and increase the economic viability of the project. The gas horizon
seems to occur over much of the West Rozel acreage.

         Effective November 21, 2005, we entered into an EDA with MAB for the
West Rozel Project, under which we have paid $1,250,000 to the assignor and paid
reimbursement of estimated costs incurred by the assignor of approximately
$180,000 through September 30, 2006. We were obligated to pay MAB monthly
project development costs in the amount of $200,000, commencing June 1, 2005,
and the first $50 million of project costs.

         Pursuant to the terms of each of the leases, we must complete
permitting on this project during 2007. One well must be drilled prior to the
expiration date of the primary term under each lease. The primary terms of two
of the leases where we intend to commence operations end in June 2008, and the
primary term of the third lease where we intend to commence operations ends in
May 2009. We plan to drill at least one test well on each of the leases prior to
the end of each respective primary term. Subsequent drilling and development, as
well as any applications to extend the term of one or more of the leases, will
be determined as we evaluate the results of the first test well and as we
further analyze the results of the seismic surveys.

         FIDDLER CREEK, MONTANA. We have acquired a significant acreage position
of 20,436 net acres on three anticlines on the northern portion of the Big Horn
Basin, which extends from north central Wyoming into southern Montana. These
three properties encompass significant portions of Roscoe Dome, Dean Dome and
Fiddler Creek structures, which we believe have significant estimated in place
oil reserves. These anticlines are large asymmetric anticlines with proven
production from several Cretaceous horizons; i.e. the Upper Greybull Sandstone,
the Lower Greybull Sandstone and the Pryor Sandstone. There is both oil and gas
potential in these sandstones and new technology and techniques have commenced
to improve recovery of oil from two previously drilled wells. We have re-entered
two wells, the Bar B #1 on Dean Dome and the #1 Eggen well on the Fiddler Creek
structure. Additional wells have been selected for additional testing as well on
Roscoe Dome, the #4 George and the #6 George wells and the #3 Keller on Dean
Dome. Three horizontal tests are planned for the Roscoe and Dean Dome this year
as well as a stratigraphically deeper test on the Fiddler Creek structure to
test Paleozoic potential in Phosphoria (Permian), Tensleep (Pennsylvanian), and
Madison (Mississippian) formations. A small 2-D seismic will be required to site
the deeper test.

         Effective July 16, 2006, we entered into an EDA with MAB for the
Fiddler Creek (Montana) Project, under which we paid $2,000,000 through
September 30, 2006, consisting of $300,000 cash to the assignor and the issuance
of $1.7 million (3.4 million shares at $0.50 per share) of our common stock as a


                                       20
<PAGE>

finders fee to a third party. We were obligated to pay MAB monthly project
development costs of $20,000 per month, commencing April 1, 2006, and the first
$100 million of project costs.

         Subsequently, we acquired additional acreage in the Fiddler Creek
Project area for a purchase price of $11,250,000 (of which $6,039,599 has been
paid through September 30, 2006). We have the option to pay said remaining
amount of approximately $5.2 million. In the event we elect not to make such
payment, we would be required to reassign the properties to the seller, and
there would be no other cost or penalty. We were obligated to pay MAB monthly
project development costs of $100,000, commencing August 1, 2006, and to pay the
first $50 million of project costs on these additional properties.

         We are obligated to perform our due diligence investigation on this
property before the final payment is due December 31, 2007.

         PROMISED LAND, MONTANA. We have acquired 49,120 net acres in a resource
play evaluating heavy oil reservoirs in Jurassic Swift Formation and Lower
Cretaceous Bow Island and Sunburst sandstone reservoirs in north central
Montana. The Swift reservoirs were deposited in a shallow marine to estuarine
depositional setting. The Swift sandstones are commonly oil saturated in the
area, and most well tests report oil shows in the Swift. The reservoirs are up
to 60 feet thick and composed of high quality sandstone, averaging about 20
percent porosity and permeabilities range up to one darcy. The oil gravities
range from 10(degree) to 22(degree)API with viscosities of 1500 centipoise to
greater than 50,000 centipoise at 125(degree)F. Additional conventional
potential is possible in Devonian Duperow grainstones, Nisku, and Madison
formations. Following some detailed geologic and geophysical investigations to
determine the depositional environment and geometry of the Swift sandstone
reservoirs, we anticipate drilling three vertical tests in the coming year
offsetting previously drilled wells that encountered oil saturated Swift
reservoirs.

         Effective May 15, 2006, we entered into an EDA with MAB for the
Promised Land Project, under which we have paid $194,250 through September 30,
2006 to the assignor for leases acquired by the assignor. We were obligated to
pay MAB monthly project development costs of $50,000, commencing May 1, 2006,
and to pay the first $50 million of project costs.

         We do not have any drilling commitments with respect to this property.

PICEANCE BASIN, COLORADO PROPERTIES

         The Cretaceous Mesaverde Group, which includes the Williams Fork and
Iles formations, has long been known to hold vast reserves of natural gas. The
gas is sourced primarily from thick coals in the lower Williams Fork formation,
with additional contribution from thinner coals in portions of the Iles
formation. While the coals hold large volumes of gas, attempts at completions in
the coal have not proven economic. The sandstone reservoirs have been charged by
the coals and account for virtually all the gas being produced from the
Mesaverde Group.

         Early attempts to complete wells resulted in low rates with no
noticeable decline. With the advent of advanced artificial fracturing techniques
and completion fluids in the late 1990s, operators began economic exploitation
of the play. Based on publicly-available data (IHS Energy PI/Dwights PLUS(R)
Well Data, July 2006), approximately 3,500 producing wells have been completed
to date. Total production from the play is 947 mmcf/day and 95 mbo/day, with
cumulative volumes produced from the play of over 1,534 bcf and 4.8 mmbo. The
play is active in Garfield, Mesa, and Rio Blanco counties in Colorado, with
approximately 50 to 60 rigs drilling at any given time (Rocky Mountain Oil
Journal, v. 86 no. 52).


                                       21
<PAGE>

         BUCKSKIN MESA PROJECT. We have leased approximately 20,000 net acres in
Rio Blanco County, Colorado. Effective September 17, 2005, we entered into an
EDA with MAB for the Buckskin Mesa Project, under which we have paid, through
September 30, 2006, $5,362,500 to the assignor and $1,961,460 in Federal lease
payments for Federal leases acquired by the assignor on November 10, 2005. As
consideration for extending the final payment due on closing, we agreed to pay a
monthly extension fee of $200,000 for each 30-day period commencing January 6,
2006 of which all were paid as of June 30, 2006. We were obligated to pay MAB
monthly project development costs of $20,000, commencing July 1, 2005, and the
first $50 million of project costs. We charged all property development costs
incurred to MAB under the related EDAs to operations.

         Effective July 18, 2006, we entered into an EDA with MAB related to the
Buckskin Mesa Project in the Piceance Basin, Colorado, under which we received
an undivided 50% working interest in the properties for $765,000. If we elect to
accept certain leases which are subject to additional title curative work, we
will pay up to a maximum of an additional $1.1 million payable to a third party
for bonus payments related to such properties. We were obligated to pay MAB
monthly project development costs of $20,000, commencing August 1, 2006 and to
pay the first $50 million of project costs.

         We have applied for and received six approved drilling permits to test
targets in the Cretaceous Mesaverde Group. A 26-square mile 3-D seismic survey
has been licensed, re-processed, and interpreted to focus initial drilling in
areas of thickest pay and enhanced fracturing. We have spudded our first well at
Buckskin Mesa, the Anderson 6-16. As of January 9, 2007, the Bronco #4 rig was
drilling ahead at 6900 feet in the Williams Fork Formation. Planned total depth
of the well is 10,270 feet. The well is on prognosis with seismic
interpretations, and gas shows have been noted. If results from this well are
favorable, we plan to initiate a multi-well production program. Depending on
observed reservoir drainage of the wells, we believe there is potential for
1,000 to 2,000 additional well locations.

         We are obligated to drill four wells to test the Rawlings Formation by
November 30, 2007, in addition to the one well being drilled as described above.

         PICEANCE II PROJECT. We have leased approximately 1,000 net acres
contiguous to Parachute, Rulison, and Grand Valley fields in Garfield County,
Colorado. Effective December 29, 2005, we entered into an EDA with MAB for the
Piceance II Project, under which we agreed to pay up to $4,000,000 to the
assignor (of which $3,898,793 has been paid through September 30, 2006) and
issued $1 million of our common stock (2,000,000 shares at $0.50 per share). We
were obligated to pay MAB monthly project development costs of $20,000 per
month, commencing November 1, 2005, and the first $50 million of project costs.

         As of January 10, 2007, we had interests in 12 producing wells, 15
wells waiting on completion, and 4 wells being drilled. Average daily production
net to us from these wells for the week ending December 17, 2006 (the most
recent available) was 2,656 mcf/day (including MAB's share of production).
Initial production rates varied from 1,000 to 2,023 mcf/day.

         Production is from frac-stimulated perforations in stacked sands of the
fluvial Williams Fork formation.

         We have signed a purchase and sale agreement to purchase leases
covering approximately 2,000 additional net acres within close proximity or
contiguous to our other Piceance II properties. We are not certain whether
additional acreage will be obtained under this agreement.

         We are obligated to drill eight wells on these leases during 2007.


                                       22
<PAGE>

AUSTRALIA PROPERTIES

         BEETALOO BASIN. The Beetaloo Basin property in the Northern Territory
of Australia currently consists of approximately 7 million acres. We have
applied for permits covering an additional 1.5 million acres that is contiguous
to the currently-owned permits. 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 new 2D 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 in contrast to easterly
verging, thrust faults discovered in the central basin. 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 4000 meters of the surface, most less than 3000
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 is
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 Jamison, Moroak, and Bessie
Creek sandstones. A number of even deeper sandstones are expected to be very
tight and were 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(degree) API gravity. The
Bukalara, Jamison, and Moroak sands (and perhaps the Bessie Creek sand along the
western margin) have potential for oil accumulations in trapped and sealed
geometries. Most of the eleven previous wells drilled within the basin had oil
and gas shows, and the Jamison #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. 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.

         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.

         Effective March 17, 2006, we entered into an EDA with MAB for the
Beetaloo Project representing exploration permits in the Northern Territory,
Australia. Under the terms of the EDA, we have paid $1,000,000 to the assignor
and have funded the $3 million seismic work commitment. We were obligated to pay
monthly project development costs of $100,000 per month, commencing March 1,
2006, and the first $100 million of project costs.

         The current 7 million acres are represented by four exploration
permits. Depending on the permit, we are in the second or third year of an
initial five-year exploration period that can be extended.


                                       23
<PAGE>

As part of the work commitment plan submitted to the Northern Territory
Department of Primary Industry, Fisheries and Mines, approximately 700
kilometers of 2D seismic data were acquired during 2006 to delineate the
previously defined exploration leads. The data are being processed, interpreted,
and mapped in anticipation of a five to ten well drilling program in 2007
including both shallow offset wells to potential bypassed wells and tests of the
undrilled structural features seen throughout the basin.

         We are required to drill four wells by August 31, 2007.

         GIPPSLAND AND OTWAY BASINS. On November 14, 2006, we entered into an
agreement with Lakes Oil N.L. ("Lakes Oil"), under which we will jointly develop
Lakes Oil's on-shore petroleum prospects (focusing on unconventional gas
resources) in the Gippsland and Otway basins in Victoria, Australia. The
arrangement is subject to various conditions precedent, including completion of
satisfactory due diligence, and the satisfactory processing of certain retention
lease applications. Under the agreement, we or our subsidiary company, Sweetpea
Petroleum Pty. Ltd., will initially farm into 33-1/3% of Lakes Oil's permits by
spending $7 million in Lakes Oil's permits. In addition, we will subscribe for
$3 million in new shares in Lakes Oil at 1.5 cents (Australian). We will also
have the right to increase our position in Lakes Oil's permits with two further
16-2/3% farm-in tranches of $10 million each, exercisable within 12 months and
24 months respectively. Under the agreement, we have the right to participate in
the same proportion in any permits which are non-contiguous to existing permits
acquired by Lakes Oil within two years, and any contiguous permits acquired by
Lakes Oil moving forward, and we have a first right of refusal in other permits
acquired by Lakes Oil within five years. We are to assume Lakes Oil's position
as operator of the permits.

PRODUCTION AND PRICES

         During the fiscal year ended September 30, 2006, we received nominal
revenues of $35,656 from the 5,822 mcf of natural gas resulting from the initial
testing and production from our interest in eight gross wells. The average price
per mcf was $6.12. We did not have any production during the fiscal year ended
September 30, 2005.

PRODUCTIVE WELLS

         The following table summarizes information at September 30, 2006,
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. 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 owned
in gross wells.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                                         GROSS                                   NET
--------------------------------------------------------------------------------------------------------------------
LOCATION                                     OIL          GAS         TOTAL         OIL          GAS         TOTAL
--------------------------------------------------------------------------------------------------------------------
<S>                                          <C>          <C>          <C>          <C>         <C>          <C>
Colorado                                     --            7            7           --          2.14         2.14
--------------------------------------------------------------------------------------------------------------------
Utah                                         --           --           --           --           --           --
--------------------------------------------------------------------------------------------------------------------
Montana                                      --           --           --           --           --           --
--------------------------------------------------------------------------------------------------------------------
Australia                                    --           --           --           --           --           --
--------------------------------------------------------------------------------------------------------------------
TOTAL                                        --            7            7           --          2.14         2.14
--------------------------------------------------------------------------------------------------------------------
</TABLE>

OIL AND GAS DRILLING ACTIVITIES

         During the fiscal year ended September 30, 2006, our drilling
activities were limited to Colorado. We drilled 2.14 net productive exploratory
wells and no dry exploratory wells. We did not drill any development wells. We
did not drill any wells during the fiscal year ended September 30, 2005.


                                       24
<PAGE>

OIL AND GAS INTERESTS

         As of September 30, 2006, we owned interests in the following developed
and undeveloped acreage positions. The "Net Acres As Adjusted" columns give
effect to the new agreement with MAB, under which MAB relinquishes its working
interest in the leases, permits, and licenses that were previously owned 50/50.
Undeveloped acreage refers to acreage that has not been placed in producing
units.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
                                          DEVELOPED                                         UNDEVELOPED
-----------------------------------------------------------------------------------------------------------------------
                                                       NET ACRES AS                                      NET ACRES AS
  LOCATION             GROSS ACRES        NET ACRES        ADJUSTED      GROSS ACRES        NET ACRES        ADJUSTED
-----------------------------------------------------------------------------------------------------------------------
<S>                              <C>              <C>             <C>      <C>              <C>             <C>
Colorado                         0                0               0           26,239.0          9,919.5        19,839.0
-----------------------------------------------------------------------------------------------------------------------
Utah                             0                0               0          177,445.0         88,722.5       177,445.0
-----------------------------------------------------------------------------------------------------------------------
Montana                          0                0               0           90,236.0         34,727.5        69,455.0
-----------------------------------------------------------------------------------------------------------------------
Australia                        0                0               0        7,000,000.0      3,500,000.0     7,000,000.0
-----------------------------------------------------------------------------------------------------------------------
TOTAL                            0                0               0        7,293,920.0      3,633,369.5     7,266,739.0
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

OFFICES

         We lease approximately 13,595 square feet of office space at 1875
Lawrence Street, Suite 1400, Denver, Colorado, pursuant to the terms of a lease
that expires June 30, 2011. We share the offices with Falcon Oil & Gas Ltd., an
affiliate, and share the costs of the office space, cost of equipment,
furniture, office operating costs, administrative staff, and related expenses on
a 50/50 basis.

         We also lease approximately 2,400 square feet of office space at 170
South Main Street, Suite 170, Salt Lake City, Utah, pursuant to the terms of a
lease that expires May 31, 2011.


ITEM 3.  LEGAL PROCEEDINGS

         There are no legal proceedings pending against us. To the best of our
knowledge, there are no legal proceedings threatened or contemplated against us.


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

         Holders of approximately 117,566,000 of the then outstanding
225,373,000 shares of common stock (approximately 52%) approved the following
actions by means of a written consent to action effective as of August 11, 2006:

             o    The election of Dr. Anthony K. Yeats, Kelly H. Nelson and
                  Carmen J. Lotito as directors of the Company;
             o    The change of our state of incorporation from Nevada to
                  Maryland;
             o    The approval of an amendment to our Articles of Incorporation
                  to change the name of the Company from "Digital Ecosystems
                  Corp." to "PetroHunter Energy Corporation"; and
             o    The adoption of our 2005 Stock Option Plan.



                                       25
<PAGE>

                                     PART II

ITEM 5.   MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
          BUSINESS 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. The following prices reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not represent actual
transactions.

         QUARTER ENDED                                HIGH      LOW

         June 30, 2005                               $ 0.53    $ 0.06
         September 30, 2005                            1.50      0.06
         December 31, 2005                             1.79      0.05
         March 31, 2006                                3.36      1.10
         June 30, 2006                                 4.23      1.45
         September 30, 2006                            2.98      1.31
         December 31, 2006                             2.30      1.50

         We have neither declared nor paid any cash dividends on our capital
stock and do not anticipate paying cash dividends in the foreseeable future. Our
current policy is to retain any earnings in order to finance the expansion of
our operations. Our board of directors will determine future declaration and
payment of dividends, if any, in light of the then-current conditions they deem
relevant and in accordance with applicable corporate law.

         On January 13, 2007, the last sale price for the common stock was
$1.72.

HOLDERS AND DIVIDENDS

         As of December 31, 2006, there were 258 record holders of our common
stock. Since our inception, no cash dividends have been declared on our common
stock.

RECENT SALES OF UNREGISTERED SECURITIES

         During the quarter ended September 30, 2006, we issued and sold
unregistered securities set forth in the table below.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
    DATE         PERSONS OR CLASS OF PERSONS               SECURITIES                       CONSIDERATION
------------------------------------------------------------------------------------------------------------------
<S>           <C>                                <C>                              <C>
9/15/06       Majedie Investments                1,000,000 shares of common       $1,000,000 pursuant to warrant
                                                 stock                            exercise
------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       26
<PAGE>

         No underwriters, placement agents or finders were used in the above
stock transactions. We relied upon Regulation S for sales made outside the
United States without registration under the Securities Act of 1933 or the
exemption from registration contained in Section 4(2) and/or Rule 506 under the
Securities Act of 1933 as to all of the transactions, as the investors with
either non-U.S. persons or deemed to be sophisticated with respect to the
investment in the securities due to their financial condition and involvement in
our business or accredited investors. Restrictive legends were placed on the
certificates evidencing the securities issued in all of the above transactions.


ITEM 6.           MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

         The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our Consolidated
Financial Statements and related notes appearing elsewhere in this Form 10-KSB.

BACKGROUND

         As a result of the stock exchange transaction by which the stockholders
of what was then GSL Energy Corporation received more than 85% of the
outstanding stock of our Company, GSL, now known as PetroHunter Operating
Company, became a wholly owned subsidiary of our Company. Since this transaction
resulted in the former shareholders of GSL acquiring control of our Company, for
financial reporting purposes the business combination was accounted for as an
additional capitalization of the Company (a reverse acquisition with GSL as the
accounting acquirer). In accounting for this transaction:

         i.       GSL was deemed to be the purchaser and parent company for
                  financial reporting purposes. Accordingly, its net assets were
                  included in the consolidated balance sheet at their historical
                  book value; and

         ii.      Control of the net assets and business of the Company was
                  acquired effective May 12, 2006 for no consideration.

         PetroHunter Operating Company (formerly GSL) was incorporated under the
laws of the State of Maryland on June 20, 2005 for the purpose of acquiring,
exploring and developing oil and gas properties. PetroHunter Operating Company
is considered a development stage company as defined by Statement of Financial
Accounting Standards ("SFAS") No. 7, and its principal activities since
inception have been raising capital through the sale of common stock and
convertible notes and the acquisition of oil and gas properties in the Western
United States and Australia.

LIQUIDITY AND CAPITAL RESOURCES

         The Company at September 30, 2006 is vastly different from its
existence at September 30, 2005. At September 30, 2005, we had been operating
for only a few months, had no employees, and had acquired an interest in two
properties, West Rozel and Buckskin Mesa, aggregating approximately 12,400 net
mineral acres. During the 2006 fiscal year, we added 16 employees, moved to
offices in Denver, Colorado, and acquired an interest in properties aggregating
approximately 7,207,000 acres.

         We funded the acquisition of these properties and the increased level
of activity primarily through the sale of debt and equity securities for cash.
We also issued 6,400,000 shares, valued at $0.50 per share, as partial
consideration for the acquisition of oil and properties and as consideration for
a finder's fee on


                                       27
<PAGE>

an oil and gas prospect. At September 30, 2006, we had working capital of
$1,275,531 and cash of $10,631,776, but we will need to raise additional funds
for our planned operations and acquisitions.

         Prior to the acquisition of PetroHunter Operating Company in May 2006,
we entered into five separate loan agreements, aggregating $400,000, due one
year from issuance, commencing October 11, 2006. The loans bear interest at 12%
per annum, are unsecured, and are convertible, at the option of the lender at
any time during the term of the loan or upon maturity, at a price per share
equal to the closing price of our common stock on the OTC Bulletin Board on the
day preceding notice from the lender of its intent to convert the loan. As of
January 10, 2007, we were in default on payment of an aggregate of $200,000 of
notes, which matured October 11, 2006 as to $100,000 and December 5, 2006 as to
$100,000.

         CASH USED IN OPERATING ACTIVITIES. Primarily as a result of our net
loss of $20,692,014, we used cash of $10,545,806 for fiscal 2006. See "Results
of Operations" below for the discussion of our operating expenses. The principal
adjustments to reconcile the net loss to net cash used in operating activities
were stock based compensation of $9,189,334, as a result of stock options issued
to employees and consultants, and $1,422,701 of financing costs, resulting from
finder's fees paid in common stock in connection with the private placement of
convertible promissory notes. In comparison, we used only $222,158 of cash for
operating activities in fiscal 2005.

         CASH USED IN INVESTING ACTIVITIES. We used cash of $32,692,402 in
fiscal 2006, primarily for our additions to our oil and gas properties
($31,062,398). We also used $553,211 for property and equipment and $1,076,793
for restricted cash, which are certificates of deposit underlying letters of
credit for exploration permits, state and local bonds and guarantees to vendors.
During fiscal 2005, we used only $1,564,600 for additions to oil and gas
properties.

         We currently anticipate our capital budget will be approximately
between $107 and $175.5 million for the period ending December 31, 2007, which
we plan to use for a diverse portfolio of development and exploration wells in
our core areas of operation. If we are unable to obtain capital through the sale
of our securities or a credit facility or otherwise, our ability to execute our
development plans could be greatly limited. We may consider selling down a
portion of our interests in some of our exploration and development projects to
industry partners to generate additional funds to finance our 2007 capital
budget.

         CASH PROVIDED BY FINANCING ACTIVITIES. We sold convertible promissory
notes in 2005 and 2006, raising a total of $20,831,667, of which $17,794,667 was
raised in fiscal 2006 and $3,037,000 was raised in fiscal 2005. Upon completion
of the share exchange between the Company and GSL, the notes were converted to
44,063,334 shares of common stock. We also sold 35,442,500 shares for gross
proceeds of $35,442,500. Total cash provided by financing activities was
$52,619,742, resulting in cash of $10,631,776 at September 30, 2006.

         It is anticipated that the continuation and future development of our
business will require additional, substantial, capital expenditures. We have no
reliable source for additional funds for administration and operations to the
extent our existing funds have been utilized. In addition, our capital
expenditure budget for the period ending December 31, 2007 will depend on our
success in selling additional prospects for cash, the level of industry
participation in our exploration projects, the availability of debt or equity
financing, and the results of our activities. We anticipate spending
approximately between $107 and $175.5 million on exploration and development
activities during the period ending December 31, 2007. 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


                                       28
<PAGE>

projects. We may need to raise additional funds to cover capital expenditures.
These funds may come from cash flow, equity or debt financings, a credit
facility, 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.

RESULTS OF OPERATIONS

         OIL AND GAS REVENUES. We generated our first revenues during the last
quarter of our fiscal year ending September 30, 2006 from initial testing and
production of natural gas wells in the Piceance Basin of Colorado. Revenues are
expected to increase significantly for the 2007 fiscal year, since we have 12
producing wells, 15 wells awaiting completion, and 4 wells being drilled in the
Piceance II Project as of January 15, 2007.

         GENERAL AND ADMINISTRATIVE. Due to the substantially increased level of
activity during fiscal 2006 as compared to fiscal 2005, operating expenses
increased by $16,148,819 or 771%. The most significant increases occurred with
respect to general and administrative expenses, particularly with respect to
stock based compensation and salaries, consulting fees and services. We incurred
stock based compensation expenses of $9,189,334 in 2006, as compared to $822,710
in 2005, and expenses for salaries, consulting fees and services of $2,035,366
in 2006, as compared to $286,666 in 2005. We expect that we may continue to
incur stock based compensation expenses of this magnitude due to the
"mark-to-market" effect of SFAS No. 123(R), and that salaries, consulting fee
and services will likely remain at current levels or increase with our expected
increased level in activity. Other significant components of general and
administrative expenses were travel-related expenses ($759,261), investor
relations ($553,807), legal ($550,584), and directors' and officers' liability
insurance ($209,000).

         PROPERTY DEVELOPMENT - RELATED. We also incurred $4,530,000 in property
development costs to MAB in 2006, as compared to $860,000 in 2005. As a result
of the new Acquisition and Consulting Agreement with MAB, which is effective
January 1, 2007, these property development costs will be reduced to $1,765,000
for the fiscal year ending September 30, 2007.

         OPERATING EXPENSES. Total operating expenses for 2006 were $18,244,610,
as compared to $2,095,791 in 2005.

         INTEREST EXPENSE. We incurred interest expense of $2,485,693 for 2006,
as compared to $23,029 for 2005. We expect that interest expense will increase
for the fiscal year ending September 30, 2007, due to the credit facility we
obtained in January 2007, which is described below in "Plan of Operations," and
due to the interest to be paid to MAB under the terms of the new Acquisition and
Consulting Agreement.

         NET LOSS. As a result of the expenses described above, we incurred a
loss of $20,692,014 for 2006, as compared to $2,118,820 for 2005, increasing the
loss accumulated since inception to $22,810,834.

GOING CONCERN

         The report of our independent registered public accounting firm on the
financial statements for the year ended September 30, 2006, includes an
explanatory paragraph relating to the uncertainty of our ability to continue as
a going concern. We have incurred a cumulative net loss $22,810,834 for the
period from inception to September 30, 2006. We require significant additional
funding to sustain our operations and satisfy our contractual obligations for
our planned oil and gas exploration and development operations. Our ability to
establish the Company as a going concern is dependent upon our


                                       29
<PAGE>

ability to obtain additional financing, in order to fund our planned operations
and ultimately, to achieve profitable operations.

PLAN OF OPERATION

         COLORADO. We expect that the development of our Colorado properties
will include: (i) continued drilling of wells in our 1,000-acre holdings in
Piceance Basin, where we expect to complete approximately 15 to 18 wells and
have additional gas production and (ii) exploration of our 20,000-acre lease
near Buckskin Mesa/Powell Park discovery wells in the northern Piceance Basin.
We have applied for and received six approved permits to drill to an estimated
depth of 10,000 to 12,000 feet, to test the Williams Fork, Cameo, and Fort Union
formations.

         Associated with the development of our Colorado properties, we
anticipate that, over the next twelve months, we will incur the following costs:

             o    $30,000,000 to $50,000,000 in connection with the Piceance II
                  project, to include seismic, drilling, completion and
                  production facilities; and

             o    $20,000,000 to $40,000,000 in connection with the Buckskin
                  Mesa project, to include seismic, and drilling.

         To fund these costs and certain commitments totaling approximately
$2,700,000 for the fiscal year ended September 30, 2007 for operating leases,
delay rentals, property development fees and consulting fees and note payments
to MAB, we are engaging in financing activities. On November 6, 2006, we
commenced an offering of up to $125,000,000 pursuant to a private placement of
units at $1.50 per unit. Each unit consists of one share of our common stock and
one-half common stock purchase warrant. A whole common stock purchase warrant
entitles the purchaser to acquire one share of our common stock at an exercise
price of $1.88 per share through December 31, 2007. We may pay a commission of
up to 5% to a broker or agent in conjunction with the sale. As of January 12,
2007, we had received $1,887,500 from the sale of units pursuant to the private
placement.

         In addition, on January 9, 2007, we entered into a Credit and Security
Agreement (the "Financing") with Global Project Finance AG, a Swiss company, for
mezzanine financing in the amount of $15 million. The loan provides for an
interest rate of 6.75% over prime, and is to be secured by a first perfected
lien on our assets, limited to the specific portion of the assets to which the
loan proceeds are applied by us. We plan to apply most of the proceeds of this
loan to our drilling and development operations in the Piceance Basin, Colorado.
The terms of the Financing also provide for the issuance of warrants to purchase
one million of our shares upon execution of the Credit Agreement, and warrants
to purchase up to an additional three million shares, tied on a pro rata basis
to each draw down of the credit facility up to $15 million - that is, warrants
for 600,000 shares for each $3 million advanced. The warrants will be
exercisable for five years after the date of the Credit Agreement. The exercise
price of the warrants will be equal to 120% of the weighted average price of our
stock for the 30 days immediately prior to each warrant issuance date. Global
Project Finance AG and its controlling shareholder, Christian Russenberger, were
shareholders of the Company prior to the Credit Agreement. As of January 10,
2007, we had drawn down $5,000,000 on the credit facility.

         HEAVY OIL. The development of our heavy oil prospects in Montana and
Utah will include (i) the development of 15,000 acres of prime heavy oil acreage
in Montana and (ii) the development of 173,000 acres owned or under contract in
the Great Salt Lake. We anticipate that, over the next twelve months, we will
incur the following costs related to our heavy oil prospects in Montana and
Utah:



                                       30
<PAGE>

             o    $7,000,000 to $12,500,000 to add land in Montana in areas
                  where we have already completed acquisitions;

             o    $8,000,000 to $15,000,000 in connection with the Fiddler Creek
                  project, to include drilling, completion and production
                  facilities; and

             o    $12,000,000 to $18,000,000 in connection with the Great Salt
                  Lake project, to include project design, project equipment
                  procurement, site infrastructure development and initial
                  drilling.

         We formed a subsidiary, PetroHunter Heavy Oil Ltd., in September 2006
("PetroHunter Heavy Oil"), for the purpose of holding and developing our heavy
oil assets. We anticipate that PetroHunter Heavy Oil will engage in a private
placement of debt securities, similar to the offering of PetroHunter Energy NT
described below in the near future.

         AUSTRALIA. In Australia we plan to explore and develop portions of the
7,000,000 acres of the project area in northwestern Australia (Beetaloo Basin).
During 2007, we plan to drill a minimum of eight wells in the exploration permit
blocks. We anticipate that, over the next twelve months, we will incur
$30,000,000 to $40,000,000 in costs related to drilling and well completion.

         Under the agreement with Lakes Oil, we or our subsidiary company,
Sweetpea Petroleum Pty. Ltd., will initially farm into 33-1/3% of Lakes Oil's
permits by spending $7 million in Lakes Oil's permits. In addition, we will
subscribe for $3 million in new shares in Lakes Oil at 1.5 cents (Australian).

         DEVELOPMENT STAGE COMPANY. We had not commenced principal operations
nor earned significant revenue as of September 30, 2006, and are considered a
development stage company. During the period from inception to September 30,
2006, we incurred a cumulative net loss of $22,810,834. In order to fund our
planned exploration and development of oil and gas properties, we will require
significant additional funding. We have sold approximately $56.3 million of
convertible notes and common stock through September 30, 2006, and our
management believes that we will be successful in raising additional funding to
have sufficient capital to meet our obligations for our planned operations for
at least the next twelve months.

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.

         OIL AND GAS PROPERTIES. We utilize the full cost method of accounting
for oil and gas activities. 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. 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.


                                       31
<PAGE>

         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. As of
September 30, 2006, the Company has no proved reserves and all oil and gas
property costs are considered to be unevaluated and are recorded at the lower of
cost or fair market value.

         ASSET RETIREMENT OBLIGATION. We apply SFAS 143, "Accounting for Asset
Retirement Obligations," which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This statement requires companies to record
the present value of obligations associated with the retirement of tangible
long-lived assets in the period in which it is incurred. The liability is
capitalized as part of the related long-lived asset's carrying amount. Over
time, accretion of the liability is recognized as an operating expense and the
capitalized cost is depreciated over the expected useful life of the related
asset. Asset retirement obligations ("ARO") relate primarily to the plugging,
dismantlement, removal, site reclamation and similar activities of its oil and
gas properties. At September 30, 2006, we had recorded an ARO of $522,054 for
our initial wells under progress.

         SHARE BASED COMPENSATION.  On October 1, 2006, we adopted SFAS 123(R),
"Accounting for Stock-Based Compensation," 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. Prior periods have
not been restated. SFAS 123(R) requires companies to recognize share-based
payments to employees as compensation expense on a fair value method. Under the
fair value recognition provisions of SFAS 123(R), stock-based compensation cost
is measured at the grant date based on the fair value of the award and is
recognized as expense over the service period, which generally represents the
vesting period. The expense recognized over the service period is required to
include an estimate of the awards that will be forfeited. Previously, no such
forfeitures have occurred. We are assuming no forfeitures going forward based on
our historical forfeiture experience. The fair value of stock options is
calculated using the Black-Scholes option-pricing model.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

         In February 2006, the Financial Accounting Standards Board (FASB)
issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments-an
amendment of FASB Statements No. 133 and 140."  SFAS No. 155 amends SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," and also resolves issues addressed in SFAS No.
133 Implementation Issue No.  D1, "Application of Statement 133 to Beneficial
Interests in Securitized Financial Assets." SFAS No. 155 was issued to eliminate
the exemption from applying SFAS No. 133 to interests in securitized financial
assets so that similar instruments are accounted for in a similar fashion,
regardless of the instrument's form. The Company does not believe that its
financial position, results of operations or cash flows will be impacted by SFAS
No. 155 as the Company does not currently hold any hybrid financial instruments.


                                       32
<PAGE>


         In June 2006, the FASB issued FASB Interpretation No. 48 (FIN 48),
"Accounting for Uncertainty in Income Taxes." The interpretation clarifies the
accounting for uncertainty in income taxes recognized in a company's financial
statements in accordance with Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes. Specifically, the pronouncement prescribes a
recognition threshold and a measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. The interpretation also provides guidance on the related
derecognition, classification, interest and penalties, accounting for interim
periods, disclosure and transition of uncertain tax positions. The Company will
be required to adopt FIN 48 for the fiscal year ended September 30, 2008. The
Company is reviewing and evaluating the effect, if any, of adopting FIN 48 on
its financial position and results of operations.


ITEM 7.  FINANCIAL STATEMENTS

         The financial statements required by this Item begin on Page F-1 of
this Form 10-KSB.


ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         On August 21, 2006, our Board of Directors approved the termination of
Telford Sadovnick, P.L.L.C. ("Telford") as our independent accountants and the
appointment of Hein & Associates LLP ("Hein") to serve as our independent
accountants for the year ending September 30, 2006. The change was effective
August 21, 2006.

         Telford's reports on our financial statements for each of the years
ended March 31, 2006 and 2005 did not contain, with the exception of a going
concern disclaimer in each such report, an adverse opinion or disclaimer of
opinion, nor were such reports qualified or modified as to uncertainty, audit
scope, or accounting principles.

         During the years ended March 31, 2006 and 2005, and the period ended
August 21, 2006, there were no disagreements with Telford on any matter of
accounting principle or practice, financial statement disclosure, or auditing
scope or procedure which, if not resolved to Telford's satisfaction, would have
caused them to make reference to the subject matter of the disagreement in
connection with the audit reports on our financial statements for such years;
and there were no events as set forth in Item 304(a)(1)(iv) of Regulation S-B.

         We provided Telford with a copy of the foregoing disclosures. We filed
as an exhibit to a report on Form 8-K a letter from Telford relating to the
disclosure included in the Form 8-K.

         During the years ended March 31, 2006 and 2005 and through August 21,
2006, we did not consult Hein with respect to the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on our consolidated financial
statements, or on any other matters or reportable events as set forth in Items
304(a)(2)(i) and (ii) of Regulation S-B. Hein was the independent accountants
for our subsidiary, PetroHunter Operating Company from its inception (June 2005)
until we acquired substantially all of its outstanding common stock (May 12,
2006).


                                       33
<PAGE>



ITEM 8A. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

         As of the end of the period covered by this report, our management
carried out an evaluation, under the supervision and with the participation of
our principal executive officer and principal financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act).
Based on this evaluation, our principal executive officer and principal
financial officer have concluded that our disclosure controls and procedures
lack adequate staff and procedures in order to be effective. Subsequent to the
end of the period covered by this report we have implemented procedures to
remediate this control deficiency by completing the implementation of an
accounting system designed for oil and gas producing companies and will be
hiring additional staff.

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

         In connection with the evaluation of our internal controls during our
last fiscal quarter, our principal executive officer and principal financial
officer have determined that there have been no changes to our internal controls
over financial reporting that has materially affected, or is reasonably likely
to materially affect, our internal controls over financial reporting.


ITEM 8B. OTHER INFORMATION

         None.





















                                       34
<PAGE>
                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND
         CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

EXECUTIVE OFFICERS AND DIRECTORS

         Our executive officers and directors are:

         NAME                       AGE    POSITION
         Kelly H. Nelson             50    Chairman and Chief Executive Officer
         Carmen J. Lotito            62    Executive Vice President, Chief
                                           Financial Officer, Treasurer,
                                           Secretary and Director
         Garry Lavold                61    President and Chief Operating Officer
         Dr. Anthony K. Yeats        60    Director

         Our shareholders elect our directors annually and our board of
directors appoints our officers annually. Vacancies in our board are filled by
the board itself. Set forth below are brief descriptions of the recent
employment and business experience of our executive officers and directors.

         KELLY H. NELSON has been the Chairman and Chief Executive Officer of
the Company since May 2006, and President and Director of PetroHunter Operating
Company since its inception. Mr. Nelson is the cofounder of Equistar Capital,
LLC, a Merchant Banking firm with offices in Salt Lake City, Utah and Zurich,
Switzerland, and has served as Equistar's Managing Partner since its inception
in 1999. While with Equistar, Mr. Nelson has been actively involved in raising
investment capital and financing for Equistar's energy sector portfolio
companies. Since August 2003, Mr. Nelson has also served as chief financial
officer and director of BioComposites International, Inc., one of Equistar's
portfolio companies. Mr. Nelson also is a director for two non-profit
organizations, The Center for Ancient American Culture and the Utah Spiders,
Women's Professional Soccer League. Mr. Nelson earned his Bachelor's degree in
Business Administration from the University of Utah and has completed management
seminars and courses through the University of Southern California and Wharton
School of Business.

         CARMEN J. LOTITO has been the Executive Vice President, Chief Financial
Officer, Treasurer, Secretary and a director of the Company since May 2006. Mr.
Lotito has also been the Executive Vice President, Chief Financial Officer,
Treasurer, Secretary and Director of PetroHunter Operating Company since its
inception. Mr. Lotito has been a director and chairman of the audit and
compensation committees of Gasco Energy, Inc. since April 2001, and a director
of Galaxy Energy Corporation from November 2002 to August 2006 He served as
chief financial officer and treasurer of Galaxy Energy Corporation from November
2002 to July 2005, and as executive vice president from August 2004 to July
2005. Both Gasco Energy and Galaxy Energy are subject to the reporting
requirements of the Securities Exchange Act of 1934. Mr. Lotito served as vice
president, chief financial officer, and director of Coriko Corporation, a
private business development company, from November 2000 to August 2002. Prior
to joining Coriko, Mr. Lotito was self-employed as a financial consultant. Mr.
Lotito holds a B.S. degree in accounting from the University of Southern
California.

         GARRY LAVOLD has been the President and Chief Operating Officer of the
Company since June 2006. Mr. Lavold has also served as the Chief Operating
Officer of PetroHunter Operating Company since its inception. Mr. Lavold was the
chief operating officer of BioComposites International from January 2003 to July
2005, where he assisted in the development of biocomposite plants to produce
composite materials. From August 2001 until December 2002, Mr. Lavold was the
director of


                                       35
<PAGE>

engineering at Coach House, developing composite material projects. From October
2000 to July 2001, Mr. Lavold was chief operating officer of Alpha Fibre,
developing petroleum-based composite materials. Prior to working for Alpha
Fibre, Mr. Lavold worked for 18 years for Nova , an Alberta Corporation (and
affiliated companies), serving in the latter years as a vice president involved
in design, construction and project management of large diameter gas pipelines
for a Nova subsidiary, and from 1969 to 1974 was employed as a process engineer
involved in start up and operations of an 80,000 BPD refinery for Gulf Oil
Canada. Mr. Lavold composed a chapter in PROJECT MANAGEMENT HANDBOOK, eds.
David Cleland and William King, N.Y: Van Rostrand Reinhold, 1983. Mr. Lavold
received a B.S. in Chemical Engineering and an MBA from the University of
Alberta, and is a registered Professional Engineer in Alberta and Ontario,
Canada.

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

COMMITTEES OF THE BOARD OF DIRECTORS

         We currently do not have an audit committee, compensation committee, or
nominating committee, primarily since we previously did not have any significant
operations. The entire Board of Directors is acting as the Company's audit
committee.

AUDIT COMMITTEE FINANCIAL EXPERT

         The Board of Directors currently has not determined whether the company
has a designated audit committee financial expert, primarily since we previously
did not have any significant operations.

FAMILY RELATIONSHIPS

         There is no family relationship between any director, executive or
person nominated or chosen by us to become a director or executive officer of
our Company. Please see Item 12. Certain Relationships and Related Transactions,
and Director Independence for a discussion of related party transactions.

CONFLICTS OF INTEREST

         Members of our management are associated with other firms involved in a
range of business activities. Consequently, there are potential inherent
conflicts of interest in their acting as officers and directors of our company.
While the officers and directors are engaged in other business activities, we


                                       36
<PAGE>

anticipate that such activities will not interfere in any significant fashion
with the affairs of our business, in terms of having adequate time to devote to
the business of the Company.

         Our officers and directors are now and may in the future become
shareholders, officers or directors of other companies, which may be formed for
the purpose of engaging in business activities similar to us. Accordingly,
additional direct conflicts of interest may arise in the future with respect to
such individuals acting on behalf of us or other entities. Moreover, additional
conflicts of interest may arise with respect to opportunities which come to the
attention of such individuals in the performance of their duties or otherwise.
Currently, we do not have a right of first refusal pertaining to opportunities
that come to their attention and may relate to our business operations.

         Our officers and directors are, so long as they are our officers or
directors, subject to the restriction that all opportunities contemplated by our
plan of operation which come to their attention, either in the performance of
their duties or in any other manner, will be considered opportunities of, and be
made available to us and the companies that they are affiliated with on an equal
basis. A breach of this requirement will be a breach of the fiduciary duties of
the officer or director. If we or the companies with which the officers and
directors are affiliated both desire to take advantage of an opportunity, then
said officers and directors would abstain from negotiating and voting upon the
opportunity. However, all directors may still individually take advantage of
opportunities if we should decline to do so. Except as set forth above, we have
not adopted any other conflict of interest policy with respect to such
transactions.

CODE OF ETHICS

         We have not yet adopted a code of ethics that applies to our principal
executive officers, principal financial officer, principal accounting officer or
controller, or persons performing similar functions, since we have been focusing
our efforts on obtaining financing for the Company. We expect to adopt a code by
the end of the current fiscal year.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Officers and directors, and persons who own more than 10% of a
registered class of our equity securities are required to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
pursuant to Section 16(a) of the Securities Exchange Act of 1934. The following
table sets forth reports that were not filed on a timely basis during the most
recently completed fiscal year:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
REPORTING PERSON                                    DATE REPORT DUE                       DATE REPORT FILED
--------------------------------------------------------------------------------------------------------------------
<S>                                               <C>                                         <C>
Garry Lavold                                      Form 3 due 06/12/06                         06/15/06
--------------------------------------------------------------------------------------------------------------------
Marc A. Bruner                                    Form 3 due 05/22/06                         12/05/06
--------------------------------------------------------------------------------------------------------------------
Kelly H. Nelson                                   Form 4 due 08/15/06                         01/18/07
--------------------------------------------------------------------------------------------------------------------
Carmen J. Lotito                                  Form 4 due 08/15/06                         01/18/07
--------------------------------------------------------------------------------------------------------------------
Garry Lavold                                      Form 4 due 08/15/06                         01/18/07
--------------------------------------------------------------------------------------------------------------------
Anthony K. Yeats                                  Form 4 due 08/15/06                         01/19/07
--------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       37
<PAGE>
ITEM 10.          EXECUTIVE COMPENSATION

         The following table summarizes the annual compensation paid to our
Chief Executive Officer and two most highly compensated executive officers for
the two fiscal years ended September 30, 2006:

<TABLE>
<CAPTION>
                           SUMMARY COMPENSATION TABLE
------------------------------------------------------------------------------------------------------------------------
                                                                        LONG TERM COMPENSATION
                                                                 -------------------------------------
                                  ANNUAL COMPENSATION                      AWARDS             PAYOUTS
                       -------------------------------------------------------------------------------
                          SALARY ($)     BONUS        OTHER                     SECURITIES
NAME AND                                              ANNUAL      RESTRICTED    UNDERLYING
PRINCIPAL                                            COMPENSA-      STOCK        OPTIONS/       LTIP         ALL OTHER
POSITION        YEAR      SALARY ($)       ($)         TION        AWARD(S)      SARS(#)      PAYOUTS      COMPENSATION
------------------------------------------------------------------------------------------------------------------------
<S>            <C>        <C>               <C>         <C>           <C>      <C>              <C>            <C>
Kelly H.       2006       230,000 (1)<F1>   --          --            --         750,000        --             --
Nelson, CEO    2005         60,000          --          --            --       2,000,000        --             --
------------------------------------------------------------------------------------------------------------------------
Carmen J.      2006       205,000 (2)<F2>   --          --            --         750,000        --             --
Lotito, CFO    2005         60,000          --          --            --       2,000,000        --             --
------------------------------------------------------------------------------------------------------------------------
Garry          2006       339,650 (3)<F3>   --          --            --         750,000        --             --
Lavold, COO    2005         116,300         --          --            --       2,000,000        --             --
------------------------------------------------------------------------------------------------------------------------
Gregory        2006         70,000          --          --            --            --          --             --
Leigh Lyons,
CEO (4)<F4>
------------------------------------------------------------------------------------------------------------------------
---------------
<FN>
(1)<F1>  Includes $155,000 paid in fiscal year 2006 and $60,000 paid in fiscal
         year 2005 to Mr. Nelson under terms of a consulting agreement prior to
         his employment with the Company.
(2)<F2>  Includes $125,000 paid in fiscal year 2006 and $60,000 paid in fiscal
         year 2005 to Mr. Lotito under terms of a consulting agreement prior to
         his employment with the Company.
(3)<F3>  Includes $211,650 paid in fiscal year 2006 and $116,300 paid in fiscal
         year 2005 to Mr. Lavold under terms of a consulting agreement prior to
         his employment with the Company. Also includes $38,000 paid in fiscal
         year 2006 to Mr. Lavold as reimbursement for $30,000 in moving expenses
         and $8,000 for lease of office space in Mr. Lavold's residence.
(4)<F4>  Mr. Lyons was appointed as an officer of the Company on September 15,
         2005.  Mr. Lyons resigned from all of his officer positions with the
         Company on May 12, 2006.
</FN>
</TABLE>

<TABLE>
<CAPTION>
                                        OPTION/SAR GRANTS IN LAST FISCAL YEAR
----------------------------------------------------------------------------------------------------------------------
                          NUMBER OF SECURITIES        % OF TOTAL
                         NDERLYING OPTIONS/SARS  OPTIONS/SARS GRANTED
                              GRANTED (#)           TO EMPLOYEES IN      EXERCISE OR BASE
NAME                          GRANTED (#)             FISCAL YEAR           PRICE ($/SH)          EXPIRATION DATE
----------------------------------------------------------------------------------------------------------------------
<S>                             <C>                      <C>                    <C>                 <C>
Kelly H. Nelson                 750,000                  5.64%                  $2.10               08/11/2011
----------------------------------------------------------------------------------------------------------------------
Carmen J. Lotito                750,000                  5.64%                  $2.10               08/11/2011
----------------------------------------------------------------------------------------------------------------------
Garry Lavold                    750,000                  5.64%                  $2.10               08/11/2011
----------------------------------------------------------------------------------------------------------------------
Gregory Leigh Lyons                --                     --                     --                     --
----------------------------------------------------------------------------------------------------------------------
</TABLE>



                                       38
<PAGE>


<TABLE>
<CAPTION>
                  AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
----------------------------------------------------------------------------------------------------------------------
                                                                               NUMBER OF
                                                                               SECURITIES             VALUE OF
                                                                               UNDERLYING            UNEXERCISED
                                                                              UNEXERCISED           IN-THE-MONEY
                                                                            OPTIONS/SARS AT        OPTIONS/SARS AT
                                                                               FY-END (#)            FY-END ($)

                            SHARES ACQUIRED ON                                EXERCISABLE/          EXERCISABLE/
NAME                           EXERCISE (#)         VALUE REALIZED ($)       UNEXERCISABLE          UNEXERCISABLE
----------------------------------------------------------------------------------------------------------------------
<S>                                 <C>                     <C>            <C>                   <C>
Kelly H. Nelson                     --                      --             950,000/1,800,000     1,280,000/1,920,000
----------------------------------------------------------------------------------------------------------------------
Carmen J. Lotito                    --                      --             950,000/1,800,000     1,280,000/1,920,000
----------------------------------------------------------------------------------------------------------------------
Garry Lavold                        --                      --             950,000/1,800,000     1,280,000/1,920,000
----------------------------------------------------------------------------------------------------------------------
Gregory Leigh Lyons                 --                      --                     --
----------------------------------------------------------------------------------------------------------------------
</TABLE>

LONG-TERM INCENTIVE PLAN AWARDS

         No long-term incentive plan awards were granted in the fiscal year
ended September 30, 2006.

COMPENSATION OF DIRECTORS

         The Company currently pays its non-employee directors compensation of
$2,500 per month. In addition, upon election, each director will be granted
options to purchase 100,000 shares of the Company's common stock annually, at
the rate of 25,000 options per quarter. Finally, the Company's independent
directors, who have not yet been elected, shall receive $1,000 per month for
each committee upon which they serve.


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS

         The following table provides certain information as to our officers and
directors individually and as a group, and the holders of more than 5% of our
common stock, as of November 30, 2006. As of November 30, 2006, there were
219,928,734 shares of common stock outstanding.

<TABLE>
<CAPTION>
                                                               AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1)<F1>                BENEFICIAL OWNERSHIP (2) <F1>     PERCENT OF CLASS (2)<F2>
--------------------------------------------                -----------------------------     ------------------------
<S>                                                               <C>                                <C>

Marc A. Bruner                                                     75,200,000 (3)<F3>                33.4%
1875 Lawrence Street, #1400
Denver, Colorado 80202

Kelly H. Nelson                                                    1,050,000 (4)<F4>                   *
170 South Main, Suite 1025
Salt Lake City, Utah 84101

Carmen J. Lotito                                                   1,050,000 (5)<F5>                   *
1875 Lawrence Street, #1400
Denver, Colorado 80202


                                       39
<PAGE>

<CAPTION>
                                                               AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1)<F1>                BENEFICIAL OWNERSHIP (2) <F1>     PERCENT OF CLASS (2)<F2>
--------------------------------------------                -----------------------------     ------------------------
<S>                                                               <C>                                <C>
Garry Lavold                                                        950,000 (6)<F6>                    *
1875 Lawrence Street, #1400
Denver, Colorado 80202

Dr. Anthony K. Yeats                                                100,000 (7)<F7>                    *
The Moat House
Saffron Walden
Essex, UK CB11 4RU

All officers and directors as a group  (4 persons)                   3,150,000                       1.4%

*Represents beneficial ownership of less than one percent (1%) of the
outstanding shares of our common stock.
---------------------
<FN>
(1)<F1>  To our knowledge, except as set forth in the footnotes to this table
         and subject to applicable community property laws, each person named in
         the table has sole voting and investment power with respect to the
         shares set forth opposite such person's name.

(2)<F2>  This table is based on 219,928,734 shares of common stock outstanding
         as of November 30, 2006. If a person listed on this table has the right
         to obtain additional shares of common stock within sixty (60) days from
         November 30, 2006, the additional shares are deemed to be outstanding
         for the purpose of computing the percentage of class owned by such
         person, but are not deemed to be outstanding for the purpose of
         computing the percentage of any other person.

(3)<F3>  Consists of (i) 68,000,000 shares held by MAB Resources LLC, an entity
         100% owned by Mr. Bruner and his family trust; (ii) 2,000,000 shares
         held by MABio Materials Corporation, an entity 68.83% owned by Mr.
         Bruner and over which Mr. Bruner has investment and voting control; and
         (iii) an option to purchase 5,200,000 shares at an exercise price of
         $0.50, which expires August 10, 2010.

(4)<F4>  Consists of (i) 100,000 shares held by Mr. Nelson, (ii) an option to
         acquire 800,000 shares at an exercise price of $0.50, which expires
         August 10, 2010, and (iii) an option to acquire 150,000 shares at an
         exercise price of $2.10, which expires August 11, 2011.

(5)<F5>  Consists of (i) 100,000 shares held by Laura Melou Lotito, Mr. Lotito's
         wife, (ii) an option to acquire 800,000 shares at an exercise price of
         $0.50, which expires on August 10, 2010, and (iii) an option to acquire
         150,000 shares at an exercise price of $2.10, which expires August 11,
         2011.

(6)<F6>  Consists of (i) an option to acquire 800,000 shares at an exercise
         price of $0.50, which expires on August 10, 2010, and (ii) an option to
         acquire 150,000 shares at an exercise price of $2.10, which expires
         August 11, 2011.

(7)<F7>  Consists of an option to acquire 100,000 shares at an exercise price of
         $2.10, which expires August 11, 2011.
</FN>
</TABLE>

         Marc A. Bruner may be deemed to be the "parent" of our company within
the meaning of the rules and regulations of the Securities and Exchange
Commission.

CHANGES IN CONTROL

         There are no agreements known to management that may result in a change
of control of our company.


                                       40
<PAGE>

EQUITY COMPENSATION PLAN INFORMATION

         The following table sets forth information as of the end of the most
recently completed fiscal year, September 30, 2006:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                Number of securities to be    Weighted average exercise
                                  issued upon exercise of       price of outstanding         Number of securities
                                   outstanding options,         options, warrants and       remaining available for
Plan category                       warrants and rights                rights                   future issuance
--------------------------------------------------------------------------------------------------------------------
<S>                                     <C>                             <C>                        <C>
Equity compensation plans               32,295,000                      $1.16                      7,705,000
approved by security holders
--------------------------------------------------------------------------------------------------------------------
Equity compensation plans not               --                           --                           --
approved by security holders
--------------------------------------------------------------------------------------------------------------------
Total                                   32,295,000                      $1.16                      7,705,000
--------------------------------------------------------------------------------------------------------------------
</TABLE>

STOCK OPTION PLAN

         On August 11, 2006, our stockholders approved the terms of the 2005
Stock Option Plan of PetroHunter Operating Company (the "Plan"). Under the Plan,
we may grant certain employees both incentive and non-qualified options to
purchase shares of common stock. The Plan is authorized to grant options
covering up to 40,000,000 shares. When we acquired more than 85% of the
outstanding stock of PetroHunter Operating Company in May 2006, we agreed to
replace all existing stock options of PetroHunter Operating Company with stock
options to purchase shares of our common stock having the same terms as the
original grant. Accordingly in August 2006, we granted options to purchase an
aggregate of 19,000,000 shares of common stock to replace those that had been
granted by PetroHunter Operating Company in August 2005, including options to
purchase 13,000,000 shares to MAB Operating Company and options to purchase
2,000,000 shares each to Kelly Nelson, Carmen Lotito and Garry Lavold. Twenty
percent of each of the options granted is exercisable immediately, and twenty
percent of each option becomes exercisable on August 10th of 2006, 2007, 2008
and 2009. Each option has an exercise price of $0.50 per share, and each option
expires and terminates, if not exercised sooner, on August 10, 2010.

         We granted additional options to purchase a total of 13,295,000 shares
under the Plan in August 2006 to employees and consultants, including options to
purchase 750,000 shares each to Kelly Nelson, Carmen Lotito, and Garry Lavold.
Twenty percent of each of the options granted is exercisable immediately and
twenty percent of each option becomes exercisable on August 10th of 2007, 2008,
2009, and 2010. Each option has an exercise price of $2.10 per share, and each
option expires and terminates, if not exercised sooner, on August 11, 2011.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
         INDEPENDENCE

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


                                       41
<PAGE>

MAB RESOURCES LLC/MARC A. BRUNER

         As described in Item 1. Description of Business above, we have several
agreements with MAB Resources LLC. Marc A. Bruner, the controlling owner of MAB,
is our largest beneficial owner of our outstanding common stock.

         During 2006 and 2005, we incurred $4,530,000 and $860,000,
respectively, in property development costs to MAB under the Development
Agreement with MAB. During 2005, we recorded expenditures paid by MAB on behalf
of us of $222,000. At September 30, 2006 and 2005, we owed MAB $197,785 and
$648,421, respectively. At September 30, 2006, MAB owed us $35,656 for our share
of oil and gas revenues from initial production earned through that date,
pursuant to the terms of the Development Agreement and EDAs.

OFFICERS

         During 2006, we incurred consulting fees related to services provided
by our officers in the aggregate amount of $491,650 as follows: Kelly H. Nelson
($155,000), Carmen J. Lotito ($125,000), and Garry Lavold ($211,650). During
2005, we incurred consulting fees related to services provided by our officers
in the aggregate amount of $236,300 and services provided by a related party in
the amount of $41,366, of which $11,966 is included in accounts payable at
September 30, 2005.

FALCON OIL & GAS LTD.

         Falcon Oil & Gas Ltd. ("Falcon") is the lessee of approximately 13,595
square feet of office space at 1875 Lawrence Street, Suite 1400, Denver,
Colorado, pursuant to the terms of a lease that expires June 30, 2011. Effective
June 1, 2006, we began sharing the offices with Falcon, and sharing the costs of
the office space, cost of equipment, furniture, office operating costs,
administrative staff, and related expenses on a 50/50 basis. Several of the
consultants and employees of Falcon and the Company who work in the shared space
perform services for both companies pursuant to separate agreements - that is,
each consultant or employee who performs work for both companies does so
pursuant to separate agreements, which define the scope of work for each company
and which do not combine such work under one agreement. At September 30, 2006,
Falcon owed us $208,514 for Falcon's share of cost incurred pursuant to the
sharing arrangement.

         Marc A. Bruner is the President, Chief Executive Officer, and Chairman
of the Board of Falcon. In addition, he owns or controls approximately 9.5% of
the issued and outstanding shares of Falcon.

GALAXY ENERGY CORPORATION

         In July 2006, Galaxy Energy Corporation ("Galaxy") used a drilling rig
under contract to us. At September 30, 2006, Galaxy owed us $712,830 for
reimbursement for charges paid to a drilling company for Galaxy's use of the
rig. Galaxy paid us $703,970 during the quarter ended December 31, 2006 and the
remaining $8,860 in January 2007.

         On December 29, 2006, we entered into a Purchase and Sale Agreement
(the "PSA") with Galaxy and its wholly owned subsidiary, Dolphin Energy
Corporation ("Dolphin"). Pursuant to the PSA, we agreed to purchase all of
Galaxy's and Dolphin's oil and gas interests in the Powder River Basin of
Wyoming and Montana (the "Powder River Basin Assets").

         Marc A. Bruner, who is our largest shareholder, also is a 14.3%
beneficial shareholder of Galaxy. Marc A. Bruner is the father of Marc E.
Bruner, the President, Chief Executive Officer and director of


                                       42
<PAGE>

Galaxy. Marc E. Bruner is the stepson of Carmen J. Lotito, the Chief Financial
Officer and a director of the Company. Mr. Lotito was a director of Galaxy from
November 2002 to August 2006 and served as its chief financial officer and
treasurer from November 2002 to July 2005, and as its executive vice president
from August 2004 to July 2005.

         The purchase price for Powder River Basin Assets is $45 million, with
$20 million to be paid in cash and $25 million to be paid in shares of our
common stock at the rate of $1.50 per share.

         Closing of the transaction is subject to approval by Galaxy's secured
noteholders, approval of all matters in its discretion by our Board of
Directors, including the Company obtaining outside financing on terms acceptable
to its Board of Directors, and various other terms and conditions. Either party
may terminate the agreement if closing has not occurred by February 28, 2007.

         Within ten (10) days of signing the PSA, we were required and did make
an initial earnest money payment of $1.4 million. On or before January 31, 2007,
we will make an additional earnest money payment of $600,000. In the event the
closing does not occur for any reason other than a material breach by us, the
deposit shall convert into a promissory note (the "Note"), payable to us, and
shall be an unsecured subordinated debt of both Galaxy and Dolphin, which is
payable only after repayment of Galaxy's and Dolphin's senior indebtedness.

         We became the contract operator of the Powder River Basin Assets
beginning January 1, 2007. At closing, the operating expenses incurred by us as
the contract operator will be credited toward the purchase price, or if closing
does not occur, will be added to the principal amount of the Note.

         MAB has orally agreed to guarantee the performance of Galaxy and
Dolphin under the PSA (including but not limited to all their obligations under
the Note), and has orally agreed to reimburse us for certain losses and damages
which might be incurred as a result of those parties entering into the PSA. A
written agreement will be entered into by the parties prior to closing.

GLOBAL PROJECT FINANCE AG

         On January 9, 2007, we entered into a Credit and Security Agreement
with Global Project Finance AG, a Swiss company ("Global"). Under that
Agreement, Global has committed to advance up to $15,000,000 over the next 18
months. Interest accrues at 6.75% over the prime rate and will be payable
quarterly beginning March 31, 2007. We are to begin making principal payments on
the loan beginning at the end of the first quarter following the end of the
18-month funding period, with the maturity date of the loan being 30 months from
the date of the Agreement. The loan is secured by a first perfected security
interest on our assets, limited to the specific portion of the assets to which
the loan proceeds are applied by us. We plan to use the loan proceeds for its
drilling and development operations in the Piceance Basin, Colorado.

         Global received warrants to purchase 1,000,000 shares of our common
stock upon execution of the Agreement and up to 3,000,000 warrants, tied on a
pro rata basis to each advance of the credit facility. The warrants will be
exercisable for five years from the date of the Agreement at a price equal to
the 120% of the volume-weighted average price of the stock for the 30 days
immediately preceding each warrant issuance date. In addition, upon each
advance, Global receives a fee equal to 1% of the amount of the advance.

         Global and its controlling shareholder, Christian Russenberger, were
shareholders of the Company prior to entering into this Credit and Security
Agreement



                                       43
<PAGE>

FUTURE TRANSACTIONS

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

DIRECTOR INDEPENDENCE

         Our common stock trades in the OTC Bulletin Board. As such, we are not
currently subject to corporate governance standards of listed companies, which
require, among other things, that the majority of the board of directors be
independent.

         Since we are not currently subject to corporate governance standards
relating to the independence of our directors, we choose to define an
"independent" director in accordance with the NASDAQ Global Market's
requirements for independent directors (NASDAQ Marketplace Rule 4200). The
NASDAQ independence definition includes a series of objective tests, such as
that the director is not an employee of the company and has not engaged in
various types of business dealings with the company.

         Anthony Yeats is considered an independent director under the above
definition. We do not list that definition on our Internet website.

         We presently do not have an audit committee, compensation committee,
nominating committee, executive committee of our Board of Directors, stock plan
committee or any other committees.


ITEM 13.          EXHIBITS

--------------------------------------------------------------------------------
REGULATION
S-B NUMBER                             EXHIBIT
--------------------------------------------------------------------------------
   2.1        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)
--------------------------------------------------------------------------------
   2.4        Purchase and Sale Agreement dated December 29, 2006 between
              Dolphin Energy Corporation and Galaxy Energy Corporation and
              PetroHunter Operating Company and PetroHunter Energy Corporation
              (incorporated by reference to Exhibit 2.1 to the Company's
              current report on Form 8-K dated December 29, 2006, filed
              January 4, 2007)
--------------------------------------------------------------------------------
   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)
--------------------------------------------------------------------------------


                                       44
<PAGE>

--------------------------------------------------------------------------------
REGULATION
S-B NUMBER                             EXHIBIT
--------------------------------------------------------------------------------
  10.1        Business Consultant Agreement dated October 1, 2005 (incorporated
              by reference to Exhibit 10.1 to the Company's current report on
              Form 8-K dated October 1, 2005, filed October 28, 2005)
--------------------------------------------------------------------------------
  10.2        Marketing Management Contract dated October 15, 2005
              (incorporated by reference to Exhibit 10.1 to the Company's
              current report on Form 8-K dated October 1, 2005, filed
              October 28, 2005)
--------------------------------------------------------------------------------
  10.3        Loan Agreement with Carnavon Trust Reg. Dated for reference
              October 11, 2005 (incorporated by reference to Exhibit 10.3 to the
              Company's quarterly report on Form 10-QSB for the quarter ended
              September 30, 2005, filed November 21, 2005)
--------------------------------------------------------------------------------
  10.4        Loan Agreement with Carnavon Trust Reg. Dated for reference
              December 5, 2005 (incorporated by reference to Exhibit 10.6 to the
              Company's quarterly report on Form 10-QSB for the quarter ended
              December 31, 2005, filed February 16, 2006)
--------------------------------------------------------------------------------
  10.5        Loan Agreement with Carnavon Trust Reg. Dated for reference
              February 2, 2006 (incorporated by reference to Exhibit 10.7 to the
              Company's quarterly report on Form 10-QSB for the quarter ended
              December 31, 2005, filed February 16, 2006)
--------------------------------------------------------------------------------
  10.6        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 on July 14, 2006)
--------------------------------------------------------------------------------
  10.7        Management and Development Agreement Between MAB Resources LLC and
              GSL Energy Corporation (Amended and Restated) Effective July 1,
              2005 (incorporated by reference from Exhibit 10.4 to the Company's
              annual report Form 10-KSB for the fiscal year ending March 31,
              2006, filed on July 14, 2006)
--------------------------------------------------------------------------------
  10.8        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
              January 25, 2007)
--------------------------------------------------------------------------------
  10.9        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)
--------------------------------------------------------------------------------
  14.1        Code of Ethics (incorporated by reference from Exhibit 14.1 to the
              Company's annual report Form 10-KSB for the fiscal year ending
              March 31, 2005, filed on July 13, 2005)
--------------------------------------------------------------------------------
  16.1        Letter from Telford Sadovnick P.L.L.C. (incorporated by reference
              to Exhibit 16.1 to the Company's amended current report on Form
              8-K dated September 8, 2006, filed September 8, 2006)
--------------------------------------------------------------------------------
  21.1        Subsidiaries
--------------------------------------------------------------------------------
  31.1        Rule 13a-14(a) Certification of Kelly H. Nelson
--------------------------------------------------------------------------------
  31.2        Rule 13a-14(a) Certification of Carmen J. Lotito
--------------------------------------------------------------------------------
  32.1        Certification of Kelly H. Nelson Pursuant to 18 U.S.C. Section
              1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
              Of 2002
--------------------------------------------------------------------------------
  32.2        Certification of Carmen J. Lotito Pursuant to 18 U.S.C. Section
              1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
              Of 2002
--------------------------------------------------------------------------------


                                       45

<PAGE>


ITEM 14.          PRINCIPAL ACCOUNTANT FEES AND SERVICES

         The fees billed for professional services rendered by our principal
accountant are as follows:

<TABLE>
<CAPTION>
FISCAL                                              AUDIT-RELATED
YEAR                         AUDIT FEES                      FEES                 TAX FEES          ALL OTHER FEES
--------------------------------------------------------------------------------------------------------------------
<S>                             <C>                          <C>                      <C>                     <C>
2005                            $ 37,558                     $-0-                     $-0-                    $-0-
2006                            $125,000                     $-0-                     $-0-                    $-0-
</TABLE>

PRE-APPROVAL POLICIES AND PROCEDURES

         The Board of Directors must pre-approve any use of our independent
accountants for any non-audit services. All services of our auditors are
approved by our Board and are subject to review by our Board.





























                                       46
<PAGE>


                                   SIGNATURES

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

                                  PETROHUNTER ENERGY CORPORATION



Date:  January 26, 2007           By: /s/ KELLY H. NELSON
                                     -------------------------------------------
                                        Kelly H. Nelson
                                        Chief Executive Officer

         In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE                                TITLE                                              DATE
<S>                                      <C>                                                <C>



                                         Chairman and Chief Executive Officer and
/s/ KELLY H. NELSON                      Director (Principal Executive Officer)             January 26, 2007
------------------------------------
Kelly H. Nelson
                                         Executive Vice President, Chief Financial
                                         Officer, Treasurer, Secretary and Director
                                         (Principal Financial Officer and Principal
/s/ CARMEN J. LOTITO                     Accounting Officer)                                January 26, 2007
------------------------------------
Carmen J. Lotito



/s/ ANTHONY K. YEATS                     Director                                           January 26, 2007
------------------------------------
Anthony K. Yeats

</TABLE>


















                                       47

<PAGE>





             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors
PetroHunter Energy Corporation
Denver, CO

We have audited the consolidated balance sheet of PetroHunter Energy Corporation
and subsidiaries (the "Company"),  a development stage company,  as of September
30, 2006, and the related consolidated  statements of operations,  stockholders'
equity and cash flows for the year ended  September 30, 2006 and for the periods
from  inception  (June 20, 2005) to September  30, 2005 and  September 30, 2006.
These financial  statements are the responsibility of the Company's  management.
Our responsibility is to express an opinion on these financial  statements based
on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform 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  audits  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, 2006 and the results of their
operations  and their cash flows for the year ended  September  30, 2006 and for
the periods from  inception  (June 20, 2005) to September 30, 2005 and September
30, 2006 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 suffered recurring losses from operations
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.


/s/ HEIN & ASSOCIATES LLP

Denver, Colorado
January 19, 2006


                                      F-1



<PAGE>

                                    PETROHUNTER ENERGY CORPORATION
                                 (FORMERLY DIGITAL ECOSYSTEMS CORP.)
                                       (A DEVELOPMENT COMPANY)
                                     CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                ASSETS

                                                                SEPTEMBER 30             SEPTEMBER 30
                                                                    2006                     2005
                                                             ------------------       -----------------
<S>                                                          <C>                      <C>
Current Assets
   Cash and cash equivalents                                 $      10,631,776        $      1,250,242
   Oil and gas receivables - related party                              35,656                    -
   Other receivables                                                    22,290                    -
   Due from related parties                                            921,344                    -
   Prepaid expenses and other assets                                    30,960                   7,699
                                                             ------------------       -----------------
      TOTAL CURRENT ASSETS                                          11,642,026               1,257,941
                                                             ------------------       -----------------
PROPERTY AND EQUIPMENT, AT COST
   Oil and gas properties under full cost, net                      45,972,784               7,231,443
   Furniture and equipment, net                                        550,213                    -
                                                             ------------------       -----------------
                                                                    46,522,997               7,231,443
                                                             ------------------       -----------------
OTHER ASSETS
   Restricted cash                                                   1,076,793                    -
   Deferred financing costs                                               -                     10,563
                                                             ------------------       -----------------

TOTAL ASSETS                                                 $      59,241,816        $      8,499,947
                                                             ==================       =================

                                 LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
   Accounts payable and accrued expenses                     $       9,644,236        $        475,107
   Accrued interest payable                                            124,474                  23,029
   Due to shareholder                                                  197,785                 648,421
   Contracts payable - oil and gas properties                             -                  5,512,500
   Notes payable                                                       400,000                    -
   Convertible notes payable                                              -                  3,037,000
                                                             ------------------       -----------------
      TOTAL CURRENT LIABILITIES                                     10,366,495               9,696,057
                                                             ------------------       -----------------
ASSET RETIREMENT OBLIGATION                                            522,054                    -
                                                             ------------------       -----------------
TOTAL LIABILITIES                                                   10,888,549               9,696,057
                                                             ------------------       -----------------

COMMITMENTS AND CONTINGENCIES (NOTES 2, 3, 4, 9, 12 AND 13)
STOCKHOLDERS' EQUITY
   Preferred stock, $.001 par value
   Authorized - 1,000,000 shares, issued, none
   Common stock, $.001 par value
   Authorized - 500,000,000 shares
   Issued and outstanding - 219,928,734 (2006)
     and 100,000,000 (2005) shares                                     219,929                 100,000
   Capital in excess of par value                                   70,944,172                 822,710
   Deficit accumulated during the development stage                (22,810,834)             (2,118,820)
                                                             ------------------       -----------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)                                48,353,267              (1,196,110)
                                                             ------------------       -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                   $      59,241,816        $      8,499,947
                                                             ==================       =================
</TABLE>

         The accompanying notes are an integral part of the consolidated
                             financial statements.


                                      F-2
<PAGE>
                         PETROHUNTER ENERGY CORPORATION
                       (FORMERLY DIGITAL ECOSYSTEMS CORP.)
                             (A DEVELOPMENT COMPANY)
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                                                  PERIOD FROM           CUMULATIVE FROM
                                                                                   INCEPTION                INCEPTION
                                                                                (JUNE 20, 2005)         (JUNE 20, 2005)
                                                           YEAR ENDED                  TO                      TO
                                                           SEPTEMBER 30           SEPTEMBER 30            SEPTEMBER 30
                                                               2006                   2005                    2006
                                                        -----------------      -----------------      -------------------
<S>                                                     <C>                    <C>                    <C>
REVENUES
    Oil and gas revenues                                $         35,656       $           -          $           35,656
                                                        -----------------      -----------------      -------------------

COSTS AND EXPENSES
    Lease operating expenses                                       3,672                   -                       3,672
    General and administrative                                13,637,801              1,235,791               14,873,592
    Property development - related                             4,530,000                860,000                5,390,000
    Depreciation, depletion, amortization and accretion           73,137                   -                      73,137
                                                        -----------------      -----------------      -------------------
        TOTAL OPERATING EXPENSES                              18,244,610              2,095,791               20,340,401
                                                        -----------------      -----------------      -------------------

OTHER INCOME (EXPENSE)
Interest income                                                    2,633                   -                       2,633
Interest expense                                              (2,485,693)               (23,029)              (2,508,722)
                                                        -----------------      -----------------      -------------------
        TOTAL OTHER INCOME (EXPENSE)                          (2,483,060)               (23,029)              (2,506,089)
                                                        -----------------      -----------------      -------------------

                                                        -----------------      -----------------      -------------------
NET LOSS                                                $    (20,692,014)      $     (2,118,820)      $      (22,810,834)
                                                        =================      =================      ===================

NET LOSS PER COMMON SHARE -
    BASIC AND DILUTED                                   $          (0.14)      $          (0.02)
                                                        =================      =================

WEIGHTED AVERAGE NUMBER OF COMMON SHARES
    OUTSTANDING - BASIC AND DILUTED                          147,309,096            100,000,000
                                                        =================      =================
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.


                                      F-3
<PAGE>
                         PETROHUNTER ENERGY CORPORATION
                       (FORMERLY DIGITAL ECOSYSTEMS CORP.)
                             (A DEVELOPMENT COMPANY)
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                                    Deficit
                                                                                                  Accumulated
                                                        Common Stock               Capital in      During the            Total
                                               -------------------------------    Excess of Par    Development        Stockholders'
                                                   Shares           Amount           Value            Stage              Equity
                                               --------------    -------------    -------------   --------------    ----------------
<S>                                            <C>               <C>              <C>             <C>               <C>
Balance, June 20, 2005 (inception)                          -    $          -     $          -    $           -     $             -

  Issuance of common shares to founder,
    at $.001 per share                            100,000,000         100,000                -                -             100,000

  Stock based compensation costs for
    options granted to non-employees                        -               -          822,710                -             822,710

NET LOSS                                                    -               -                -       (2,118,820)         (2,118,820)
                                               --------------    -------------    -------------   --------------    ----------------

BALANCE, SEPTEMBER 30, 2005                       100,000,000         100,000          822,710       (2,118,820)         (1,196,110)

  Issuance of common stock for property
    interests at $.50  per share                    3,000,000           3,000        1,497,000                -           1,500,000

  Issuance of common stock for finders fee
    on property at $.50  per share                  3,400,000           3,400        1,696,600                -           1,700,000

  Issuance of common shares upon conversion
    of debt, at $.50 per share                     44,063,334          44,063       21,987,604                -          22,031,667

  Issuance of common shares for commission
    on convertible debt at $.50 per share           2,845,400           2,846        1,419,855                -           1,422,701

  Sale of common shares and warrants at
    $1.00 per unit                                 35,442,500          35,442       35,407,058                -          35,442,500

  Issuance of common shares for commission
    on sale of units                                1,477,500           1,478        1,476,023                -           1,477,501

  Costs of stock offering
    Cash                                                    -               -       (1,638,374)               -          (1,638,374)
    Common shares for commission at $1.00                   -               -       (1,477,500)               -          (1,477,500)

  Exercise of common stock warrants                 1,000,000           1,000          999,000                -           1,000,000

  Recapitalizaton of shares issued upon merger     28,700,000          28,700         (435,138)               -            (406,438)

  Stock based compensation                                  -               -        9,189,334                -           9,189,334

NET LOSS                                                    -               -                -      (20,692,014)        (20,692,014)
                                               --------------    -------------    -------------   --------------    ----------------

BALANCE, SEPTEMBER 30, 2006                       219,928,734    $    219,929     $ 70,944,172    $ (22,810,834)    $    48,353,267
                                               ==============    =============    =============   ==============    ================
</TABLE>

        The accompanying notes are an integral part of the consolidated
                             financial statements.

                                      F-4
<PAGE>
                         PETROHUNTER ENERGY CORPORATION
                       (FORMERLY DIGITAL ECOSYSTEMS CORP.)
                             (A DEVELOPMENT COMPANY)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                       PERIOD FROM         CUMULATIVE FROM
                                                                                        INCEPTION              INCEPTION
                                                                                     (JUNE 20, 2005)        (JUNE 20, 2005)
                                                                 YEAR ENDED                 TO                    TO
                                                                SEPTEMBER 30           SEPTEMBER 30          SEPTEMBER 30
                                                                    2006                   2005                  2006
                                                             ------------------     -----------------     -----------------
<S>                                                          <C>                    <C>                   <C>
Cash flows used in operating activities
    Net loss                                                 $     (20,692,014)     $     (2,118,820)     $    (22,810,834)
    Adjustments to reconcile net loss to
    net cash (used) in operating activities
       Stock for expenditures advanced                                    -                  100,000               100,000
       Stock based compensation                                      9,189,334               822,710            10,012,044
       Depreciation, depletion, amotization and accretion               73,137                  -                   73,137
       Stock for financing costs                                     1,422,701                  -                1,422,701

    Changes in assets and liabilities
       Accounts receivable                                             (57,946)                 -                  (57,946)
       Due from related party                                         (921,344)                 -                 (921,344)
       Prepaids and other                                                9,311               (18,262)               (8,951)
       Accounts payable and accrued expenses                           881,651               343,793             1,379,787
       Due to shareholder                                             (450,636)              648,421               197,785
                                                             ------------------     -----------------     -----------------

NET CASH USED IN OPERATING ACTIVITIES                              (10,545,806)             (222,158)          (10,613,621)
                                                             ------------------     -----------------     -----------------

CASH FLOWS USED IN INVESTING ACTIVITIES
    Additions to oil and gas properties                            (31,062,398)           (1,564,600)          (32,781,341)
    Property and equipment                                            (553,211)                 -                 (553,211)
    Restricted cash                                                 (1,076,793)                 -               (1,076,793)
                                                             ------------------     -----------------     -----------------

NET CASH USED IN INVESTING ACTIVITIES                              (32,692,402)           (1,564,600)          (34,411,345)
                                                             ------------------     -----------------     -----------------

CASH FLOWS FROM FINANCING ACTIVITIES
    Proceeds from the sale of common stock                          35,442,500                  -               35,442,500
    Proceeds from the exercise of warrants                           1,000,000                  -                1,000,000
    Cash received upon recapitalization and merger                      20,949                  -                   20,949
    Proceeds from issuance of convertible notes                     17,794,667             3,037,000            20,831,667
    Offering costs                                                  (1,638,374)                 -               (1,638,374)
                                                             ------------------     -----------------     -----------------

NET CASH PROVIDED BY FINANCING ACTIVITIES                           52,619,742             3,037,000            55,656,742
                                                             ------------------     -----------------     -----------------

NET INCREASE IN CASH AND CASH EQUIVALENTS                            9,381,534             1,250,242            10,631,776

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                       1,250,242                  -                     -
                                                             ------------------     -----------------     -----------------

CASH AND CASH EQUIVALENTS, END OF PERIOD                     $      10,631,776      $      1,250,242      $     10,631,776
                                                             ==================     =================     =================

SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
    Cash paid for interest                                   $       1,028,353      $           -         $      1,028,353
                                                             ==================     =================     =================
    Cash paid for income taxes                               $            -         $           -         $           -
                                                             ==================     =================     =================
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
    Stock issued for expenditures advanced                   $            -         $        100,000      $        100,000
                                                             ==================     =================     =================
    Contracts for oil and gas properties                     $       6,261,460      $      5,512,500      $     11,773,960
                                                             ==================     =================     =================
    Common stock issued for debt conversion                  $      22,031,667      $           -         $     22,031,667
                                                             ==================     =================     =================
    Common stock issued for commissions on offerings         $       2,900,201      $           -         $      2,900,201
                                                             ==================     =================     =================
    Common stock issued for finders fee on property          $       1,700,000      $           -         $      1,700,000
                                                             ==================     =================     =================
    Convertible debt issued for property                     $       1,200,000      $           -         $      1,200,000
                                                             ==================     =================     =================
    Common stock issued for property                         $         500,000      $           -         $        500,000
                                                             ==================     =================     =================
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                      F-5
<PAGE>
                         PETROHUNTER ENERGY CORPORATION
                       (FORMERLY DIGITAL ECOSYSTEMS CORP.)
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 2006


NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION

     PetroHunter Energy Corporation, formerly known as 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 "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 from Digital Ecosystems
     Corp. to PetroHunter Energy Corporation ("PetroHunter").

     GSL was  incorporated  under the laws of the State of  Maryland on June 20,
     2005 for the purpose of  acquiring,  exploring and  developing  oil and gas
     properties.  GSL is  considered a  development  stage company as defined by
     Statement  of  Financial  Accounting  Standards  ("SFAS")  No.  7,  and its
     principal  activities since inception have been raising capital through the
     sale of common stock and  convertible  notes and the acquisition of oil and
     gas properties in the Western United States and Australia. In October 2006,
     GSL changed its name to PetroHunter Operating Company. 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,
     PetroHunter  formed  PetroHunter  Heavy Oil Ltd. ("Heavy Oil"), as a wholly
     owned  subsidiary  for the purpose of holding and  developing the Company's
     heavy oil assets. (Unless otherwise specified, PetroHunter, GSL, Heavy Oil,
     and Paleo are collectively referred to herein as the "Company").

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

     i.     GSL was deemed to be the purchaser and parent company for  financial
            reporting purposes. Accordingly, its net assets were included in the
            consolidated balance sheet at their historical book value; and

     ii.    Control of the net  assets and business  of PetroHunter was acquired
            effective May 12, 2006 for no consideration.

     The fair value of the  Digital  assets  acquired  and  liabilities  assumed
     pursuant to the transaction with GSL are as follows:

     Net cash acquired                                          $    20,949
     Current assets                                                  22,009
     Liabilities assumed                                           (449,396)
                                                                ------------
     Value of 28,700,000 Digital Shares                         $  (406,438)
                                                                ============

                                      F-6
<PAGE>
                         PETROHUNTER ENERGY CORPORATION
                       (FORMERLY DIGITAL ECOSYSTEMS CORP.)
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 2006


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 balance sheet the Company
     has the Company has incurred a cumulative net loss of  $22,810,834  for the
     period from  inception  (June 20,  2005) to  September  30,  2006,  and has
     significant capital expenditure commitments.  As of September 30, 2006, the
     Company has received oil and gas revenue from its initial  wells,  and will
     require  significant  additional  funding to  sustain  its  operations  and
     satisfy its contractual obligations for its planned oil and gas exploration
     and development operations.  These factors, among others, may indicate that
     the Company may be unable to continue in existence. The Company's financial
     statements do not include any adjustments related to the realization of the
     carrying value of assets or the amounts and  classification  of liabilities
     that  might be  necessary  should  the  Company  be unable to  continue  in
     existence.  The Company's ability to establish itself as a going concern is
     dependent upon its ability to obtain additional financing, in order to fund
     its planned operations and ultimately,  to achieve  profitable  operations.
     Management  believes that they can be successful in obtaining equity and/or
     debt  financing  which will enable the Company to continue in existence and
     establish  itself as a going  concern.  The Company has sold  approximately
     $56.3 million of convertible  notes and common stock through  September 30,
     2006,  and  management  believes  that the Company  will be  successful  in
     raising   additional  funding  to  have  sufficient  capital  to  meet  its
     obligations  for  its  planned  operations.   The  Company  has  raised  an
     additional  $3,417,500  subsequent  to  September  30,  2006 in two private
     placements of common stock currently in process and has received $5,000,000
     from a private investor pursuant to a loan commitment (See Note 13).

     BASIS OF PRESENTATION

     The accompanying  consolidated financial statements include PetroHunter for
     the period from May 12, 2006 to September  30,  2006,  and its wholly owned
     subsidiary,  GSL, for the twelve months ended  September 30, 2006.  For the
     period ended September 30, 2005, the consolidated  financial statements are
     those  of  GSL.  All  significant   intercompany   transactions  have  been
     eliminated upon consolidation.

     OIL AND GAS PROPERTIES

     The Company  utilizes  the full cost method of  accounting  for oil and gas
     activities.  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 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.


                                      F-7
<PAGE>
                         PETROHUNTER ENERGY CORPORATION
                       (FORMERLY DIGITAL ECOSYSTEMS CORP.)
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 2006


NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     OIL AND GAS PROPERTIES (Continued)

     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.  As of September 30, 2006, the Company has
     no  proved  reserves,   has  received  nominal  revenue  from  testing  and
     production  on its initial  wells,  and all oil and gas property  costs are
     considered to be unevaluated  and are recorded at the lower of cost or fair
     market value.

     ASSET RETIREMENT OBLIGATION

     The  Company   applies   SFAS  143,   "Accounting   for  Asset   Retirement
     Obligations,"  which  addresses  financial  accounting  and  reporting  for
     obligations  associated with the retirement of tangible  long-lived  assets
     and  the  associated  asset  retirement  costs.  This  statement   requires
     companies to record the present value of  obligations  associated  with the
     retirement  of  tangible  long-lived  assets  in the  period in which it is
     incurred.  The liability is capitalized  as part of the related  long-lived
     asset's  carrying  amount.  Over  time,   accretion  of  the  liability  is
     recognized as an operating  expense and the capitalized cost is depreciated
     over the  expected  useful  life of the  related  asset.  Asset  retirement
     obligations  ("ARO")  relate  primarily  to  the  plugging,  dismantlement,
     removal,  site  reclamation  and  similar  activities  of its  oil  and gas
     properties.  At  September  30,  2006,  the Company had  recorded an ARO of
     $522,054 for its initial wells.

     PROPERTY AND EQUIPMENT

     Furniture,   equipment   and   computer   software  is  recorded  at  cost.
     Depreciation  and amortization is recorded using the  straight-line  method
     over the  estimated  useful  lives of the related  assets of three to seven
     years.  Expenditures  for  replacements,   renewals,  and  betterments  are
     capitalized. Maintenance and repairs are charged to operations as incurred.

     REVENUE RECOGNITION

     The Company recognizes oil and gas revenues from its interests in producing
     wells as oil and gas is produced and sold from these wells. The Company has
     no  gas  balancing   arrangements  in  place.  Oil  and  gas  sold  is  not
     significantly different from the Company's product entitlement.


                                      F-8
<PAGE>
                         PETROHUNTER ENERGY CORPORATION
                       (FORMERLY DIGITAL ECOSYSTEMS CORP.)
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 2006


NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     IMPAIRMENT

     The Company  applies SFAS 144,  "Accounting for the Impairment and Disposal
     of Long-Lived Assets," which requires that long-lived assets to be held and
     used be reviewed for impairment whenever events or changes in circumstances
     indicate that the carrying amount of an asset may not be  recoverable.  Oil
     and gas properties  accounted for using the full cost method of accounting,
     the method utilized by the Company, are excluded from this requirement, but
     will continue to be subject to the ceiling test limitations.  The Company's
     unproved  properties  are evaluated  periodically  for the  possibility  of
     potential impairment. At September 30, 2006, there was no impairment charge
     for unproved properties.

     INCOME TAXES

     The Company has 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.

     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.

     USE OF ESTIMATES

     The  preparation  of financial  statements  in conformity  with  accounting
     principles  generally  accepted  in the United  States of America  requires
     management  to make  estimates  and  assumptions  that affect the  reported
     amounts of assets and liabilities  and disclosure 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 from those estimates.

     The Company's  financial  statements  are based on a number of  significant
     estimates, including oil and gas reserve quantities which are the basis for
     the  calculation of  depreciation,  depletion and impairment of oil and gas
     properties,   and  timing  and  costs   associated   with  its   retirement
     obligations.

     The oil and gas  industry  is  subject,  by its  nature,  to  environmental
     hazards  and  clean-up  costs.  At  this  time,   management  knows  of  no
     substantial  costs  from  environmental  accidents  or events for which the
     Company may be currently  liable.  In addition,  the  Company's oil and gas
     business makes it vulnerable to changes in wellhead prices of crude oil and
     natural gas. Such prices have been volatile in the past and can be expected
     to be volatile in the future.  By definition,  proved reserves are based on
     current oil and gas prices and estimated  reserves.  Price declines  reduce
     the estimated quantity of proved reserves and increase annual  amortization
     expense (which is based on proved reserves).


                                      F-9
<PAGE>
                         PETROHUNTER ENERGY CORPORATION
                       (FORMERLY DIGITAL ECOSYSTEMS CORP.)
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 2006


NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     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 dilutive
     weighted  average number of common shares  outstanding  excluded  potential
     common shares from stock options and warrants of  approximately  25,309,000
     for the fiscal year ending September 30, 2006.

     SHARE BASED COMPENSATION

     The Company has followed  Accounting  Principles  Board ("APB") Opinion No.
     25,"Accounting for Stock Issued to Employees", and related interpretations,
     through September 30, 2005 which  resulted in the  accounting for grants of
     awards to employees at their intrinsic value in the consolidated  financial
     statements.  Additionally,  the Company has recognized compensation expense
     in the financial  statements for awards granted to non-employees which must
     be re-measured each period under the mark-to-market, as required under EITF
     96-18,  "Accounting  for Equity  Instruments  That Are Issued to Other Than
     Employees for Acquiring or in Conjunction with Selling, Goods or Services".
     The Company previously adopted the provisions of SFAS No. 123,  "Accounting
     for Stock-Based Compensation",  as amended by SFAS No. 148, "Accounting for
     Stock-Based Compensation  --Transition and Disclosure",  through disclosure
     only.

     Effective October 1, 2006, the Company adopted SFAS123(R),  "Accounting for
     Stock-Based  Compensation,"  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. Prior periods have not been
     restated.  SFAS 123(R) requires companies to recognize share-based payments
     to employees as compensation expense on a fair value method. Under the fair
     value recognition provisions of SFAS 123(R),  stock-based compensation cost
     is  measured  at the grant date based on the fair value of the award and is
     recognized as expense over the service period,  which generally  represents
     the vesting  period.  The  expense  recognized  over the service  period is
     required  to include an  estimate  of the  awards  that will be  forfeited.
     Previously,  no such forfeitures have occurred.  The Company is assuming no
     forfeitures  going  forward based on the  Company's  historical  forfeiture
     experience.  The fair  value of  stock  options  is  calculated  using  the
     Black-Scholes option-pricing model. Had compensation cost for the Company's
     stock-based  compensation  plans been determined based on the fair value at
     the  grant  dates for  awards  under the plan  consistent  with the  method
     prescribed  in SFAS  123(R)  for the year ended  September  30,  2006,  the
     Company's  net loss and net loss per share for the  period  would have been
     adjusted to the pro-forma amounts indicated below.




                                      F-10

<PAGE>
                         PETROHUNTER ENERGY CORPORATION
                       (FORMERLY DIGITAL ECOSYSTEMS CORP.)
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 2006


NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     SHARE BASED COMPENSATION (Continued)

<TABLE>
<CAPTION>
                                                                          2006             2005
                                                                    ----------------------------------
<S>                                                                 <C>                 <C>
           Net loss as reported                                      $  (20,692,014)    $  (2,118,820)
           Add stock based compensation included in
                   Reported loss                                          9,189,334           822,710
           Deduct stock based compensation expense
                   Determined under fair value method                    (9,189,334)       (1,202,422)
                                                                     ---------------    --------------
           Pro-forma net loss                                        $  (20,692,014)    $  (2,498,532)
                                                                     ===============    ==============
           Net loss per share
                                                       As reported           $(0.14)           $(0.02)
                                                         Pro-forma           $(0.14)           $(0.02)
</TABLE>

     The estimated value of stock options granted following  calculation methods
     prescribed by SFAS 123R, uses the Black-Scholes stock options pricing model
     with the following assumptions used:

                                                       2006             2005
                                                  --------------- --------------
           Expected option term - years                        4              5

           Risk-free interest rate                      4.6%-4.9%          4.13%

           Dividend yield                                      0              0

           Volatility                                         74%            74%

     As of September  30, 2006,  options to purchase an aggregate of  32,295,000
     shares of the Company's common stock were  outstanding.  These options were
     granted, to the Company's officers,  directors and consultants in August of
     2005 and 2006,  vest 20% at grant date and 20% per year on the  anniversary
     of the grant date for the next four  years.  Each  option  has an  exercise
     price  equal to the fair  market  value per share of the  Company's  common
     stock at the date of grant and each option expires and  terminates,  if not
     exercised  sooner,  five years from the grant  date.  Stock-based  employee
     compensation of $2,632,372 and stock-based non-employee  compensation costs
     of  $6,556,962  before tax,  were  charged to  operations  as  compensation
     expense for the year ended September 30, 2006.

     CASH AND CASH EQUIVALENTS

     For  purposes of  reporting  cash  flows,  the  Company  considers  as cash
     equivalents all highly liquid  investments  with a maturity of three months
     or less at the time of  purchase.  Restricted  cash at  September  30, 2006
     consists  of  certificates  of  deposit  underlying  letters  of credit for
     exploration permits, state and local bonds and guarantees to vendors.


                                      F-11
<PAGE>
                         PETROHUNTER ENERGY CORPORATION
                       (FORMERLY DIGITAL ECOSYSTEMS CORP.)
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 2006


NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     CONCENTRATION OF CREDIT RISK

     Financial   instruments   which   potentially   subject   the   Company  to
     concentrations  of credit risk consist of cash. The Company  maintains cash
     accounts at one financial  institution.  The Company periodically evaluates
     the  credit  worthiness  of  financial  institutions,  and  maintains  cash
     accounts  only  in  large  high  quality  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.  The Company  believes  that credit risk  associated  with cash is
     remote.

     FAIR VALUE

     The carrying  amount  reported in the balance sheet for cash,  receivables,
     prepaids,  accounts payable and accrued liabilities approximates fair value
     because  of  the  immediate  or  short-term  maturity  of  these  financial
     instruments.

     Based upon the borrowing rates currently available to the Company for loans
     with similar terms and average  maturities,  the fair value of  convertible
     notes approximates their carrying value.

     OFF BALANCE SHEET ARRANGEMENTS

     The Company has no off balance sheet arrangements.

     RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In February 2006, the Financial  Accounting  Standards  Board (FASB) issued
     SFAS No. 155,  "Accounting  for  Certain  Hybrid  Financial  Instruments-an
     amendment of FASB Statements No. 133 and 140." SFAS No. 155 amends SFAS No.
     133,  "Accounting for Derivative  Instruments  and Hedging  Activities" and
     SFAS No. 140,  "Accounting for Transfers and Servicing of Financial  Assets
     and  Extinguishments of Liabilities," and also resolves issues addressed in
     SFAS No. 133 Implementation  Issue No. D1, "Application of Statement 133 to
     Beneficial  Interests in  Securitized  Financial  Assets." SFAS No. 155 was
     issued to eliminate the  exemption  from applying SFAS No. 133 to interests
     in securitized  financial assets so that similar  instruments are accounted
     for in a similar fashion,  regardless of the instrument's form. The Company
     does not believe that its financial position, results of operations or cash
     flows will be impacted by SFAS No. 155 as the  Company  does not  currently
     hold any hybrid financial instruments.




                                      F-12
<PAGE>
                         PETROHUNTER ENERGY CORPORATION
                       (FORMERLY DIGITAL ECOSYSTEMS CORP.)
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 2006


NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued)

     In June  2006,  the  FASB  issued  FASB  Interpretation  No.  48 (FIN  48),
     Accounting for Uncertainty in Income Taxes.  The  interpretation  clarifies
     the  accounting for  uncertainty in income taxes  recognized in a company's
     financial  statements in accordance with Statement of Financial  Accounting
     Standards  No.  109,  Accounting  for  Income  Taxes.   Specifically,   the
     pronouncement   prescribes  a  recognition   threshold  and  a  measurement
     attribute for the financial statement  recognition and measurement of a tax
     position taken or expected to be taken in a tax return.  The interpretation
     also  provides  guidance  on  the  related  derecognition,  classification,
     interest and  penalties,  accounting  for interim  periods,  disclosure and
     transition  of  uncertain  tax  positions.  The Company will be required to
     adopt FIN 48 for the fiscal year ended  September 30, 2008.  The Company is
     reviewing  and  evaluating  the effect,  if any, of adopting  FIN 48 on its
     financial position and results of operations.

     RECLASSIFICATION

     Certain  reclassifications  have been made to the 2005 financial statements
     to conform to 2006 presentation.  Such  reclassifications  had no effect on
     net loss.


NOTE 3 -- AGREEMENT WITH MAB RESOURCES LLC

     Effective  January 1, 2007,  the  Company  and MAB  Resources  LLC  ("MAB")
     entered into an  Acquisition  and  Consulting  Agreement  (the  "Consulting
     Agreement")  which replaced in its entirety the Management and  Development
     Agreement  (the  "Development  Agreement")  entered into July 1, 2005,  and
     materially revised the relationship  between MAB and the Company.  MAB is a
     Delaware limited liability company controlled by the largest shareholder of
     the  Company.  MAB is in  the  business  of oil  and  gas  exploration  and
     development. Under the terms of the Consulting Agreement:

     o   The Company's  working  interest  in  all  its  oil  and gas properties
         doubled (from 50% undivided interest in the properties to 100%);
     o   The Company's prior  obligation to carry MAB for its 50% portion of the
         first $700 million in capital costs was eliminated;
     o   The Company's aggregate monthly payments to MAB related to the existing
         properties  were  reduced  from $600,000 to (i) $25,000 for consulting,
         plus (ii) $225,000 for  payments under  a $13.5 million promissory note
         as partial consideration for MAB's assignment of its previous undivided
         50% working interest in the properties;
     o   MAB's  3%  overriding  royalty  was  increased  to  10%,  half of which
         accrues but is deferred for three years.



                                      F-13

<PAGE>
                         PETROHUNTER ENERGY CORPORATION
                       (FORMERLY DIGITAL ECOSYSTEMS CORP.)
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 2006


NOTE 3 -- AGREEMENT WITH MAB RESOURCES LLC (CONTINUED)

     The new  agreement  provides for the  issuance of 50 million  shares of the
     Company's common stock to MAB. MAB has the right and opportunity to receive
     up to an  additional 50 million  shares,  to be held in escrow and released
     over a five-year period in specified numbers of shares that are tied to the
     Company's performance in booking reserves. The entire Consulting Agreement,
     including the monthly payments to MAB,  terminates after five years, except
     MAB's overriding royalty continues for the life of the properties.

     Commencing  July 1, 2005 and  continuing  through  December 31,  2006,  the
     Company and MAB  operated  pursuant  to the  Development  Agreement,  and a
     series of individual property agreements (collectively, the "EDAs").

     The Development Agreement sets forth: (a) MAB's obligation to assign to the
     Company a minimum 50% undivided  interest in any and all oil and gas assets
     which MAB acquires from third parties in the future;  and (b) MAB's and the
     Company's long-term  relationship  regarding the ownership and operation of
     all jointly-owned  properties.  Each of the Properties acquired was covered
     by a  property-specific  EDA  that is  consistent  with  the  terms  of the
     Development Agreement.

     Each EDA and the  Development  Agreement  include  the  following  material
     terms:

     1.   OWNERSHIP:  MAB and the  Company  each  own an  undivided  50% working
          interest in all oil and gas leases, production facilities, and related
          assets (collectively, the "Properties").

     2.   OPERATOR:  The  Company  is  named  as  Operator,  and has appointed a
          related controlled entity, MAB Operating Company LLC, as sub-operator.
          The Company and MAB will sign a joint  operating  agreement, governing
          all operations.

     3.   COSTS AND REVENUES: Each party pays its proportionate share  of  costs
          and  receives  its  proportionate  share  of  revenues, subject to the
          Company bearing the following burdens:

          (a)   MAB OVERRIDING  ROYALTY INTEREST:  Each assignment of Properties
                from  MAB  to  the  Company   reserves  an  overriding   royalty
                equivalent to 3% of 8/8ths  (proportionately  reduced to 1.5% of
                the Company's  undivided 50% working interest in the Properties)
                (the "MAB Override"), payable out of production and sales.

          (b)   PROJECT COSTS:  Each  Acquisition  Agreement  provides  that the
                Company  shall  pay  100%  of  the  cost  of  acquisitions   and
                operations  ("Project  Costs") up to a specified  amount,  after
                which time each party shall pay its  proportionate  50% share of
                such costs.  The maximum  specified  amount of Project  Costs of
                which the Company must pay 100%, under the Development Agreement
                for  Properties  acquired  in the  future,  is $100  million per
                project.  There is no "before  payout" or "after  payout" in the
                traditional sense of a "carried  interest" because the Company's
                obligation to expend the  specified  amount of Project Costs and
                MAB's receipt of its 50% share of revenues  apply without regard
                to whether  "payout"  has  occurred.  Therefore,  the  Company's
                payment of all Project Costs up to such  specified  amount might
                occur BEFORE actual payout,  or might occur AFTER actual payout,
                depending on each project and set of Properties.



                                      F-14
<PAGE>
                         PETROHUNTER ENERGY CORPORATION
                       (FORMERLY DIGITAL ECOSYSTEMS CORP.)
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 2006


NOTE 3 -- AGREEMENT WITH MAB RESOURCES LLC (CONTINUED)

          (c)   PROJECT  DEVELOPMENT  COSTS:  Under  the  Development Agreement,
                the  Company  pays  to MAB  monthly  Project  Development  Costs
                representing  a  specified  portion of MAB's  "carried"  Project
                Costs.  The total amount  incurred to MAB by the Company will be
                deducted  from MAB's portion of the Project Costs carried by the
                Company.

     4.   RIGHTS AND OBLIGATIONS:   MAB  conveys  to  the  Company  an undivided
          50% working interest in all rights and benefits under each Acquisition
          Agreement,  and  the  Company  assumes  its  share  of all duties  and
          obligations  under each  Acquisition Agreement (such  as  drilling and
          development obligations).

NOTE 4 -- OIL AND GAS PROPERTIES

     Commencing effective July 1, 2005 and continuing through December 31, 2006,
     the Company  entered  into a  Management  and  Development  Agreement  (the
     "Development Agreement") and a series of property-specific  Exploration and
     Development   Agreements   (collectively,   the  "EDAs")  pursuant  to  the
     Development  Agreement with MAB. Effective January 1, 2007, the Development
     Agreement and the EDA's were replaced in their  entirety by the  Consulting
     Agreement with MAB as discussed in Note 3 above.

     The   following   description   of  the  Company's  oil  and  gas  property
     acquisitions  for the  period  from  inception  to  September  30,  2006 is
     pursuant to the  original  Development  Agreement  and related  EDA's.  All
     references to the Company's  obligations to pay "project development costs"
     pertaining  to the  following  properties  means  the  specified  amount of
     capital expenditures (for each such property),  which were credited against
     the  Company's  obligation  to carry  MAB for  MAB's  50%  portion  of such
     expenditures.

     WEST ROZEL PROJECT

     Effective  November 21, 2005, the Company  entered into an EDA with MAB for
     the West Rozel Project,  under which the Company has paid $1,250,000 to the
     assignor and paid reimbursement of estimated costs incurred by the assignor
     of  approximately  $180,000.  The Company is  obligated  to pay MAB monthly
     project  development  costs in the amount of $200,000,  commencing  June 1,
     2005, and the first $50 million of project costs.

     BUCKSKIN MESA PROJECT

     Effective  September 17, 2005, the Company entered into an EDA with MAB for
     the Buckskin Mesa Project,  under which the Company has paid  $5,362,500 to
     the assignor and  $1,961,460 in Federal Lease  payments for Federal  leases
     acquired  by the  assignor on  November  10,  2005.  As  consideration  for
     extending  the final  payment due on closing,  the Company  agreed to pay a
     monthly extension fee of $200,000 for each 30-day period commencing January
     6,  2006 of  which  all were  paid as of June  30,  2006.  The  Company  is
     obligated  to  pay  MAB  monthly  project  development  costs  of  $20,000,
     commencing  July 1, 2005, and the first $50 million of project  costs.  The
     Company  charges to operations all property  development  costs incurred to
     MAB under the related EDA's.



                                      F-15
<PAGE>
                         PETROHUNTER ENERGY CORPORATION
                       (FORMERLY DIGITAL ECOSYSTEMS CORP.)
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 2006


NOTE 4 -- OIL AND GAS PROPERTIES (CONTINUED)

     PICEANCE II PROJECT

     Effective  December 29, 2005, the Company  entered into an EDA with MAB for
     the Piceance II Project,  under which the Company will pay up to $4,000,000
     to the  assignor  (of which  $3,898,793  has been  paid) and has  issued $1
     million (2.0  million  shares at $0.50 per share) of the  Company's  Common
     Stock.  The Company is  obligated  to pay MAB monthly  project  development
     costs of $20,000 per month,  commencing November 1, 2005, and the first $50
     million of project costs.

     BEETALOO PROJECT

     Effective  March 17, 2006, the Company entered into an EDA with MAB for the
     Beetaloo  Project   representing   exploration   permits  in  the  Northern
     Territory,  Australia.  Under the terms of the EDA,  the  Company  has paid
     $1,000,000  to the  assignor  and has funded the $3  million  seismic  work
     commitment.  The Company is  obligated to pay monthly  project  development
     costs of $100,000 per month,  commencing  March 1, 2006, and the first $100
     million of project costs.

     FIDDLER CREEK PROJECT

     Effective July 16, 2006,  the Company  entered into an EDA with MAB for the
     Fiddler Creek (Montana)  Project,  under which the Company paid $2,000,000,
     consisting  of  $300,000  cash to the  assignor  and the  issuance  of $1.7
     million (3.4  million  shares at $0.50 per share) of the  Company's  Common
     Stock as a finders fee to a third  party.  The Company is  obligated to pay
     MAB monthly  project  development  costs of $20,000  per month,  commencing
     April 1, 2006, and the first $100 million of project costs.

     Subsequently,  the Company acquired additional acreage in the Fiddler Creek
     Project area for a purchase price of $11,250,000  (of which  $6,039,599 has
     been  paid).  The Company  also is  obligated  to pay MAB  monthly  project
     development  costs of $100,000,  commencing  August 1, 2006, and to pay the
     first $50 million of project costs on these additional properties.

     SOUTH BRONCO PROJECT

     Effective July 17, 2006,  the Company  entered into an EDA with MAB related
     to the South Bronco properties in the Piceance Basin, Colorado, under which
     the Company  receives an undivided 50% working  interest in the  properties
     and commits to drill four exploration  wells. The Company also is obligated
     to pay MAB monthly project development costs of $20,000,  commencing May 1,
     2006, and to pay the first $50 million of project costs.

     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  receives an
     undivided 50% working  interest in the  properties.  Under the terms of the
     agreement,  the Company  issued to a third party as the purchase  price,  a
     convertible note for $1.2 million, convertible to 2.4 million shares of the
     Company's  Common Stock at $0.50 per share of the  Company's  Common Stock.
     The Company also is obligated to pay MAB monthly project  development costs
     of  $50,000  commencing  May 1, 2006,  and to pay the first $50  million of
     project costs.


                                      F-16
<PAGE>
                         PETROHUNTER ENERGY CORPORATION
                       (FORMERLY DIGITAL ECOSYSTEMS CORP.)
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 2006


NOTE 4 -- OIL AND GAS PROPERTIES (CONTINUED)

     BUCKSKIN MESA II PROJECT

     Effective July 18, 2006,  the Company  entered into an EDA with MAB related
     to the Buckskin Mesa Project in the Piceance Basin,  Colorado,  under which
     the Company  receives an undivided 50% working  interest in the  properties
     for  $765,000.  If he Company  elects to accept  certain  leases  which are
     subject to additional  title  curative work, it will pay up to a maximum of
     an  additional  $1.1  million  payable to a third party for bonus  payments
     related  to such  properties.  The  Company  is also  obligated  to pay MAB
     monthly project development costs of $20,000, commencing August 1, 2006 and
     to pay the first $50 million of project costs.

     PROMISED LAND PROJECT

     Effective  May 15, 2006,  the Company  entered into an EDA with MAB for the
     Promised  Land  Project,  under which the Company has paid  $194,250 to the
     assignor for leases acquired by the assignor. The Company also is obligated
     to pay MAB monthly project development costs of $50,000,  commencing May 1,
     2006, and to pay the first $50 million of project costs.

     GIBSON GULCH PROJECT

     Effective  September 18, 2006, the Company entered into an EDA with MAB for
     the Gibson Gulch  Project  under which the Company has acquired an interest
     to participate  in four wells proposed to be drilled.  The Company has paid
     $850,000  for its share of costs  associated  with the AFE's  submitted  to
     date. The Company also is obligated to pay MAB monthly project  development
     costs of $5,000, commencing August 1, 2006, and to pay the first $5 million
     of project costs.

     The Company's exploration projects continue to be evaluated, and management
     believes that the carrying costs of these projects are recoverable.  Should
     the company be  unsuccessful in its  exploration  activities,  the carrying
     cost of these prospects will be charged to operations.  The Company charges
     to  operations  all property  development  costs  incurred to MAB under the
     related EDA's. None of the Company's projects had production as of the date
     of acquisition and, as of September 30, 2006, the Company had received only
     nominal revenues from initial testing and production.

NOTE 5 - PROPERTY AND EQUIPMENT

     Oil and Gas  Properties - Oil and gas  properties at September 30, 2006 and
     2005 consisted of the following:

<TABLE>
<CAPTION>
                                                                                    2006           2005
                                                                                 --------------------------
                                                                                        (In thousands)
<S>                                                                                <C>             <C>
     Oil and gas properties, full cost method
     Unevaluated costs, not subject to amortization
          United States                                                            $ 39,906        $ 7,231
          Australia                                                                   6,106              -
     Evaluated costs                                                                      -              -
                                                                                   ---------       -------
                                                                                     46,012          7,231
     Less accumulated depreciation, depletion, amortization and impairment              (39)             -
                                                                                   ---------       -------
                                                                                   $ 45,973        $ 7,231
                                                                                   =========       =======
</TABLE>

                                      F-17
<PAGE>
                         PETROHUNTER ENERGY CORPORATION
                       (FORMERLY DIGITAL ECOSYSTEMS CORP.)
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 2006


NOTE 5 - PROPERTY AND EQUIPMENT (CONTINUED)

     Property  acquisition  costs include costs incurred to purchase,  lease, or
     otherwise  acquire  a  property.  Exploration  costs  include  the costs of
     geological and geophysical activity, and drilling and equipping exploratory
     wells.  The  Company  reviews  and  determines  the cost basis of  drilling
     prospects on a drilling location basis.

     Depreciation, depletion, and amortization of oil and gas properties for the
     years ended September 30, 2006 and 2005 was  approximately  $38,000 and $0,
     respectively.  Depreciation  of assets  recognized in  accordance  with the
     Asset Retirement  Obligation  calculation is included in these amounts (see
     below).

     Information  relating to the  Company's  costs  incurred in its oil and gas
     operations during the years ended September 30, 2006 and 2005 is summarized
     as follows:

                                                          2006           2005
                                                     ---------------------------
                                                             (In thousands)
     Property acquisition costs                       $  25,076     $   7,066
     Exploration costs                                   13,184           165
     Development costs                                        -             -
                                                      ---------     ---------
                                                      $  38,260     $   7,231
                                                      =========     =========

     Furniture and Equipment - Furniture and equipment at September 30, 2006 and
     2005 consisted of the following:

                                                          2006           2005
                                                     ---------------------------
                                                             (In thousands)
     Furniture and equipment                          $     582     $       -
     Less accumulated depreciation                          (32)            -
                                                      ----------    ----------
                                                      $     550     $       -
                                                      ==========    ==========

     Depreciation  expense  associated  with  capitalized  office  furniture and
     equipment during fiscal 2006 and 2005 was $32,000 and $0, respectively.


NOTE  6 - ASSET RETIREMENT OBLIGATION

     SFAS 143, "Accounting for Asset Retirement  Obligations addresses financial
     accounting and reporting for obligations  associated with the retirement of
     tangible  long-lived assets and the associated asset retirement costs. This
     statement  requires  companies to record the present  value of  obligations
     associated with the retirement of tangible  long-lived assets in the period
     in  which it is  incurred.  The  liability  is  capitalized  as part of the
     related  long-lived  asset's carrying amount.  Over time,  accretion of the
     liability is recognized as an operating expense and the capitalized cost is
     depreciated  over  the  expected  useful  life of the  related  asset.  The
     Company's asset  retirement  obligations  relate primarily to the plugging,
     dismantlement,  removal, site reclamation and similar activities of its oil
     and gas properties.


                                      F-18
<PAGE>
                         PETROHUNTER ENERGY CORPORATION
                       (FORMERLY DIGITAL ECOSYSTEMS CORP.)
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 2006


NOTE  6 - ASSET RETIREMENT OBLIGATION (CONTINUED)

     The following table summarizes activity related to the accounting for asset
     retirement  obligations  for the fiscal years ended  September 30, 2006 and
     September 30, 2005:

<TABLE>
<CAPTION>
                                                                                          2006           2005
                                                                                      ---------------------------
                                                                                               (In thousands)
<S>                                                                                     <C>            <C>
     Asset retirement obligations, beginning of fiscal year                             $      -       $     -
     Liabilities incurred                                                                    520             -
     Liabilities settled                                                                       -             -
     Accretion of asset retirement obligation including revision of estimates                  2             -
                                                                                        --------       --------
     Asset retirement obligations, end of fiscal year                                        522             -
     Less current portion                                                                      -             -
                                                                                        --------       --------
     Long-term portion                                                                  $    522       $     -
                                                                                        ========       ========
</TABLE>

NOTE 7 -- CONVERTIBLE NOTES

     During the year ended September 30, 2006 the Company  completed the sale of
     $20,831,667  convertible  promissory notes to accredited investors pursuant
     to a private  placement  memorandum.  The notes pay interest at the rate of
     14% per annum and are due one year from  closing of the  placement.  At the
     option of a note holder,  the principal may be converted into the Company's
     common stock at a rate of one share for each $0.50 of debt (the "Conversion
     Price"). Each Note may be converted by the Company, in its sole discretion,
     into the Company's  common stock at the Conversion  Price anytime after the
     earlier to occur of (i) the Company  raising at least  $5,000,000 in funds,
     including  the  proceeds   received  under  the  Placement;   or  (ii)  the
     consummation  of a  consolidation  of the Company with a reporting  company
     under the Securities  Exchange Act of 1934, whose stock is publicly traded,
     provided  that the  stockholders  of the Company  immediately  prior to the
     consolidation own at least 80% of the post-consolidation  entity. Each Note
     holder will receive at least 60 days'  interest at 14% per annum so that if
     this  mandatory  conversion  occurs  less than 60 days  after the date of a
     Convertible Note, the holder still will receive payment for a minimum of 60
     days' interest.  Upon completion of the share exchange between  PetroHunter
     and GSL, the notes were converted to 41,663,334 shares of common stock.

     Prior to the merger with GSL on May 12,  2006,  Digital  entered  into five
     separate loan agreements, aggregating $400,000, due one year from issuance,
     commencing  October 11, 2006. The loans bear interest at 12% per annum, are
     unsecured,  and are  convertible  at the option of the lender,  at any time
     during the term of the loan or upon maturity, at a price per share equal to
     the closing  price of the  Company's  common shares on the OTC.BB market on
     the day preceding notice from the lender of its intent to convert the loan.
     As of  January  10,  2007,  the  Company  was in  default  on payment of an
     aggregate $200,000 of notes which matured subsequent to September 30, 2006.



                                      F-19
<PAGE>
                         PETROHUNTER ENERGY CORPORATION
                       (FORMERLY DIGITAL ECOSYSTEMS CORP.)
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 2006


NOTE 8 -- STOCKHOLDERS' EQUITY

     COMMON STOCK

     During the period from June 20, 2005 (inception) to September 30, 2005, the
     Company issued  100,000,000 shares of its common stock, at $.001 per share,
     to its founder for previous advances for expenditures made on behalf of the
     Company in the amount of $100,000.

     During the twelve  months  ended  September  30, 2006,  the Company  issued
     119,928,734 shares of its common stock as follows:

       o   3,000,000 shares, valued at $.50 per share, as partial  consideration
           for the acquisition of oil and gas properties

       o   3,400,000 shares, valued at $.50 per share,  as  consideration  for a
           finders' fee on an oil and gas prospect

       o   2,845,400  shares valued at $.50 per share, as partial  consideration
           for finder's fees on the sale of convertible debt

       o   44,063,334, shares at $.50 per share, for  conversion  of convertible
           debt (Note 7)

       o   28,700,000  shares  pursuant to the share exchange agreement with GSL
           (Note 1)

       o   35,442,500 shares  pursuant to the sale of units at $1.00 per unit to
           accredited investors pursuant to a private placement memorandum. Each
           unit consists of one share of common stock and a warrant to  purchase
           one share of common share for a period of 5 years at $1.00 per share.

       o   1,477,500 shares valued at $1.00 per share, as partial  consideration
           for finder's fees on the sale of $1.00 units

       o   1,000,000 shares for exercise of warrants at $1.00 per share

     STOCK OPTION PLAN

     The Company  adopted the 2005 Stock Option Plan (the  "Plan"),  as amended.
     Under the Plan,  stock 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.  Options  may be  granted to key  employees  and other  persons  who
     contribute  to the  success  of  the  Company.  The  Company  has  reserved
     40,000,000  shares of common  stock for the plan.  At  September  30, 2006,
     options to purchase  7,705,000 shares were available to be granted pursuant
     to the stock option plan.


                                      F-20
<PAGE>
                         PETROHUNTER ENERGY CORPORATION
                       (FORMERLY DIGITAL ECOSYSTEMS CORP.)
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 2006


NOTE 8 -- STOCKHOLDERS' EQUITY (CONTINUED)

         A summary of option  activity  under the Plan as of September  30, 2006
         and 2005 and changes during the years then ended is presented below:

<TABLE>
<CAPTION>
                                                                               Weighted
                                                                Weighted       Average
                                                                 Average      Remaining
                                                                Exercise     Contractual       Aggregate
                                            Number of Shares      Price          Term       Intrinsic Value
<S>                                         <C>                 <C>               <C>         <C>
Options outstanding - June 20, 2005                    -        $     -
Granted during period                           19,000,000      $  0.50
                                            -----------------
Options outstanding - September 30, 2005        19,000,000      $  0.50
Granted during period                           13,295,000      $  2.10
Exercised during period                                -              -
Forfeited during period                                -              -
Expired during period                                  -              -
                                            -----------------
Options outstanding - September 30, 2006        32,295,000      $  1.16           4.28        $ 41,213,419
                                            ================================================================

Exercisable at September 30, 2006               10,259,000      $  0.91           4.12        $ 13,212,971
                                            ================================================================
</TABLE>


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

     A summary of the status of the Company's  nonvested options as of September
     30, 2006 and 2005 and changes  during the periods  then ended is  presented
     below:

                                                                      Weighted
                                                     Number of      Average Fair
                                                      Shares           Value

     Inception - June 20, 2005                               -                -
     Granted during period                            19,000,000       $   0.32
     Exercised during period                                 -                -

     Vested during period                             (3,800,000)      $   0.32
     Forfeited during period                                 -                -
     Expired during period                                   -                -
                                                  ----------------
     Nonvested - September 30, 2005                   15,200,000       $   0.32
     Granted during period                            13,295,000           1.23
     Exercised during period                                 -                -

     Vested during period                             (6,459,000)      $   1.28
     Forfeited during period                                 -                -
     Expired during period                                   -                -
                                                  ----------------
     Nonvested - September 30, 2006                   22,036,000       $   1.21
                                                  ================


                                      F-21
<PAGE>
                         PETROHUNTER ENERGY CORPORATION
                       (FORMERLY DIGITAL ECOSYSTEMS CORP.)
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 2006


NOTE 8 -- STOCKHOLDERS' EQUITY (CONTINUED)

     As of  September  30,  2006  there is  $28,000,448  of  total  unrecognized
     compensation   cost   related   to   nonvested   share-based   compensation
     arrangements granted under the Plan. That cost is expected to be recognized
     over a  weighted-average  period of 3.35  years.  The total  fair  value of
     shares vested during the year ended September 30, 2006 was $8,253,927.

     WARRANTS

     The following  stock  purchase  warrants were  outstanding at September 30,
     2006:

         NUMBER OF SHARES            EXERCISE PRICE             EXPIRY DATE
            34,442,500                   $1.00                      2011

     During 2006,  the Company  issued  35,442,500  stock  purchase  warrants 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, 2006, 1,000,000 warrants were
     exercised.


NOTE 9 -- RELATED PARTY TRANSACTIONS

     During  2006,  the Company  incurred  consulting  fees  related to services
     provided  by  its  officers  in  the  aggregate  amount  of  $529,650,  and
     $4,530,000  in  property  development  costs to MAB under  the  Development
     Agreement  between MAB and the Company (Note 3). At September 30, 2006, MAB
     was owed $197,785 by the Company.

     In June 2006,  the Company  entered into an Office  Sharing  Agreement with
     Falcon Oil & Gas Ltd. ("Falcon") for office space in Denver,  Colorado,  of
     which Falcon is the lessee.  Under the terms of the  agreement,  Falcon and
     the Company share,  on a 50/50 cost basis,  all costs related to the office
     space,  including rent, office operating costs, furniture and equipment and
     any other expenses related to the operations of the corporate offices.  The
     largest  single  shareholder  of the  Company  is also the Chief  Executive
     Officer and a Director of Falcon.  At September  30, 2006,  Falcon owed the
     Company  $208,514,  for Falcon's  share of costs  incurred  pursuant to the
     agreement.

     Due from related parties at September 30, 2006 includes $712,830 due to the
     Company from Galaxy Energy  Corporation  ("Galaxy") for  reimbursement  for
     charges paid to a drilling company for Galaxy's use of a drilling rig under
     contract to the Company.  This amount was paid to the Company subsequent to
     September  30, 2006.  The largest  single  shareholder  of the Company is a
     14.3% beneficial  shareholder of Galaxy and the father of the President and
     Chief Executive Officer of Galaxy.

     At September 30, 2006, the Company is owed $35,656 from MAB for oil and gas
     revenues for it's share of initial  production earned through September 30,
     2006 pursuant to the Development and EDA agreements with MAB.




                                      F-22

<PAGE>
                         PETROHUNTER ENERGY CORPORATION
                       (FORMERLY DIGITAL ECOSYSTEMS CORP.)
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 2006


NOTE 9 -- RELATED PARTY TRANSACTIONS (CONTINUED)

     During  2005,  the Company  incurred  consulting  fees  related to services
     provided by its officers in the  aggregate  amount of $236,300 and services
     provided by a related  party in the amount of $41,366,  of which $11,966 is
     included in accounts  payable at September 30, 2005; and incurred  $860,000
     in  property  development  costs to MAB  under  the  Development  Agreement
     between MAB and the Company and recorded expenditures paid by MAB on behalf
     of the Company of $222,000. At September 30, 2005, MAB was owed $648,421 by
     the Company.


NOTE 10  - INCOME TAXES

     Income tax expense  (benefit) for the years ended  September 30 consists of
     the following:

                                                       2006             2005
                                                       ----             ----
     Current taxes                                 $          -     $         -

     Deferred taxes                                  (6,850,000)       (835,000)
        Less: valuation allowance                     6,850,000         835,000
                                                  --------------    ------------
     Net income tax provision (benefit)            $          -     $         -
                                                  ==============    ============

     The  effective  income tax rate for the years ended  September 30, 2006 and
     2005 differs  from the U.S.  Federal  statutory  income tax rate due to the
     following:

<TABLE>
<CAPTION>
                                                                          2006       2005
                                                                          ----       ----
<S>                                                                     <C>        <C>
     Federal statutory income tax rate                                   (35.0%)    (35.0%)
     State income taxes, net of Federal benefit                          (3.25%)    (3.25%)
     Permanent differences - disallowed interest on convertible debt      4.76%       .07%
                             other                                         .44%        -
     Increase in valuation allowance                                     33.05%     38.18%
     Net income tax provision (benefit)                                     -          -

</TABLE>








                                      F-23
<PAGE>
                         PETROHUNTER ENERGY CORPORATION
                       (FORMERLY DIGITAL ECOSYSTEMS CORP.)
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 2006


NOTE 10  - INCOME TAXES (CONTINUED)

     The  components of the deferred tax assets and  liabilities as of September
     30, 2006 and 2005 are as follows:

<TABLE>
<CAPTION>
                                                                            2006                  2005
                                                                            ----                  ----
<S>                                                                    <C>                   <C>
Deferred tax assets:
Federal and state net operating loss carryovers                        $      6,640,000      $         510,000
 Asset retirement obligation                                                    200,000                   -
Oil and gas property
Stock compensation                                                            3,830,000                325,000
                                                                       -----------------     ------------------
Deferred tax asset                                                     $     10,670,000      $         835,000
                                                                       =================     ==================

Deferred tax liabilities:
Intangible drilling costs and other exploration costs                  $     (2,982,000)     $            -
capitalized for financial reporting purposes
Property and equipment                                                           (3,000)                  -
                                                                       -----------------     ------------------
Total deferred liabilities                                                   (2,985,000)                  -

Net deferred tax asset                                                        7,685,000                835,000
  Less: valuation allowance                                                  (7,685,000)              (835,000)
                                                                       -----------------     ------------------

Deferred tax liability                                                 $        -0-          $         -0-
                                                                       =================     ==================
</TABLE>

     The Company has a $17,360,000  net operating loss carryover as of September
     30,  2006.  The net  operating  losses may offset  against  taxable  income
     through the year ended  September 2026. 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 Company has provided a valuation  allowance  for the deferred tax asset
     at September 30, 2006,  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  $6,850,000 and $835,000 for
     the years ended September 30, 2006 and 2005, respectively.


NOTE 11 - SEGMENT INFORMATION

     Segment  information  has  been  prepared  in  accordance  with  SFAS  131,
     "Disclosures About Segments of an Enterprise and Related  Information." All
     of the  Company's  operations  are in the  oil and gas  industry  with  its
     principal business activity being in the acquisition and development of oil
     and gas properties.  The Company has two geographic  reporting segments for
     its unevaluated  oil and gas  properties,  the United States and Australia.
     Corporate  expenses  are  not  allocated  to the  geographic  segments.  An
     analysis of the Company's geographic areas is as follows:





                                      F-24

<PAGE>
                         PETROHUNTER ENERGY CORPORATION
                       (FORMERLY DIGITAL ECOSYSTEMS CORP.)
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 2006


NOTE 11 - SEGMENT INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
                                                   UNITED STATES         AUSTRALIA        CORPORATE            TOTAL
<S>                                                 <C>                <C>             <C>              <C>
         2006
         Revenue for the year                       $     35,656       $         -     $          -     $     35,656
         Operating costs                                   3,672                 -                -            3,672
         Depreciation, depletion,                         40,645                 -           32,492           73,137
         amortization and accretion
         Corporate costs and expenses                          -                 -       20,650,861       20,650,861
         Loss for the year                                 8,661                 -       20,683,353       20,692,014
         Capital assets                               39,866,574         6,106,210          550,213       46,522,997

         2005
         Revenue for the year                       $          -       $         -     $          -     $          -
         Loss for the year                                     -                 -        2,118,820        2,118,820
         Capital assets                                7,231,443                 -                -        7,231,443
</TABLE>


NOTE 12 -- COMMITMENTS AND CONTINGENCIES

     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 noncapital  nature are  recorded  when
     environmental  assessment and/or remediation is probable, and the costs can
     be reasonably estimated.

     CONTINGENCIES

     The Company may from time to time be involved in various claims,  lawsuits,
     disputes   with   third   parties,   actions   involving   allegations   of
     discrimination,  or breach of contract  incidental to the operations of its
     business.  The Company is not  currently  involved  in any such  incidental
     litigation which it believes could have a materially  adverse effect on its
     financial condition or results of operations.




                                      F-25

<PAGE>
                         PETROHUNTER ENERGY CORPORATION
                       (FORMERLY DIGITAL ECOSYSTEMS CORP.)
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 2006


NOTE 12 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)

     COMMITMENTS

     OPERATING LEASES

     In 2006, the Company has entered into lease  agreements for office space in
     Denver,  Colorado and Salt Lake City, Utah. The Company is obligated to pay
     the following  minimum future rental  commitments  under the  noncancelable
     operating  leases,  including its obligation  under the sublease  agreement
     with Falcon:

           Year ended September 30, 2007           $183,521
                                    2008            188,317
                                    2009            194,281
                                    2010            201,414
                                    2011            153,705

     Rent expense for the year ended September 30, 2006 was $81,225.

     DELAY RENTALS

     In conjunction with the Company's  working interests in undeveloped oil and
     gas prospects, the Company must pay approximately $224,000 in delay rentals
     during the fiscal year ending  September  30, 2007 to maintain the right to
     explore these prospects.  The Company  continually  evaluates its leasehold
     interests,  therefore certain leases may be abandoned by the Company in the
     normal course of business.

     AGREEMENTS WITH MAB

     During the fiscal year ending  September 30, 2007, the Company is obligated
     to pay MAB property  development  fees of $1,765,000 for the period October
     1, 2006 to December  31, 2006 under the EDAs;  and  $225,000 in  consulting
     fees and  $2,025,000 as payments under a $13.5 million note, for the period
     January 1, 2007 to September 30, 2007 under the  Consulting  Agreement (See
     Note 3).

     WORK COMMITMENTS

     During  2007,  the  Company is  obligated  to perform  the  following  work
     commitments  pursuant  to the  original  EDA's  and  the  January  1,  2007
     Consulting Agreement with MAB:

        o   Drill eight wells on the Piceance II prospect
        o   Drill five wells on the Buckskin prospect
        o   Drill four wells on the Beetaloo prospect
        o   Complete permitting on the West Rozel Project

     Additionally,  the Company has contracted  with two drilling rigs,  each of
     which has a  stand-by  day rate  commitment  of $24,000  per day,  with one
     obligated through May 2007 and one obligated through June 2007.



                                      F-26
<PAGE>
                         PETROHUNTER ENERGY CORPORATION
                       (FORMERLY DIGITAL ECOSYSTEMS CORP.)
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 2006


NOTE - 13 - SUBSEQUENT EVENTS (UNAUDITED)

     (a)      On November 6, 2006,  the Company  commenced the sale of a maximum
              $125,000,000 pursuant to a Private Placement of Units at $1.50 per
              unit.  Each unit  consists  of one share of the  Company's  common
              stock and one-half common stock purchase  warrant.  A whole common
              stock purchase warrant entitles the purchaser to acquire one share
              of the  Company's  common stock at an exercise  price of $1.88 per
              share through  December 31, 2007. The Company may pay a commission
              of up to 5% to a broker or agent in conjunction  with the sale. As
              of January 12, 2007, the Company has received  $1,887,500 from the
              sale of units pursuant to the Private Placement.

     (b)      In  December  2006,  the  Company's   newly  formed  wholly  owned
              subsidiary,   PetroHunter   Energy  NT  Ltd  ("PetroHunter   NT"),
              commenced  the sale,  pursuant  to a private  placement,  of up to
              $50,000,000 of convertible  notes.  The notes bear interest at 12%
              per  annum,  mature  one  year  from  date  of  issuance  and  are
              convertible,  at the option of the note holder, at the rate of one
              share of  PetroHunter NT common stock for each $.50 of debt. As of
              January 12, 2007, $1,530,000 has been received from the offering.

     (c)      On November 14, 2006, the  Company and Lakes Oil N.L. entered into
              an  agreement  (the  "Agreement")  under  which they will  jointly
              develop  Lakes Oil's  on-shore  petroleum  prospects  (focusing on
              unconventional gas resources) in the Gippsland and Otway basins in
              Victoria,   Australia.  The  arrangement  is  subject  to  various
              conditions  precedent,  including  completion of satisfactory  due
              diligence,  and the satisfactory  processing of certain  retention
              lease  applications.  Under  the  Agreement,  the  Company  or its
              subsidiary  company  Sweetpea will  initially farm into 33-1/3% of
              Lakes Oil's permits by spending $7 million in Lakes Oil's permits.
              In  addition,  the Company  will  subscribe  for $3 million in new
              shares in Lakes Oil at 1.5 cents  (Australian).  PetroHunter  will
              also  have the  right to  increase  its  position  in Lakes  Oil's
              permits with two further 16-2/3%  farm-in  tranches of $10 million
              each,  exercisable  within 12 months  and 24 months  respectively.
              Under the  Agreement,  the Company has the right to participate in
              the same  proportion  in any permits which are  non-contiguous  to
              existing  permits  acquired  by  Lakes  within  2  years,  and any
              contiguous  permits  acquired  by Lakes  moving  forward,  and the
              Company has a first right of refusal in other permits  acquired by
              Lakes  within  5 years.  The  Company  is to  assume  Lakes  Oil's
              position as operator of the permits.

     (d)      On November 14, 2006, the Company, through its subsidiary,  Paleo,
              and the Box Hill Institute  signed an agreement  which commenced a
              five-year  research  collaboration  with the BioSkills  Specialist
              Centre for  Biotechnology  Training at the Box Hill  Institute  in
              Melbourne,  Australia. As part of the agreement, Paleo and the Box
              Hill  Institute   share   laboratory   space  and  offer  training
              opportunities for Box Hill students.  The team will target a broad
              array    of    applications    including     energy/petrochemical,
              environmental    remediation,    timber   and   plant   resources,
              agricultural and consumer products.


                                      F-27
<PAGE>
                         PETROHUNTER ENERGY CORPORATION
                       (FORMERLY DIGITAL ECOSYSTEMS CORP.)
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 2006


NOTE - 13 - SUBSEQUENT EVENTS (CONTINUED)

     (e)      On December  29,  2006,  the  Company  entered  into an  agreement
              ("PSA")  with  Galaxy and its  wholly  owned  subsidiary,  Dolphin
              Energy  Corporation  ("Dolphin"),  for the  Company  to  purchase,
              through  its  wholly  owned  subsidiary,   PetroHunter   Operating
              Company,  all of Galaxy's and  Dolphin's  oil and gas interests in
              the Powder River Basin of Wyoming and Montana.

              Dolphin  owns an average 86%  working  interest in 197 oil and gas
              wells in the Powder River Basin.  Twenty-two  wells are  currently
              selling gas at an average  rate of 850,000  cubic feet a day.  The
              remaining  wells  are in  various  stages of  dewatering,  shut-in
              waiting on pipeline, or waiting to be completed.

              The PSA provides for the Company to pay $45 million to acquire all
              of Galaxy's  and  Dolphin's  oil and gas  interests  in  Sheridan,
              Johnson,  Converse  and Campbell  Counties in Wyoming,  and in Big
              Horn,  Custer,  Powder River and Rosebud Counties in Montana.  The
              purchase  price  will be $20  million  in cash and $25  million in
              shares  of the  Company's  common  stock at the rate of $1.50  per
              share.  Closing of the transaction  will be subject to approval by
              Galaxy's senior lenders, approval in its discretion of all matters
              by  the  Company's  Board  of  Directors,  including  the  Company
              receiving  financing on terms  acceptable to it, and various other
              terms and conditions.  Either party may terminate the agreement if
              the closing has not occurred by February 28, 2007.  The  agreement
              calls for a $2 million  earnest money payment to be made to Galaxy
              in two  installments by January 31, 2007, of which  $1,400,000 has
              been paid as of January 10, 2007.

     (f)      On January 9, 2007, the Company entered into a Credit and Security
              Agreement  (the  "Financing")  with Global  Project  Finance AG, a
              Swiss  company,  for  mezzanine  financing  in the  amount  of $15
              million.  The loan  provides  for an  interest  rate of 6.75% over
              prime,  and is to be  secured  by a  first  perfected  lien on the
              Company's assets, limited to the specific portion of the assets to
              which the loan  proceeds are applied by the  Company.  The Company
              plans to apply most of the  proceeds of this loan to its  drilling
              and development  operations in the Piceance Basin,  Colorado.  The
              terms  of the  Financing  also  provide  for the  issuance  of one
              million  warrants of the  Company's  shares upon  execution of the
              Credit Agreement,  and up to an additional three million warrants,
              tied on a pro rata basis to each draw down of the credit  facility
              up to $15 million - that is,  warrants for 600,000 shares for each
              $3 million  advanced.  The warrants will be  exercisable  for five
              years after the date of the Credit  Agreement.  The exercise price
              of the  warrants  will be  equal to 120% of the  weighted  average
              price of the Company's stock for the 30 days immediately  prior to
              each warrant  issuance  date.  Global  Project  Finance AG and its
              controlling shareholder, Christian Russenberger, were shareholders
              of the Company  prior to the Credit  Agreement.  As of January 10,
              2007,  the  Company  has  drawn  down  $5,000,000  on  the  credit
              facility.



                                      F-28